How You Can Make Sure You Have Enough Insurance Coverage
Do you feel comfortable with your home insurance coverage? You rely on your policy to get you back to normal if fire or water damages your home. A loss like that can be both emotionally and financially devastating, especially if you don’t have the right insurance coverage. Unfortunately, many Canadians are underinsured, and they don’t even know it.
You may need to take a close look at your policy, your personal finances, and your home itself to determine whether you have sufficient coverage. You can’t always rely on a broker who doesn’t truly understand the value of your home and/or property. Depending on how well you communicate with the broker, there may be misunderstandings and errors leading to aspects of your policy that haven’t been fully explained or understood by either side.
There are several common reasons you may be underinsured. You may have insufficient coverage in key areas like Additional Living Expenses, Structure, or Personal Contents. You may not have budgeted for your deductibles, or you may be missing bylaw and upgrade coverage, all of which can leave you out-of-pocket if you suffer a loss.
Budgeting for Deductibles
If you don’t remember what your deductibles are, check your policy. Some policies include multiple partial deductibles for different areas of potential claims, meaning you might pay a few smaller deductibles even if you only suffer one loss.
A deductible is an amount of money that you have to pay before the insurer begins to pay. Insurers require a deductible for a couple of reasons:
- The insurer’s financial stability: insurers need to take some steps to ensure that both parties are protected against catastrophic loss; and
- Avoiding minor claims: without a deductible, the insurer could be responsible for every little breakdown or accident in your home. The costs could quickly spiral out of control, which would either make their business unprofitable or force them to raise premiums significantly.
If you are looking for a policy with lower premiums, a broker may sell you a policy with a higher deductible. If you opt for this solution, it’s smart to keep an emergency fund with at least the value of the deductible. That way you won’t be in severe financial hardship if you’re faced with a major loss and still having to pay the deductible. Be wary of lowering your premiums and make sure you understand exactly what you are trading in the deal.
Additional Living Expenses
Additional Living Expenses (ALE) coverage helps with the financial burden when you need to stay somewhere other than your home. ALEs cover increased expenses like:
- Hotel stays;
- Restaurants and takeout;
- Short and long-term rentals;
- Transportation costs; and/or
- Pet boarding.
It’s important to know that ALE coverage does not provide 100% reimbursement on these costs, but instead just the increased portion above and beyond what you would normally spend. You have to consider your everyday costs to maintain your normal standard of living and then claim only the increased (i.e. “additional”) expenses. For example, ALEs would cover your entire hotel bill because normally you would stay in your home at no cost. However, when it comes to food, the insurer would subtract your normal food expenditure from what you spent during the recovery period.
ALE limits are typically calculated as a percentage of the replacement cost coverage on your home. Usually an ALE limit comes in at about 20-30% of the structural coverage amount.
Your policy might cap ALEs to a certain period of time, whether specified (i.e. 12 months) or subjective (i.e. “reasonable time to repair or rebuild”). If your ALE period is capped subject to a “reasonable” repair time, and you are using your own contractor instead of the insurer’s preferred vendor, the insurer may still try to cap the period using their preferred vendor’s proposed timeline. If your own contractor takes longer to complete the repairs, the insurer may deny ALE costs for the extra time.
Shortfalls in Contents Insurance
Contents coverage is easily undervalued when applying for or updating a policy. When you buy a new home, you sign up for a home insurance policy with contents insurance for the things you move in with. As years go by you buy new computers, new furniture, upgrade the fridge, collect jewelry and other valuables, but you don’t update your home insurance policy to reflect the additional or more valuable belongings.
Your policy may have special limits for valuable items like jewelry, which might be inapplicable if the cause of loss qualifies as a specified peril. For example, high-risk items like jewellery may be subject to limited coverage if they are lost to theft, but not if they are lost to specified perils like fire.
To avoid being underinsured on contents, evaluate your belongings every so often and determine if your policy needs to be updated. If you plan to significantly add to the value of your belongings, check the limits on your policy and talk to your broker about adjusting your insurance.
If you’re worried that the insurer will not fully compensate you for lost contents, meeting with content insurance claims experts can be a good place to start.
Bylaw coverage is not as well-known as contents or structure coverage, but it is an area where policy holders can be caught short. If you want to know what is bylaw and upgrade coverage, it prepares you for making structural repairs in a new way than was actually built pre-loss due to updated bylaw or building code standards.
Building codes are regularly updated regulations on construction materials and methods. Updated codes help ensure that new buildings are safer, more resilient to natural disasters and the elements, and more energy efficient, saving homeowners money and protecting them from loss.
As building codes get updated, most previous structures are grandfathered in until they’re renovated, at which point they must be built to the updated code.
When it comes to your insurance, that means your rebuild might cost more than it would have cost to simply rebuild the exact same structure that you had before the loss. Without bylaw coverage, your insurer is only responsible for bringing your home back to its state before the loss. You will have to pay out of your own pocket to bring the structure up to code if you do not have bylaw coverage after an insurance loss.
If you can’t remember the details of your home insurance policy and you’re worried about being underinsured: get your declaration page and long-form insurance policy and review it. In particular, look for key figures and ask yourself the following questions:
- Can you afford to pay the deductibles if something were to happen today?
- Does contents insurance coverage accurately reflect the full value of ALL of your belongings?
- Do you have sufficient ALE coverage to provide for increased living costs over a long period of time?
- Do you have bylaw and upgrade coverage?
- Could you realistically rebuild your entire home from the ground up for the amount listed for the “structure” coverage?
Talk to your broker about changing your coverage if you find you’re underinsured.