Know Your Homeowners Insurance Policy

A homeowners insurance policy is probably not high on your summer reading list. Yet it could be quite an eye opener if you've never bothered to take a close look.

You can expect to be covered if a raccoon, skunk or other wild animal wreaks havoc in your home. But standard policies won't cover damage from termites, rodents or your pet ferret. And if your home is swallowed by a sinkhole because it was built over an old coal mine, you're out of luck — unless you bought special sinkhole coverage.

Even after the September terror attacks, most standard homeowners policies cover terrorism-related claims. But in the wake of an explosion of costly toxic mold claims, it's tougher to get insurers to pay to clean up mold contamination. Some insurers are excluding mold coverage altogether.

Complex issues such as water damage can be confusing. And it's important to know about exclusions or policy limitations. You often can purchase additional coverage for a modest price. If you know that you are unlikely to be covered for mold contamination or insect infestation, you might take greater pains to look for signs of trouble and fix problems before they mushroom.

Insurance is state-regulated, although most homeowners policies are similar. Texas, which requires different coverage in its homeowners policies, is an exception.

Insurers usually offer several basic levels of coverage. The so-called HO-3 policy is the most common (see box). That stands for "homeowners No. 3 policy," and it covers all perils unless they are specifically excluded.

Such policies generally won't protect you against major catastrophes like war, nuclear disaster, earthquake and flood.

Separate earthquake and flood insurance is available but can be expensive in high-risk areas. Some mortgage lenders will require you to purchase such coverage. Otherwise, you'll have to weigh the risk and the cost.

If you live in one of the more than 19,000 communities that participate in the National Flood Insurance Program (NFIP), you're eligible to purchase flood insurance. If you live near an ocean, river, lake or stream, your premiums will be higher. For information, contact your agent or NFIP at 888-356-6329.

In the relatively low-risk New York metropolitan area, it costs about $2.50 per $1,000 for earthquake coverage — or nearly $500 a year for a brick home that would cost $200,000 to replace, according to Cathy Torres, an underwriter at Campbell Solberg Associates in Manhattan. In San Francisco, homeowners pay on average $1,100 to $1,200 a year for earthquake coverage, according to the Independent Insurance Agents & Brokers of America.

"You don't want to be paying premiums when the chances of a flood or earthquake are very remote," says Robert Hunter, director of insurance for the Consumer Federation of America.

There are often limits on coverage of personal property. No matter what the value of your jewelry, furs and watches, standard policies typically will pay only $1,000 to $2,500. And that only covers theft.

If you accidentally drop your diamond ring down the drain, you won't get a dime. If you purchase a jewelry rider, which will insure against loss as well as theft, you'll pay about $10 to $15 a year for each $1,000 in coverage.

Keep in mind that insurance policies are not always black and white. Water-related damage, for instance, is one of the murkier homeowner issues. Among the fine points of water claims:

  • Most policies won't cover damage if your sewer backs up into the basement. But you can often purchase separate coverage for sewers and drains. A separate rider runs about $25 a year for $25,000 in coverage, Torres says.
  • If water seeps from the ground into your basement and damages your foundation, it's considered a maintenance problem and generally won't be covered. But you probably will be covered if a pipe bursts, causing water to soak the ground and crack your foundation, says Rob Schneider at Consumers Union.
  • However, if your pipes burst in winter and cause water damage, you won't be covered if you left the house unoccupied and without heat.

Even if the damage from a burst pipe is covered, your insurer may refuse to pay to repair the pipe if it broke because of normal wear and tear, says Madelyn Flannagan of the Independent Insurance Agents & Brokers of America.

If you and your insurer have a difference of opinion about what your policy covers, you may be in luck. "If there is any ambiguity in the policy language, the courts will find in favor of the policyholder," Hunter says.


If your claim is turned down, ask the insurer to put its decision in writing, pointing to the policy provision that is the basis for its denial. You may decide to appeal to a higher level at the company. As a last resort, consult a lawyer.

Mold is by far the most controversial homeowners insurance issue. Claims have skyrocketed in humid areas as homeowners worry about potential health hazards that include shortness of breath, eye irritation, sinus congestion and skin rashes.

The industry paid $1.3 billion in mold claims last year — 70% of them in Texas. Claims there surged 425% to 37,202, the Insurance Information Institute says.

Mold damage always has been excluded from insurance coverage, says Robert Hartwig, chief economist at the Insurance Information Institute, unless it occurred as a result of a so-called covered peril, such as a hailstorm.

This year, insurers have sought to further limit their exposure. Allstate is capping coverage for mold cleanup at $5,000 in most states. And State Farm has excluded mold coverage in 34 states and Washington, D.C., even if it results from a covered peril.

Note that if your insurer changes or limits its coverage, it won't take effect until your policy comes up for renewal. Be sure to read all the information, including the fine print, that comes with your renewal notice.

Homeowners policies can contain some good surprises too, Flannagan says. Many people don't realize that most policies cover personal property away from home. So if a set of golf clubs gets stolen from your car, you'll generally be covered. And if your dog bites a neighbor, your liability coverage will protect you up to a certain limit.