Understanding Your Home Insurance Policy
Understanding your home insurance policy makes claims for fire or flood damage easier to navigate and negotiate. Generally, there are two parts to your home insurance policy: the declaration pages and the long-form policy. The long-form policy is the full wording of all of your home insurance terms, including every necessary detail. Often the long-form policy will include optional endorsement clauses, which are special terms that have been added or limited according to your specific file. The declaration pages are a where you will find your coverage limits as well as a summary of the key terms or endorsements applicable to your file.
Unless you have the policy and declaration pages stored online, there is a good chance that after a fire you may need to contact your insurance company for a new copy of your complete policy.
Once you have your complete home insurance policy, you need to review and discover what expenses are covered by the policy and what limits are in place. One way you can make the negotiation process is easier is working with Virani Law at any point in the process.
You can also use the information provided in this article to improve your understanding of your home insurance policy and its key terms.
Understanding Key Terms
To start, familiarize yourself with some of the key terms in your insurance policy and the claim process.
A common insurance term, deductible refers to an amount of money you have to pay before the insurance company pays funds to the claim. You may be familiar with this from a workplace benefits package.
This is a summary of your insurance policy including an overview of the details regarding coverage and your policy limits. For guidance reading this or the long-form portion of your policy, see our advice further in this article.
Schedule of Loss
A detailed list of personal contents in your residence that were destroyed or damaged. The insurance company uses your Schedule of Loss to negotiate your personal contents coverage.
Personal belongings in your home including furniture, food, clothing, electronics, and other items.
Actual Cost Value
Actual Cost Value coverage takes depreciation into account. You will receive settlement based on what your items were actually worth at the time of loss. For example, furniture that is 3 years old will have significant wear and tear, meaning it only be worth 50% of what you paid for it. This type of coverage, which is different from Guaranteed Replacement Cost coverage, may be applicable to your personal contents or the repair/rebuild elements of your home.
The decline in value of an item or asset due to wear and tear or passage of time. Depreciation is important for calculating the Actual Cost Value.
The present-day value of something based on what others have paid for similar things. For example, the market value of your home could be estimated at $500,000. It’s important to understand that the insurer does not pay out your claim based on market value. An Insurance claim is paid out based on the cost of repair and replacement for your home and its contents using replacement costs for material and labour. This is often far less than its market value because the insurance company does not need to factor in the location of the property, the lot traits, or similar market factors since those were not affected by the loss.
Contents and structure coverage may be provided using Replacement Cost coverage instead of Actual Cash Value. This coverage will provide you with the funds to buy the same or similar items as a replacement. The overall value is determined using the current cost of the item.
Additional Living Expenses
Additional Living Expenses (“ALEs”) are a distinct area of coverage included in your home insurance policy. This coverage area is meant to reimburse you for the increased everyday living costs associated with being unable to live in your damaged home. Also known as Loss of Use coverage, it reimburses you for living expenses above and beyond your usual budget, including accommodation, food, travel, and storage.
Private and Detached Structures
This refers to repair or rebuild coverage for detached structures like a garage or a shed.
Also referred to as ordinance or bylaw coverage, this covers the costs of upgrading or altering a home if required by current standards and bylaws. An older home probably did not meet all of the current codes at the time it was damaged, and when it’s repaired or rebuilt, some changes may need to be made in order to meet those new codes and qualify for the necessary permits. Upgrade coverage helps ensure that if your home was not up to current codes, the cost of those additional changes doesn’t come out-of-pocket. Under your general structure or dwelling coverage, the insurer is only agreeing to rebuild the home exactly as it stood before the damage, so the cost of these unanticipated changes might not be covered.
A specified peril is a type of loss specifically named in your insurance policy, such as damage by fire or flood. Some policies put limits on what they will cover for certain categories of personal contents (auto parts for example), and these limits may not apply if the loss came by way of a specified peril (and not something left unspecified such as theft).
Global Cash Settlement
This is an agreement with your insurance company that you settle all or a portion of your claim for a lump sum payment that you can proceed to spend how you want. Some insurers may offer a settlement that requires a homeowner to repurchase the exact or similar items to those listed in the Schedule of Loss and submit the receipts to receive full payment. Often homeowners prefer the global cash settlement method, as it lets them retain the power of choice when replacing their contents.
Reading Your Declaration Pages
As mentioned above, the declaration pages are an essential summary of your home insurance coverage. While the fine print can be found in the long-form policy, if you start your reading with the declaration pages you will have a good idea about what is covered and what your limits are. Before you start, consult our overview of how to read your declaration pages and what essential information you should look for.
Determine who is named in your insurance policy. This is the “named insured,” but other people who are not named may be insured as well (immediate family members for example). Defining who is insured outside of the named insureds is likely found in the long-form policy.
Determine the address listed in your insurance policy, also known as the address of risk. This is the address that the policy insures. It may be easy to miss; if it is not visible, it is likely that the billing address is the address of risk.
Determine the timing. You must ensure that the policy was in place during the time of residential loss, i.e., the house fire, mass evacuation order, or flood. It is not uncommon for homeowners to be in possession of old declaration pages. Do not panic if the declaration pages do not state that the policy was in place during the time of residential loss. Usually, it means that you do not have updated paperwork and amounts, as many policies have limits that rise slightly each year to match inflation.
Find out if the type of loss (i.e., fire, flood) is a specified peril covered by the policy. Fire damage is one of the most common specified perils in insurance policies, though each policy will specify certain perils while excluding others. Further information can be found in your long-term policy.
Notify your mortgage company if you are preparing to make an insurance claim. Most mortgages require you to promptly notify your lender in the event of a residential loss. You must continue to make mortgage payments, even if your home has been completely destroyed. However, most mortgage companies have programs in place that can help borrowers through a disaster. They may be willing to suspend mortgage installments or late payments for a limited time period or stop foreclosure. Lenders are often willing to help homeowners get back to normal, but the obligation to keep up with mortgage payments remains.
Make sure that your premiums are up to date and that they were paid in full by the time of residential loss. You will find a billing history on most declaration pages. Ultimately missed payments could mean that your insurance policy was not in place at the time of residential loss.
Determine your coverage limits for the three main categories in your home insurance policy:
- Structure / Dwelling – The costs of repairing your home, such as repairing smoke damage, replacing siding, windows, floors, etc.
- Personal Property / Contents – The costs of replacing your personal belongings lost or damaged by the fire or flood.
- Additional Living Expenses / Loss of Use – The extra costs of living incurred due to loss of use of your residence.
Check to see if your Personal Property and Contents or Structure / Dwelling coverage includes Guaranteed Replacement Costs, usually found in the same place where you would find coverage amounts. You may need to consult the long-form policy.
Determine your deductibles. As explained in our glossary of terms, your deductible is the amount that you must pay out ahead of your coverage kicking in, or alternatively, it may simply be deducted from your payments later on the claim.
Check for any unique clauses that could be applicable, such as clauses related to sewage back-up, single-inclusive policy limits, or liability limits.
You can call us to learn more about negotiating a settlement that’s fair. We’ve lived through it and understand the stress of understanding your home insurance policy.