Understanding Your Home Insurance Policy
Filing an insurance claim is a major undertaking. There can be significant finances at stake and a mountain of legal paperwork to deal with. Making a claim for fire or flood damage will be much easier when you understand what your home insurance policy covers. That information can be found in the two parts of 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.
The declaration pages are where you will find your coverage limits, as well as a summary of the key terms or endorsements applicable to your file. The long-form policy is your entire policy, including endorsement clauses, which are special terms that have been added or limited according to your specific file. They are where you will find a complete outline of your entitlements and obligations.
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, it’s time to review and discover what expenses are covered by the policy and what limits are in place.
What Is a Home Insurance Policy?
First, let’s look at what a home insurance policy is and what it covers. As the biggest investment you likely own, your home needs protection. You can’t guarantee that a fire will never start in your home or that extreme weather could damage. However, you can take out an insurance policy that will pay for the damage and help you rebuild if something happens.
Your home insurance policy will pay for structural repairs, lost or damaged contents, and living expenses related to the loss of use of your home. Typically, these losses are covered if they are the result of a fire, weather events, water damage, or theft. Your policy should also include liability coverage, which protects you if you are sued because someone injures themselves on your property.
There are several home insurance policy types:
- Basic or “no-frills” policies that provide below-average coverage;
- Standard policies or “named perils,” which provides coverage for specified events that put your home at risk, such as a fire;
- Broad policies that offer a greater range of coverage;
- Comprehensive policies that cover all risks.
You can learn more about what a home insurance policy covers in our home insurance claims guide. It provides insights into the different areas of coverage and how your policy breaks down to pay for different expenses.
Know Your Policy Before You Negotiate
When you file a claim, a claims adjuster reviews the damage to your home and loss of belongings. They may consult contractors to determine what structural damage needs to be repaired, and they will provide estimates on the value of your contents. Then they recommend how much the insurance company should offer.
You do not necessarily have to accept the first offer the insurer makes. You have an opportunity to review the offer and determine whether or not it’s fair. You may disagree with some of the insurer’s decisions, such as refusing to make certain repairs or undervaluing your belongings. An initial low offer may even be a negotiation tactic that the policyholder isn’t expected to accept.
You can submit a counter-offer that you believe will be fairer. Before you do, you should know what you’re entitled to in your policy. You should know your coverage limits, how those limits break down, and what types of coverage your policy entails.
It helps to have experts in home insurance claims on your side when you start to negotiate with the insurer. They’re familiar with the process and know how to talk to insurers and persuade them to raise their offer without having to resort to dispute resolution or legal actions. Not only do you want to make sure that you receive a fair settlement, but you also want to avoid any unnecessary delays in the process so that your family can rebuild and get back to normal life as soon as possible.
Throughout the home insurance claim process, Virani Law makes sure that your insurer lives up to the terms they agreed to in your policy. Your policy is a contract, and both parties have obligations that they need to uphold when a claim is made.
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Understanding Key Insurance Terms
As you start the claims process, it can help to familiarize yourself with some of the key terms in your insurance policy and the claims process. An insurance lawyer can also help you understand these and other terms, as well as the legal documents you will have to complete and sign along the way. You can also find more information in our frequently asked questions about your policy, insurance coverage, and the entire claims process.
A deductible refers to the amount of money you have to contribute to expenses before the insurance company pays out funds. You may be familiar with this from a workplace benefits package. Home insurance policies include deductibles to prevent homeowners from claiming every minor repair they need. If the cost of repairing the damage is not higher than the deductible, you may not want to make a claim at all.
This is a summary of your home 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.
Proof of Loss
A detailed list of personal contents in your residence that were destroyed or damaged. The insurance company uses your Proof of Loss to determine how much Contents coverage you receive. The form will also list the Replacement Value and Actual Cash Value of listed items, as well as the amount your home insurance policy covers.
Personal belongings in your home including furniture, food, clothing, electronics, and other items. All personal belongings are covered under the limit, except for certain valuables that may be subject to special coverage limits, such as jewelry, art, furs, etc.
Actual Cost Value (ACV)
There are two home insurance policy types of coverage: Actual Cost Value and Replacement Cost. ACV coverage takes depreciation into account. You will receive a 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 will only be worth a fraction 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. This home insurance policy type can leave families frustrated as they only receive Guaranteed Replacement Cost if you replace the item. Most people want to obtain new or different items after a 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 items of “like-kind-and-quality.” The overall value is determined using the current cost of the item.
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. There are various ways depreciation may be calculated, and not all things depreciate in the same way. Generally speaking, a percentage of the item’s cost is subtracted for each year since you purchased it. You may have reason to disagree with the insurance adjuster’s depreciation calculations, and that can impact the final size of your settlement.
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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 repairing your home and its contents using replacement costs for material and labour. This is often far less than a property’s 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.
Additional Living Expenses
Also called Loss of Use, additional living expenses 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 displacement. ALE coverage reimburses you for living expenses above and beyond your usual budget, including accommodation, food, travel, and storage.
You may be able to get a cash advance for ALEs during the home insurance claim process. Expenses can mount quickly, and it wouldn’t hurt to get money right away to cover the costs. The advance is simply deducted from your final claim when you settle.
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. If you live in an older home, there is a good chance it did not meet all of the current building codes at the time it was damaged. Buildings are typically grandfathered into new codes, but whenever repairs or renovations are made, some changes may need to be made in order to meet those new codes and qualify for the necessary permits.
These changes are common problems with home insurance claims because your standard home insurance policies will only pay to replace what was damaged. 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 included without this extended coverage.
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). Adjusters often overlook this coverage line and apply a limit when a limit would not be applicable.
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 Proof 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.
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Reading Your Declaration Pages
As mentioned above, the declaration pages are an essential summary of your home insurance policy. 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 of 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 home insurance policy. This is the “named insured,” but other people who are not named may be insured as well (immediate family members for example). You will likely find information about those not named as insureds 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. Make sure you obtain a copy of both documents.
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.
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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 in 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 know the stress that comes with home insurance claims and can help you every step of the way.
What to Look for in a Home Insurance Policy
When you’re getting home insurance policy quotes, you have to look beyond the premiums. The majority of Canadians are underinsured, and the consequences of filing a claim without enough coverage can be a significant financial setback. When you’re underinsured, your policy won’t cover the full costs of rebuilding your home. Without sufficient funds, you could wind up in debt or be forced to rebuild a smaller home.
Look past the home insurance policy quotes and look at what kind of coverage you’re getting. Before you settle on a policy, ask yourself these questions:
- Do you have enough money saved to pay the deductibles in your policy?
- Are you financially prepared if your costs surpass the limits in your policy?
- Is paying a lower premium worth the potential risks of being underinsured?
The more you know about the claims process, the better you can anticipate your insurance needs. Check out our claims and recovery guide to find out what you might have to go through should you lose your home to a fire.
Your home insurance policy protects what is likely the most valuable asset you own. It pays to understand that policy and make sure you’re prepared for the unexpected.