Homeowners’ Insurance Overview: What Are My Options?

Raziel Ungar

Raziel Ungar

November 23rd, 2022 - 13 min read

This section will give you a better idea of how homeowner’s, or hazard insurance works and the different types of coverages available.

Most lenders typically require your first year of homeowner’s insurance is paid in advance at the close of escrow. You must have your policy in place as the lender cannot fund your loan until it has verified that your insurance policy will take effect immediately upon the recordation of your deed. Once you’ve finalized your insurance carrier, please make sure to let your escrow officer know at the title company.

This Article Includes

The difference between local vs national carriers

Many of our clients have existing insurance relationships with national carriers. While we encourage you to get multiple quotes and shop around, we have found that some national carriers have broad guidelines that are not as flexible with insuring older homes, and you may run into issues where your home is not a fit for them. The good news is many carriers write policies in our area. If you’d like a referral or two for an insurance broker, please let us know. A good broker will guide you through the decisions you need to make about your homeowner insurance program.

Reconstruction Value Of Your Home

Now that you have found your dream home, or completed your rebuild or renovations, it's time to to purchase a homeowners insurance policy to protect your investment. The proper evaluation of a homeowners insurance policy begins with the determination of dwelling coverage.

Dwelling coverage is the amount of money granted by a Homeowners Insurance policy to rebuild the building structure that creates the living space of your home, including any attached structures or structures, for example built-in cabinets, that are permanently affixed to the home structure. Dwelling coverage is one of the most important components of Homeowners policy coverage as many other coverage amounts are functions of the Dwelling coverage limit. In addition, much of the Homeowners policy premium is driven by the Dwelling coverage.

Dwelling coverage should be equal to the replacement cost of the home, or the cost to rebuild the same home in the event of a total loss. Dwelling coverage should not be equal to the market value of the home or to the appraised value of the home as determined during a sale or a refinance. In fact, in many cases considering the current economic conditions, the cost to rebuild a home from the ground up is actually more expensive than the market value of the home. As a result, the Dwelling coverage on a Homeowners Insurance policy can be higher than the market value of the home.

Dwelling coverage is generally evaluated on a cost per square foot basis. Throughout the majority of the greater Bay Area, the low end of the appropriate range of Dwelling coverage, as of 2022, is approximately $500 to $600 per square foot, though on the Peninsula, it's fair to estimate up to $800 per square foot (some high end, very custom homes can even approach $1,000 a square foot). Thus, a 2,000 square foot home in Burlingame would need an average of at least $1.6 million of dwelling coverage. However, larger homes or homes with significant custom features would need even higher coverage per square foot.

Many carriers will conduct a replacement cost appraisal of a home (at no charge) once a policy is in place to further evaluate the appropriateness of dwelling coverage. A replacement cost appraisal is a great record of the homes features and can be very useful in the case of a large loss.

Carrying proper dwelling coverage limits on a homeowners policy is extremely important because if the coverage limit is inadequate to rebuild your home in the event of a loss, certain policy features may become null and void and you may be forced to liquidate assets to rebuild your home. Most homeowners don't have enough insurance to full rebuild after a total loss. Don't let this happen to you!

Extended Replacement Cost coverage can ensure that your home will be rebuilt to the same standards as the original construction. This includes quality materials and craftsmanship. Your house should not look the same after a covered loss, but – as closely as possible – be the same.

Personal Property Coverage

Replacement Cost Coverage ensures that your personal property will be replaced after a covered loss, not paid for after deductions for depreciation. You should also have “all risk” coverage for your personal property so that your belongings are covered for a wider array of perils than most standard policies allow. You might also want to consider listing expensive items, such as jewelry or fine art, separately.

Personal Property coverage, also known as Contents coverage, is just like it sounds and covers your belongings in your home. If you picked your home up off the ground and turned it upside down, the items that would fall out of your home are your personal property. While it's easy to think that you don't have a lot of contents in your home, when you add up the cost of every item from your pillows and bed sheets to your pots and pans to your furniture, the dollar amount adds up quickly! Personal property coverage usually provides limited coverage for valuable articles, like jewelry, fine art, silverware, china, or musical instruments. If you'd like to cover these items, you'll need additional coverage.Generally, personal property coverage is equal to 70% or 75% of the Dwelling coverage on the homeowners policy and most carriers will not allow the coverage limit to be decreased. If your home, like many in Burlingame and San Mateo, has a replacement cost (Dwelling coverage limit) of $1,000,000 or higher, you may want to contact me to evaluate Homeowners Insurance options from carriers that allow the Personal Property coverage to be decreased from the standard percentage, saving you premium. Otherwise you might end up with an unnecessarily high personal property coverage limit.

Loss of Use Coverage

If your home burned to the ground, where would you live? How would you pay for your living expenses while your home is being rebuilt? The answer is Loss of Use coverage.

Loss of Use coverage is the amount of money granted by a homeowners insurance policy to cover your expenses if you are displaced from your home in the event of a loss. Loss of Use coverage is generally equal to between 10% and 50% of your Dwelling Coverage. Some of the higher end carriers will provide unlimited Loss of Use coverage.

Though the amount of the coverage generally cannot be increased or decreased, it's important to be aware of the amount of Loss of Use coverage granted by your homeowners insurance policy to ensure that you have enough coverage to maintain your lifestyle and living situation in the case that loss leaves you out of your home.

Liability coverage - personal liability, personal injury, and medical payments

Usually, when people think about homeowners insurance, they think about the coverage that rebuilds the home after a fire - otherwise known as the Property coverages. But what coverage applies if a person is injured as a result of visiting your home? These coverages -- the Liability coverages -- are also essential pieces of a Homeowners Insurance policy. Unlike Property coverages, Liability coverages in Homeowners policy are notsubject to deductible.

The main Liability coverages are described below.

Personal Liability Insurance

Personal Liability covers damages that a member of your household is legally obligated to pay to another for bodily injury and/or property damage. Bodily injury refers to physical harm, including sickness or disease. Property damge means destruction of tangible property and the resulting loss of its use.

Personal Liability claims generally involve a lawsuit against you. But the good news is that most Homeowners Insurance policies will provide unlimited coverage to defend you against any Liability claim or suit. So, if someone trips on your sidewalk and claims paralysis as a result of the injury, the defense costs will not be limited.

On the other hand, the Personal Liability coverage limit that would apply to the final judgement is applied only up to the policy limits. Most Homeowners policies can provide Personal Liability limits of $100,000, $300,000, or $500,000. Your Liability coverage limit should at least be equal to the market value of your home, but you should also consider your net worth when selecting a Personal Liability limit. After all, you could be sued for your net worth!

Personal Injury

Personal Injury coverage pays for damages associated with the following injuries:

  • Shock/mental anguish

  • False arrest/false imprisonment

  • Wrongful entry or eviction

  • Libel, slander, or defamation of character

The Personal Injury coverage limit is usually the same as the Personal Liability coverage limit. However, Personal Injury coverage is not automatically included on all Homeowners Insurance policies (though in my professional opinion, it should be!).

If you are purchasing a home that you'll be renting to tenants, ensuring that your policy includes Personal Injury coverage is important.

An example of a Personal Injury coverage claim is as follows:

In 2010, parents in Northern California were sued by a high school teacher for damages in the amount of $10,000,000. The claim arised because their daughter was posting negative remarks on Facebook about the teacher, who claimed that the student caused significant damage to her professional career.

Medical Payments

Medical payments coverage pays the necessary medical expenses up to the policy limit for injury to anyone except you or a family member. These expenses must be the result of an accident that:

  • occurs at your home,  or at the steps, driveways, or sidewalks immediately adjoining your home

  • is caused by a member of your household

  • is caused by animal owned by or in the care of a member of your household

Medical Payments includes reasonable charges for first aid, medical, surgical, and hospital expenses. More importantly, Medical Payments coverage includes charges for items not generally covered by or limited by Health Insurance, including funeral, dental, and rehabilitation expenses.

Medical Payments coverage is no-fault coverage, so you do not need to be found liable in order for the coverage to apply. Having sufficient Medical Payments coverage can often deter a lawsuit against you, which is a definite advantage!

For example, if a guest at your home trips on your sidewalk and suffers a broken arm resulting in $10,000 of expenses, medical payments coverage would pay for the expenses associated with the injury up to the limit on the policy. If your Homeowners policy has only $1,000 of Medical Payments coverage, the injured party would likely need to file a lawsuit against you to collect the additional $9,000 to cover the damages.

Most Homeowners Insurance policies for homes can provide medical payments coverage of at least $5,000 and up to $50,000. So buy the highest medical payments coverage limit possible - it's inexpensive and valuable!

Additional living expenses

What will it cost if you cannot live in your home after a loss? Hotel bills and restaurant charges can add up quickly. The insurance policy you select should include enough coverage to allow you to continue to live as you are accustomed to, without additional expense.

Other Structures: Coverage for fences, pools, ADUs, decking, hardscape, etc.

Most homeowner policies include only a minimum coverage amount for damage to fences, pools, detached garages, and other structures that are not attached to the main house. You should consider having enough coverage to fully replace these items.

Other structures coverage is the amount of money granted by a homeowners insurance policy to rebuild the detached structures on the lot owned by the homeowners. If you picked your home up off of the ground, the structures left on the ground on your lot would be covered by Other Structures coverage. This would include detached garages, pools, sheds, fencing, decking, hardscape, and driveways. The larger the land on the lot surrounding the home, the higher the potential for the existence of Other Structures. A home in Burlingame or San Mateo would likely have more Other Structures than a home on a compact lot size in San Francisco.

Generally, other structures coverage is equal to 10% or 20% of the Dwelling coverage limit on the homeowners policy. Most carriers will not allow the other structures coverage to be decreased and, as such, it is not a premium driving factor on the homeowners policy. But, the Other Structures coverage limit can be increased if necessary to appropriately rebuild detached structures on your property.

Does a homeowners’ insurance policy cover everything that involves or occurs at your home? Are all types of damage to the home's structure covered?

Several fairly obvious items are not covered by a homeowners insurance policy. These include intentional acts, illegal acts, and fraudulent acts. If you intentionally burn your home down, your homeowners’ policy will not provide any coverage. Similarly, if you are personally liable for any damages related to the sale or provision of illegal drugs, for example, the Liability coverage in your Homeowners policy would not apply.

In addition, if there are instances of false statements in conjunction with the policy issuance, the homeowners’ policy coverages may not apply. For example, if you tell your homeowners' insurance carrier that you have a fire alarm that is monitored by an alarm, like ADT or Bay Alarm, you will receive a discount on your homeowners' insurance premium. If a fire causes damage to your home and it turns out that you did not have a monitored fire alarm, the carrier can decline to pay for your loss, denying coverage for material misrepresentation.

Builder's Risk policies - Doing work to your home prior to moving in

If you plan to keep your home vacant for a period of time while you do updating or remodeling, we recommend you get a builder’s risk policy. Typical homeowners insurance will not provide coverage if the home is not occupied and there is a loss or claim during that period. Having a builder’s risk policy in place well before any construction starts is a good idea. For example, if someone were to walk into your backyard or breaks inside, lights a cigarette and a fire starts, regular homeowners wouldn’t cover it. Prior to starting any work, you’ll also want your general contractor to list you as additionally insured on their insurance policy prior to starting construction. 

What about the policy exclusions that are not so obvious?

Common California Homeowners Policy Exclusions

Earth Movement - In California, all homeowners-type policies exclude losses resulting from earth movement, including earthquakes, landslides, mudslides, and mudflow. In Burlingame, San Mateo, and most of the Bay Area, the risk of earthquake loss is fairly high, so if you want to protect yourself and your home from this type of loss, consider carrying separate earthquake Insurance, which will be discussed in more detail in next month's post.

Flood, Surface Water, and Repeated Seepage or Leakage - Generally, for water-related losses to be covered, the loss has to result from sudden and accidental discharge of water. For example, if your dishwasher breaks, causing water damage to your kitchen cabinets and walls, the damage would usually be covered by your homeowners’ policy. To protect yourself against flood losses, you would need to purchase a separate flood insurance policy. Depending on the flood zone in which your home is located, your lender may require this coverage (specifically applicable in almost all of Foster City and San Mateo locations within a couple of miles from the Bay).

Fungi, Mold, and Rot - Losses caused by fungi, mold, and rot, including dry rot, are specifically excluded from the homeowners' policy coverages.

Business Pursuits - Unless specific coverage is added, all liability damages arising out of business pursuits would not be covered by a homeowners’ policy. There is generally minimal coverage included in the homeowners' policy for business property (i.e. computers and equipment that may be at your home). If you are operating a business at home generating more than $10,000 of annual revenue, you should strongly consider purchasing at least a basic commercial insurance policy and be aware that business-related losses that occur at your home may not be covered by your Homeowners policy.

Inadequate/Defective Design, Repair, Construction, Renovation, and Maintenance - If you purchase a home that has a roof deck, and it turns out that there is damage to the ceiling inside of your home under the roof deck that is determined to be caused by poor sealing (i.e. defective construction), the resulting damages would not likely be covered by your Homeowners policy. Another example: if you purchase a home that does not have proper surrounding irrigation and that is located at the bottom of a downward-sloping driveway, damages to the exterior/interior walls caused by water pooling around the home are also not likely to be covered due to the inadequate design of the home.

Lastly, the homeowners' policy coverages only apply to losses that occur during the policy period. So, if you purchase a home with pre-existing damage of which you are aware, your homeowners' coverages will not apply to related or ensuing losses. To help avoid some of these situations where damages to your newly purchased home would not be covered by your homeowners' insurance, talk with Raziel about detailed home inspections and make sure that you thoroughly review and understand the key findings of such reports, including action items that require repair or replacement.

Earthquake Insurance

In California, all homeowners’ insurance carriers are required to offer their insureds earthquake insurance every other year.

The standard earthquake insurance policy includes dwelling coverage that is equal to the limit on your homeowners’ policy, $5,000 of personal property coverage, $1,500 of loss of use coverage, and a substantial deductible of 15% of the dwelling coverage limit. For most homes in Burlingame, Hillsborough, and San Mateo, this would yield a deductible of at least $100,000.

Since the earthquake insurance policy has such a substantial deductible, the policy helps the most in the event of a catastrophic loss. The downside is that, in the case of such a severe loss, where the damage has surpassed the deductible, chances are that you will not be able to live at your home and you would need significantly more than $1,500 of Loss of Use coverage.

Questions to ask when considering earthquake insurance

How much equity do I have in my home?
The more equity you have in your home, the more reason to consider purchasing earthquake insurance. Though the premiums and deductibles can be high, if you own your home completely or even if you have a mortgage for less than half of the worth of the home, you have a much bigger investment to lose in the event of an earthquake causing major damage to your house.

In what year was my home built?

Homes built before 1948 that have not been retrofitted are much more likely to be damaged by an earthquake than homes built after the year 2000 simply because of the change in building codes, seismic technology, and building materials used in current construction.

Has my home been seismically retrofitted?

Most carriers require that your home be seismically retrofitted if it was built before 1948. Seismic retrofitting includes foundation anchor bolts, cripple walls where applicable in crawlspaces, and the strapping of the water heater to the wall. Most homes built after 1989 have some extent of retrofitting by the nature of building codes. Many times clients opt to spend what would be their annual earthquake insurance premium on the seismic retrofit of their home, which provides strength and stability to the foundation, significantly reducing the risk of earthquake damage.

How close is my home to a fault? On what type of soil is my home built?

If your home is located within 1/8 of a mile of a fault, earthquake insurance is a more important consideration than it would be if your home was 15 miles from a fault. In the immediate Bay Area, nearly all homes are within 10 miles of a fault. Homes that are built on bedrock are much less susceptible to earthquake damage than homes built on soft soil, which is prone to liquefaction. As a side note, usually, homes built on soft soil are located near water and are thus in flood zones, where Flood Insurance is required by lenders.

How easily can I satisfy the deductible?

As noted above, the standard Earthquake policy deductible is 15% of the Dwelling coverage limit. There are a few policies available with a 10% deductible, for an additional premium of course. If you do not have the liquidity to satisfy the potentially $100,000+ deductible, the coverage may not make sense for you.

Who will be my earthquake insurance carrier?

Since homeowners’ insurance carriers are required to offer earthquake insurance, many carriers have chosen to become a part of the California Earthquake Authority (CEA) pool to transfer the responsibility of underwriting this coverage. If your homeowners' carrier is a part of the CEA and you purchased earthquake insurance, then the CEA, a California government agency, would be responsible for the collection of premiums, the investment of premiums, and the payment of claims in the event of a loss. Make sure you understand exactly what carrier or entity will be responsible for paying claims in the event of an earthquake.

Another way to mitigate the risk of loss due to an earthquake is to install a seismic or an excess flow valve on your gas main. These valves automatically shut off your gas main if the earth moves at a greater magnitude than 5.0 or if too much gas is constantly flowing from your gas main. This valve reduces the risk that an earthquake could cause your gas main to break and blow up your home. Many insurance companies provide a discount on the homeowners' policy premium for installing one of these valves.

Whether you choose to purchase earthquake insurance or not, be informed about your decision and the reasons behind it.

Flood Insurance

Given we live next to San Francisco Bay, many homeowners are asking themselves if flood coverage is something they should have and what it covers.

Most homeowners’ insurance policies DO NOT cover damage due to flooding. To get that coverage, you can buy a separate policy through the federal government's National Flood Insurance Program (NFIP) or through other carriers that offer this valuable coverage. Flood coverage may be available to you whether or not you are in a high-risk flood zone.

If you own or are purchasing a home in a designated high-risk flood zone, you may be required by your lender to obtain flood coverage for the life of the loan unless the flood zone designation changes. Flood zone designation changes are not common, however, there was a recent mapping change that affected homes on the San Francisco Peninsula effective 10-16-2012. For more information visit FloodSmart.gov.

Even if your lender does not require flood coverage you must be aware that 25% of flood claims are filed from areas that are designated as “moderate” to “low risk. So, if you feel your area may be exposed to flooding you should at least look into the price of coverage. Generally speaking, flood insurance is quite inexpensive.

Moderate to Low-Risk Zones (B/C/X) are eligible for coverage at a preferred rate. Preferred rate policy premiums are the lowest premiums available. The premiums usually run in the range of $375 - $500 annually with the maximum limit of $250,000 for the dwelling and $100,000 maximum for personal property. A $1,000 deductible is the only option available in this category.

High-Risk Zones (A/AE/V) are eligible for coverage at a standard rate. If your home is located in one of these zones and you carry or plan to carry a federally backed mortgage (which are most loans) most likely your lender will require you to carry flood coverage to insure the reconstruction cost of your home for the maximum limit of $250,000 building coverage. Personal property coverage may be optional. The rate for this type of policy is in the range of $1,700 to $2,300 with a maximum of $250,000 in-building coverage and a $100,000 maximum in personal property. The high-risk policy may offer options for higher deductibles but you must check with your lender and refer to the terms of the loan.

What is Covered?

Building property: Dwelling Coverage is offered up to $250,000 on a basic policy but may be eligible for excess coverage to cover the full replacement cost of the home. Building property covers the insured building and its foundation, electrical and plumbing systems, furnaces, air conditioning, and water heaters. Also included are permanently installed properties such as refrigerators, stoves, dishwashers, carpeting, and unfinished flooring. Generally, outbuildings such as a guest houses, detached garages, pool houses, etc. cannot be insured. Please refer to your policy contract or agent to confirm coverage.

Personal Property: This coverage is offered up to $100,000 on a basic policy but may be eligible for increased limits on an excess flood policy. Your contents coverage would include personal belongings such as clothing, furniture, electronic equipment, and portable appliances.

What is Not Covered?

Damage caused by moisture, mildew, or mold that could have been avoided by the property owner. Currency, precious metals, and valuable papers such as stock certificates are not covered. Property and belongings outside of the building such as trees, plants, wells, septic systems, walk, decks, patios, fences, seawalls, hot tubs, and swimming pools are also not covered. Living expenses such as temporary housing are not covered.

Coverage is limited regardless of zone in areas below the lowest elevated floor such as basements, crawl spaces, walkout basements, and enclosed areas under other types of elevated buildings.

What if my property is rezoned due to a map change?

A flood map change could affect the requirement by your lender to carry flood coverage or it could result in the requirement to carry flood coverage when not required previously.

If your zone has changed from a high-risk zone to a moderate or low-risk zone you may be eligible to cancel your flood coverage required by your lender or have an option to convert to a preferred rate if you wish to continue coverage.

If your zone has changed from a low to moderate-risk zone to a high-risk zone your lender may require flood coverage to be purchased. In this case, if your zone has changed recently you may be eligible to be grandfathered into a preferred rate for a minimum of two years.

We recommend you look into your flood options as you may find flood coverage can be very affordable and extremely valuable to protect your most important asset, your home.

Much of the content on this page was written as a guest post originally by Meghan O'Neill Hanson back in 2012, though I have updated it over the years. Meghan was a personal insurance expert at MacCorkle Insurance Service in Burlingame at the time. She had worked previously as a CPA at PricewaterhouseCoopers as well as at the private equity firm Kohlberg Kravis Roberts & Co (KKR). Meghan is a Bay Area native with roots in thoroughbred horseracing throughout Northern and Southern California.

For additional questions about homeowners’ insurance and recommendations please reach out to us.

Next In This Series

What Happens When Your Offer Is Accepted

If you're thinking about buying, or if your offer has been accepted, this will hopefully give you an idea of what you can expect when that exciting moment happens and you get the call that you just bought a home!

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