Understanding Home Insurance

Your most valuable material possessions are probably your home and its contents. Could you afford to replace them? No? Then you, too, need insurance… not only to protect your belongings but also to help you meet your potential legal obligations to others.

Many insurance companies base their policies on the clear-language wording developed by the Insurance Bureau of Canada. While this explanation is a useful guide to typical policies, please remember that it is not a legal document. (If you are renting your home, or if you own a condominium, please refer to Tenant Insurance, Condominium Insurance and You!)


Read Your Policy Carefully
Home insurers are very competitive and there can be many differences from one policy to another. While this makes it easier to shop for the policy that most closely meets your particular requirements, it does mean that you should read the text carefully and ask for clarification if there’s anything that you don’t understand. When you read an insurance policy, you’ll want to know:

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Good, Better, Best…
There’s a policy to suit every wallet.

Standard/Good: This form of home insurance (this explanation is based primarily on this type) provides coverage against specific perils on buildings and contents.

Broad/Better: Another type provides so-called “all-risk” coverage on buildings, and coverage for specific (often called “named”) perils on contents.

Comprehensive/Best: For a somewhat higher premium, you can buy “all-risk” coverage on both buildings and contents. NOTE: Even though the term “all-risk” is commonly used, there are still some exclusions!

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When Should I Buy Home Insurance, and How Much?
Insurance coverage on your home should begin as soon as you become the legal owner, even if it is still under construction. If you are borrowing money to pay for your home, the lender will usually require you to insure the building for the undepreciated amount that it would cost to replace. Your broker will help you to determine that amount. Remember, however, that land is not insurable. (Many lenders still tend to look for insurance in the amount of the mortgage – which, of course, includes land value – unless the insurer provides information that the dwelling itself is insured to its replacement value, being what it would cost to rebuild the home if it were destroyed.)

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Inventory: Know What You Own!
How much insurance you need depends, in part, on contents. An up-to-date inventory is important to record items and their value in order to help your insurer, police and others in the event of a burglary or fire, for example. Some people like to make a drawer-by-drawer, room-by-room video recording of their possessions; some use a regular camera. An audio cassette recorder could be useful for making a spoken list of collections (books, tools, stamps, and so on); this would capture more detail than you could achieve with a camera. Hand-written or typed descriptions are useful, too. Keep purchase receipts for major items. Store your inventory records in a safety-deposit box or other secure location.

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Deductibles
Your insurance policy will require you to pay an agreed amount of certain losses; the higher the deductible, the lower the premium. Deductibles in homeowner policies generally are $500; this means that you pay the first $500 of each claim and the insurer pays the rest. For example, if your policy specifies a $500 deductible and you experience a loss of $2,000, you are responsible for the first $500 and the policy responds to cover the balance of $1,500. It’s certainly best to know the deductibles that apply to your policy before you need to make a claim.

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Replacement or Depreciated Values?
Suppose that your old TV is stolen. A new one (replacement) may cost ten times more than the depreciated price of a used one. The choice is yours; it can be worthwhile to pay a higher premium in order to replace “used” with “new”. Regardless of your policy type, cash settlements are usually based on depreciated value; you must actually buy a new replacement article to receive replacement value from your insurer.

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Who are “You” and What’s “Yours” …and Theirs?
When the text of an insurance policy uses the words “you” or “your”, it’s usually referring to the person(s) who is (are) named on the coverage summary page. The policy also includes, while living in the same household, that person’s spouse, the relatives of either, or any person under 21 in their care. Common-law husband-and-wife unions are recognized for insurance purposes if a man and a woman have lived together continuously for three years, or for one year if a child is born of their union. It may be possible for your policy to be expanded to cover property that you are storing temporarily for people who are not members of your household.

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What’s a “Dwelling”?
Your dwelling coverage applies to your home and attached structures such as a garage or carport. Permanently installed outdoor equipment on the premises (a swimming pool and attached equipment, for example) is included. Building materials are covered, too. You may apply up to 10% of the amount of insurance on your dwelling to insure building fixtures and fittings (such as mirrors or air conditioners) temporarily removed for repair or seasonal storage. You may apply up to 5% of your insurance to trees, plants and shrubs; but there’s often a limit for any one item. Lawns aren’t insured. As always, it is advisable to check your actual policy wording for specific limitations.

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Other Buildings
Separate structures and buildings on the same premises as the primary dwelling are also covered for specified amounts, usually up to 10% of the main coverage. This could apply to detached garages, for example, or even to garden sheds. If 10% seems too low, consider buying additional coverage.

About Cottages: If you have a cottage, you may want to insure it separately, or you may wish to have it insured on the same policy as your home insurance. Coverage is usually more limited than with dwellings that are occupied year-round and are close to water-mains, police and firefighting services. Burglary can be purchased, but not theft; in other words, for a claim to be considered, there must be signs of forcible entry. Vandalism and malicious acts are not covered either, but can often be purchased separately. In winter, make sure that snow does not accumulate on the roof; a collapse due to the weight of snow would not be covered. Your broker can explain further. With cottage insurance, it’s particularly important to invest whatever time it takes to be certain that you understand the policy’s limits before you agree to coverage. Remember to include outbuildings, fences, and so on when calculating the coverage you need.

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Business Premises and Vacant Buildings aren’t “Homes”
Loss or damage to a dwelling or its contents is not normally insured if the building has been used for business or farming, or has been vacant for more than a month without your insurer’s prior approval. (A “vacant” building is one that you’ve moved out of, not intending to return.)

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Personal Property (but not Business Equipment)
Your homeowner’s policy will cover the contents of your home and other personal property that you own, wear or use (including clothing, cameras, furniture, etc.) while on your premises. It may even cover personal property of others (but not of roomers or boarders) who are not related to you. Your policy will normally cover personal property (up to 10% of the amount of insurance on your personal property) while it is temporarily away from your home anywhere in the world. Personal property not normally kept at home is not covered. Personal property in a warehouse is usually covered against theft.

A note about theft: Some policies cover theft (no signs of forcible entry); most will cover burglary and robbery. “Mysterious disappearance” is not part of a basic policy (example: a wedding ring left by mistake in a blouse pocket is nowhere to be found at the end of the washing machine’s spin-dry cycle).

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Special Limits of Insurance

About “floater” policies or wordings: Reasonably priced supplementary insurance is usually available. These policies or riders provide all-risk coverage for specific items – often fragile and/or valuable – subject to certain exclusions. Coverage can be world-wide. There’s usually no deductible and “mysterious disappearance” is covered.

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Additional Living Expense
If an insured peril (please see following list) makes your home unfit to live in, and you have to move out while it is being repaired, your insurer will cover any necessary increase in living expenses (including moving costs) so that your household can maintain its normal standard of living. Payment – usually not exceeding 20% of the building coverage amount – is limited to the reasonable time required to repair or rebuild your home, or for you to settle elsewhere.

Fair rental value: If you lose a tenant because of an insured peril, your policy will cover fair rental value for the reasonable time required for repairs or rebuilding. Rent-related expenses (heating or electricity, for example) that don’t continue during reconstruction aren’t covered, nor is a lease cancellation. The total coverage available under this provision, too, is limited to a percentage of the building coverage amount.

Access denied: If the police or other civil authorities deny you access to your home as a direct result of damage by an insured peril to neighbouring premises (or perhaps because of an event such as a forest fire), you may be reimbursed by your insurer for additional living expenses and/or lost rental income for up to two weeks. Additional coverage is sometimes available in the event of mass-evacuation (following a toxic spill from a train wreck, for example). As this is a relatively new form of coverage, be sure to check your policy wording carefully.

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What Perils are Insured?
Insurable perils can include:

Observations about oil: Contamination of property is not normally covered, but optional coverage is sometimes available for spills of furnace oil.

Words about water: Water escape is an insured peril that is often misunderstood. It means accidental discharge or overflow of water or steam from within a plumbing, heating, sprinkler or air-conditioning system, appliance, pool (and related equipment) and public water-mains. This could be due to freezing, or due to cracking or bursting from a variety of causes (including excess pressure, or lack of water in a furnace). Excluded are floodwater (from an overflowing creek, for instance), water seepage that is repeated or continuous (from a cracked basement wall, perhaps), sewer backup, malfunctioning sump pumps, leaky eaves-troughs and downspouts. Coverage for sewer backup may be available for an additional premium.

Facts about freezing: Your policy will not normally cover damage caused by freezing that occurs during the usual heating season if you have been away from your premises more than four days. However, if you had arranged for a competent person to enter your home daily to ensure that heating was being maintained, or if you had shut off the heater supply and had drained all the pipes and appliances, you would still be insured. Damage from freezing outside the home is not covered.

Maintenance memo: An insurance policy is not a maintenance contract! Your insurer would not consider a claim for damage if, for example, a wall of your bedroom were to be soaked by water leaking from a rusty outside eavestrough or downspout.

Cool words about “hot” property! Illegally acquired property is not covered (including stolen goods). Some insurers won’t cover imported items which have not been declared to Canada Customs. Still on the subject of “hot” property, direct damage resulting from the application of heat is not covered. For example, clothing scorched by an iron would not be covered, because the heat was applied intentionally. But if the iron set the clothing on fire and the flames spread to the room and its contents, that damage would be covered. Intentional damage caused by you or damage that results from your criminal activity would not be covered.

Moving? Discuss your coverage with your insurance broker – and your moving company – before you move. Your regular policy doesn’t include coverage for moving.

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Liability Coverage
Personal liability insurance is rather like third-party liability car insurance, but for the owners and occupants of buildings. It applies anywhere in the world to bodily injury you may unintentionally inflict on others, or to your accidental damaging of their property. At your home, for example, suppose a visitor or a household employee were to be injured by a falling brick, and you were judged to be legally responsible; there would be no deductible and you would be covered for legal liability arising out of your personal actions. (This coverage does not apply to injuries sustained by you, however, nor to members of your immediate household. Also, there’s no coverage for “punitive” damages assessed by a court as punishment for your actions.)

Trailers, boats, golf carts… Your liability insurance automatically covers for losses arising from your ownership or non-business use of

Business and business property: Home insurance is not business insurance. However, you are insured against claims arising from the occasional rental of your home to others (with certain restrictions pertaining to boarders).

Legal defence and settlement: If someone alleges that you are responsible for injuring him or her – or for damaging his or her property – your insurer will defend you against any resulting suit for compensation, even if the suit is groundless, false or fraudulent. (Of course, the suit has to be related to your insurance coverage.)

Note: Your insurer has the right to investigate, negotiate and settle any claim or suit as it sees fit. Legal insurance – a product that is unrelated to property and casualty insurance – might be useful in the event that you were to disagree with your insurer’s settling out of court on your behalf.

Voluntary payments: You may not be legally responsible for accidentally injuring someone or damaging someone else’s property, but you may feel morally obliged to make amends. Or you may wish to reimburse others for direct property damage caused, even intentionally, by a child (12 years of age or younger) in your household. That’s where “voluntary payment for damage to property” and “voluntary medical payments” coverage can be useful. (Although this provision can apply to loss or injury experienced by household staff, members of your household are not covered.)

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Making A Claim
Most claims are subject to a policy deductible. (Deductibles help make insurance more affordable for everyone by eliminating minor “nuisance” claims.) Of course, there’s no coverage for losses that result from criminal behavior by the policy-holder. And you can’t claim for the amount (if any) that exceeds the sum insured.

If you have suffered a loss for which you are insured, inform your insurance broker of the nature of your claim. If there has been a burglary or theft, the police must also be informed. You’ll be required to supply information about the circumstances of the claim as well as reasonable evidence to justify the amount claimed. Your insurer will want an accurate description of items stolen, for example, and will want to know when they were acquired and what they cost at that time.

A claims adjuster may then be appointed – at no cost to you – to look after the details. In liability claims, he or she will attempt to assess responsibility. You should take reasonable steps to protect against additional damage. If a pipe has burst, for example, shut off the water supply. In some instances, your insurer may arrange assistance for temporary repairs, such as covering a damaged roof, or boarding over a broken picture window.

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Questions?
When you buy home insurance, you buy peace of mind. Insurance is a product that works best when both sellers and buyers are knowledgeable. If you have questions that are not answered that have not been addressed, all you have to do is ask!

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