7 Things You Should Know About Your Homeowner's Policy

Don't be shocked by unexpected losses for items not covered

7 Things You Should Know About Your Homeowner's Insurance

Here's a great read to take with you on vacation: your homeowner's insurance policy.

Well, maybe not.

(But I do wish you would read it — and a boring airplane ride is just the place!)

As a result of disasters like 2012's Hurricane Sandy, along with more frequent tornadoes, wildfires and floods, insurance companies are shifting more risk and costs to you than ever, so it's more important than ever that you understand what your policy covers — and what it doesn't cover.

To help homeowners better understand their policies, the Consumer Federation of America and United Policyholders released a list of the top seven facts you need to know about your policy. These are:

1. Most policies do not pay for damage due to floods, earthquakes or landslides. You should determine if you're in a high-risk zone by checking official local flood and earthquake maps.

2. Different deductibles can result in unexpected out-of-pocket costs. Most policies have at least two deductibles: one that applies a flat-dollar amount for most losses and another, higher deductible that applies if the loss is related to wind. Read your policy so you know your exposure in the event of wind damage.

3. Hidden clauses can result in reduced or denied claims. For example, say during a storm, your home sustains both wind damage (covered by your policy) and flood damage (not covered). If your policy has an ACC clause (for "anti-concurrent causation"), coverage could be eliminated or reduced even if the damage was caused by the covered peril.

4. Is coverage limited to your house's original cost or its replacement cost? Many policies reimburse you only for the amount you paid to buy the house. But if you bought it many years ago, it might cost you much more to rebuild it today. Make sure your policy covers replacement cost, not merely reimbursement cost.

5. Your policy might not cover specific high-cost damage. Many policies don't cover damage from mold, non-flood water damage, destruction of computers, loss of business property, damage to artwork or food spoilage. Read your policy to see if it contains exclusions like these.

6. Must you replace more than your house? After a natural disaster, local governments sometimes require homeowners to upgrade their houses when rebuilding — such as raising the elevation. Many policies won't cover the additional costs. You might need to buy separate coverage.

7. Prices vary widely. Shop for a new policy every three years or whenever you get a large rate increase. Many insurers raise rates when they believe policyholders aren't paying much attention to costs.

Originally published in Inside Personal Finance August 2013

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