No one expects their home to be damaged or destroyed in a natural disaster. That's why it’s easy to go years (or decades) without giving your homeowners insurance a second thought.
But as recent years have shown, disasters can strike out of blue—and sometimes occur in unexpected places. By the time you know your home could be at risk from an impending event, it may be too late to do much about it. That’s why the best time to get prepared is now, even if you think you don’t need to. So dig your policy document out of the filing cabinet, or request it from your insurer if you don't have it on hand.
Here are 8 things to check about your homeowners insurance policy, plus a few more steps you can take to help ensure you’re protected and well organized.
8 things to check in your homeowners insurance
1. Understand your homeowners insurance policy type
There are 8 main types of homeowners insurance policies, which are generally referred to by their numbers. While HO-1 homeowners insurance is typically the most limited type of policy, the most common type is HO-3, also known as a “Special Form” policy.1
Your type of policy is important because it sets out the basic structure of your coverage. For example, HO-2 only covers damage due to perils specifically listed in the policy. If fire isn’t listed in the policy, then damage due to fire isn’t covered. HO-3, in contrast, generally covers the structure of your home against everything except for specific listed exclusions (like earthquakes, typically). But it usually only covers your belongings against specifically named perils.
2. What disasters does your home insurance cover?
Understand what types of disasters your coverage protects against, and what types of disasters are excluded. For example, HO-3 policies often don’t cover damage to your house due to flooding, landslides, sinkholes, or earthquakes—unless you’ve specifically added such coverage.
Again, keep in mind that depending on the type of policy you have, you may need to hunt down what perils are specifically included, or what types are specifically excluded. And be aware that the structure of your house might be protected against a broader set of perils than your personal belongings.
If you're having trouble determining this from your declarations page or your full policy document, contact your insurance agent to get clarification.
3. Check your home and belongings coverage limits
The limit on your dwelling signals the maximum your insurer may pay to repair or rebuild the structure of your home, in case of a covered disaster. It’s generally advised that this limit should be based on the cost of rebuilding your home, if ever needed.
For your belongings, or personal property, your policy likely includes a total limit, but also limits on specific categories of items—like any cash you keep in the home, jewelry, electronics, or business-related property. Think about which categories are most relevant to you: Do you have generations of valuable family heirlooms in the attic? Are you a gamer with a high-end electronics setup? Or do you keep inventory at home for your personal business? Consider whether the limits in your policy are sufficient.
4. Verify if you have loss-of-use coverage
Check if your policy includes this. “Loss of use” is what would help cover your living expenses—like the cost of temporary housing—if your home were rendered unlivable by a covered disaster.
5. Replacement cost vs. actual cash value: What’s the difference?
Suppose you own a 55-inch TV, but you bought it 5 years ago. The replacement cost of this would be the cost of a new 55-inch TV. The actual cash value would be the value of a 5-year-old 55-inch TV. As you can tell, replacement cost is typically higher than actual cash value.
Figure out whether you’re covered for replacement cost or actual cash value, for both your house’s structure and your personal belongings. It’s common for your house itself to be covered at replacement cost (up to your policy limit) but your belongings to be covered at actual cash value.
6. What to do in case of a loss
If something were to happen to your home, you might have obligations under your policy. These might include notifying your insurer in a timely manner, notifying the police if there’s been a theft, and taking reasonable steps to protect your property from further damage.
7. Review riders and endorsements in your policy
These might be toward the end of your policy document, but they’re important because they change your insurance contract. Each one may limit or expand your coverage in certain specific ways.
8. Research your insurer’s credit rating
Insurance companies receive credit ratings, which can give a sense of their financial stability. This is important because you want to feel confident that your insurer will have the financial resources to pay you, if you ever need to make a claim. After all, your coverage is only as strong as your insurer.
While this information isn’t included within your policy documents, it’s typically easy to look up online. The main insurance ratings agencies include A.M. Best, Fitch Ratings, Moody’s, and S&P Global. Try to look up your insurer’s credit rating with multiple agencies and be sure to check what each agency’s rating means, as each uses a slightly different rating system.
3 extra steps to be prepared in case of a disaster
Knowing the details of your coverage and obligations is a major first step. But as you might have guessed, there are a few more steps to consider, to make sure you’re truly ready for anything unexpected. Here’s how you can keep making progress as a prepared homeowner:
1. Make a home inventory
This is documentation of your belongings, which you may need if you ever have to file an insurance claim. In the event of a major loss, it can be very challenging to go back and try to remember everything you had. The more detail you can capture the better—particularly for higher-value belongings.
But if you start to feel overwhelmed by this step, try not to give up. Consider prioritizing documentation for higher-value items, or items that would need to be replaced right away. And remember that some documentation, even if it’s just a photo, is better than nothing.
2. Consider if you need more coverage
Now that you know what your coverage includes, you also have a better idea of all the things it doesn’t include. If you have higher-value belongings that exceed your coverage limits in certain categories, you may be able to boost your coverage with only a modest increase in your premium.
While adding flood or earthquake insurance might be more costly, you can always start by pricing it out before making a decision. Think about the risks of your area and of your particular property and weigh your ability to self-insure. A financial professional can help you better understand your financial capacity to take on risk, if you choose to self-insure.
3. Make a plan for financial and personal documents
Hopefully you never face a natural disaster. But if you do, your focus in the moment will need to be on getting yourself and your loved ones to safety—not on tracking down documents.
So take the time to figure out what documentation you would want to save in a disaster scenario and make a plan. Make sure to also back up your home inventory somewhere you could still access it, even if you lost access to your home.
No one wants to think about the unthinkable or spend hours making plans they might never use. But remember that it’s an investment in your family’s security, so consider it time well spent.