Buying a home is likely the single largest purchase you will make and it’s therefore important to protect your investment by insuring it against loss. But what type of insurance do you need and how do you find a good, yet affordable policy?
Homeowner’s Insurance
The primary type of insurance you will need is Homeowner’s or Hazard Insurance. This type of insurance comes in several forms, depending on the type of property and the perils covered. Thus the insurance needed for a condo or town home will differ from the policy needed for a single family detached home. A homeowner’s policy covers various protections for losses to the property itself, personal property and liability for accidents that might occur on the property. When purchasing a condo, the HOA generally has a master policy that covers the actual structure of your home, but does not cover anything on the interior, such as cabinets or flooring, or personal property. Those items will need to be covered in a separate homeowner’s policy that you as the buyer purchase.
When selecting a policy it is important to understand exactly what is covered, and what is not covered. The most common type of policy will include perils such as fire, lightening, burst pipes, vandalism, civil riot, theft, and falling objects, to name a few, but does not cover against flood or earthquakes.
The cost of your insurance will be based on a number of factors including the cost to re-build the house in case of destruction, (replacement cost), the location of the property, the amount of coverage and deductibles, and factors such as having a security or fire sprinkler system which might qualify for a discount. For instance, a home that is situated on the edge of an open space that is considered a fire danger zone will likely pay a higher premium as the risk of fire is greater.
If you are purchasing the home with a loan, the lender will require that they be named as loss payee on the policy and will generally require the first year premium to be paid through escrow. If you are establishing an impound account to pay your taxes and insurance with your mortgage payment, the lender will additionally require a deposit of 2-3 months insurance payments to establish the account.
Shopping for Homeowner’s Insurance
One of the first places to begin shopping for homeowner’s insurance is with the company that carries your automobile policy, as most large companies will provide a multiple policy discount. These days it is relatively easy to get several quotes as you can search and complete requests for quotes online. Before you sit down at your computer however, make sure you are prepared with information about the home you are purchasing including square footage, age, type of roof and age of roof, location of the nearest fire hydrant, and any special preventative features such as fire sprinklers or a security system. It is also important to know if your home falls within a flood zone as this might mean that you will need additional flood insurance as well.
When evaluating quotes, price is not the only consideration. It is a good idea to inquire about the company’s rating as this reflects their financial strength. Ratings go from A+++ which is superior, down to a D- which is poor. Obviously, if you have a claim you want to make sure the company is financially strong enough to pay your claim so a higher rating is preferable. You may also want to search for comments from customers about their claims experience, especially how long it took for claims to be processed and payments received. Additionally, if you will not be paying through an impound account be sure to inquire as to what type of payments are available as some companies do not offer monthly payments and require that you pay in one annual or two semi-annual payments.
Flood Insurance 
You may also want to consider flood insurance offered through the National Flood Insurance Program (NFIP) which is run by the Federal Emergency Management Agency (FEMA). As noted above, water damage from a burst pipe is covered in your homeowner’s insurance, but flooding from storms and hurricanes or dam inundation is not. Flood insurance is based on replacement cost for your home’s structure and actual cash value for personal property.
During the inspection period of your purchase transaction you will receive many disclosures, including a Natural Hazard Zone Disclosure Report. This report will reveal whether or not you are in a flood zone. It should be noted however, that even if the property you are buying is outside a zone on a flood map, over 20% of flood insurance claims are filed in areas of low to moderate flood risk.
Flood insurance policies are written by over 100 insurance companies who participate in the NFIP so getting a quote is easy. It should be noted that after a policy is written and paid for there is a 30-day waiting period before it goes into effect. In case of a flood, those who are uninsured may be eligible for low rate loans, if the area is declared a presidential disaster area. The disadvantage of course, is that loans must be repaid whereas with insurance you are simply paid according to your claim. More information is available at www.floodsmart.gov.
Earthquake Insurance
The thing that makes earthquakes so scary is that they are pretty much unpredictable. Although science has made great strides in the last 20 years in terms of identifying potential stresses that may trigger a quake, predicting an earthquake isn’t like looking at a map and plotting the course of a hurricane or a swollen river. Earthquakes arrive with little to no warning, and as we have witnessed, can cause massive destruction of property.
What many people don’t understand is that no matter where you live in the U.S., damage from an earthquake is not covered by your homeowner’s insurance policy. Earthquake insurance is a separate policy, similar to flood insurance. In California, earthquake insurance is issued by the California Earthquake Authority. What might surprise you however, is that despite California’s earthquake history, fewer than 12% of homeowners have earthquake insurance.
One reason so few people have earthquake insurance it the high deductible. With homeowner’s insurance, your deductible is a flat amount, such as $2500, but with earthquake insurance your deductible is 15% of your home’s value. Thus a home valued at $600,000 would have a $90,000 deductible! The truth is that even if a home is damaged during an earthquake the damage rarely exceeds the deductible.
Should you consider earthquake insurance? The answer might depend on where your home is located. As noted above, during your inspection period you will receive a Natural Hazard Zone Disclosure Report which in addition to showing whether or not your home is in a flood zone, will show your proximity to earthquake faults. Depending on your home’s proximity to a fault, the cost of your home and your financial resources, earthquake insurance might be a wise choice.
If you’re ready to shop for your dream home in San Diego County, please give me a call!
Fire photo courtesy of nj.com. Flooded house photo courtesy of ctmirror.org
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