*note: this means it’s based on the POV of an insurance agent/broker
There is no question that homeowner’s insurance is filled with “special terms” that are not always easy to understand. We hope to help you understand these terminologies by defining them in this article. For easier reference, the terms will be arranged alphabetically.
Replacement Value (RC)
Replacement Value will repair or replace with like-kind and quality up to the policy limit. RC is like ITV but may not be listed on your policy. That is why your policy should have coverage for the cost to fully reconstruct your home.
Rebuilding is different from buying. The cost to buy a home is different from the cost to rebuild one. You cannot rely on your home’s market value to set your insurance limits. An appropriate amount of insurance coverage will permit you to rebuild your home in the event of a total loss. That replacement value depends on the physical characteristics of your home, as well as the price of labor and materials in your area. In most areas, these costs increase with time.
We recommend completing a thorough inventory of your personal belongings. Compare the value of your belongings to the home contents, or personal property limit, listed in your policy, and make sure it matches.
Actual Cash Value refers to the worth of assets for an insurance claim. This takes into consideration the loss of value due to depreciation. As such, the ACV would be less than the amount that the insured or homeowner originally paid for the item.
Here is an example:
A roof could cost $10,000 when it was first installed. However, it would not be worth the same amount after 5 years due to wear and tear.
If a hailstorm occurs and the roof will have to be replaced, its Actual Cash Value would probably be around $8,500.
The decrease in its value from the original amount of $10,000 would be because of the wear and tear or depreciation.
When you purchase homeowners’ insurance, it is important to remember that each policy contains limits. These limits indicate the maximum amount an insurance company would pay for in the event a claim is made.
If a claim is filed and the liability limit is reached, the policyholder has the option to purchase Additional Coverage. In layman’s terms, this would mean “additional protection”.
The “additional protection” is used in case an unfortunate event happens again within the same policy year and a claim needs to be filed. This may apply to the standard policy; it may also apply to the valuables in your home.
Some insurance companies allow the policyholder to pay an additional premium to the existing policy for an increase in coverage. For example, you can pay an additional $250 for an extra coverage of one million dollars. However, some companies would require you to purchase a separate policy.
Additional Living Expense
Additional living expenses pertain to the additional costs incurred by the policyholder after having made a claim. If your kitchen is completely damaged during a fire, you might end up having to order food while the repairs are being made.
The extra cost you incur for having to order food might be covered under Additional Living Expense.
For additional expenses to be covered, certain criteria such as the following have to be met:
- The policyholder must be the one who incurred the expense.
- The additional expense should have been caused by the occurrence of the covered event.
- The expense incurred must be necessary. Using the same example, let us assume that you end up having to buy commercially-prepared food. If your average meal costs somewhere around $12, that would amount to $252 per week per person (for 3 meals a day). If home-cooked meals would cost about $75 per week on average, then you would probably be reimbursed for $177 ($252 – $75). Therefore, if you tend to eat four times a day and splurge on food, you could end up spending $400 a week on food. In this case, the excess amount will be on you.
- The purpose of incurring the additional expense must be to maintain a normal standard of living.
Note that a “baseline” would normally be established before the insurance company decides how much should be reimbursed.
When an insurance claim is made, one of the most important questions is “How much will the insurance company pay or reimburse the policyholder?”
This is where the role of the “claims adjuster” comes into play. The adjuster is the one who investigates insurance claims. He or she determines how much the insurance company would be liable to pay when a claim is made.
Some of an adjuster’s tasks are as follows:
- To speak to the claimant/s.
- To gather information and check facts–i.e., research police or medical records
- To interview any witnesses.
- To inspect any involved party.
In other words, it is a claims adjuster’s job to verify insurance claims and determine a settlement amount that is fair to both parties.
Agency (Insurance Agency)
An insurance agency is a sales office for insurance policies. It is an entity separate from the insurance carrier (i.e., Nationwide, AIG, etc).
The agency is not employed by the insurance carrier and is free to sell whichever policy they feel is best for their client.
An insurance agent is a person licensed by a state insurance department to “sell” insurance on behalf of one or more insurers.
From the insurance company’s perspective, it is the role of an insurance agent to identify opportunities for selling insurance plans. They are also in charge of overseeing a portfolio of clients.
From the client’s perspective, an insurance agent is responsible for identifying risks and proposing risk management strategies to their client. They are also responsible for keeping track of insurance claims and policy renewals.
A captive agent is an insurance sales agent who is affiliated with just one company and sells policies for just that company. Of course, he or she also needs to be licensed.
The term catastrophe covers both natural disasters and man-made events. However, not all-natural disasters are considered catastrophes. Earthquakes, floods, and tsunamis are natural disasters, but it does not necessarily mean that they will be automatically considered a catastrophe.
There is a certain threshold that has to be reached before unfortunate events are considered to be a catastrophe. This threshold is in terms of dollar value in insurance claims–which is currently $25 million. In addition, a certain number also needs to be reached in terms of how many policyholders and insurers are affected.
An insurance claim is a policyholder’s formal request for coverage or compensation for an event covered by the policy. This may be a structural damage to the property, an accident on the property wherein someone needed medical attention, or even theft.
After a claim has been made against a homeowner’s insurance policy, the insurer will send a claims adjuster to evaluate the situation.
An insurance professional should be able to help the insured through the claims process. He or she should be prepared to answer questions pertaining to coverage, the claims process, requirements, and relevant time frames.
Condominium Owners Insurance
A condo owner’s insurance, also known as HO6 coverage, provides coverage for the following:
- The condo unit
- Personal liability
- Living expenses in the event the unit becomes uninhabitable
Also called the walls-in coverage, HO6 covers the individual unit. Coverage for the common areas would be under the condo association’s master policy.
Note that standard HO6 insurance policies don’t normally cover certain events such as floods.
A homeowner’s insurance coverage is the amount of liability or risk that the insurance company will cover in case an unforeseen event happens.
The coverage details which events the insurance company will be liable for, and which events it will not cover. Below are a few examples:
- Repair or replacement of equipment and other valuables in the home
- Damage to property caused by storms
- Costs incurred due to someone getting injured on the property
The extent of coverage may differ between policies. In most cases, insurance policies can be customized according to the needs of the client and their budget.
The deductible refers to the out-of-pocket cost that the insured will have to pay first when there is a claim. After the deductible has been paid by the insured, the insurance company pays for the rest of the damages.
This is a way for insurance companies to protect themselves from claims for smaller damages that have a higher possibility of occurrence.
When it comes to premiums, the higher the deductible, the lower the monthly premium.
Choosing a higher deductible could actually mean savings on monthly premiums. However, the homeowner should make sure that this amount will be available should there be a need to make a claim. Otherwise, the insurance company won’t be able to release the amount required to cover the damages.
Depreciation is the loss of value of an asset over time.
Depending on what is stipulated in the policy, the insurance company may release a claim amount that is equal to the value of the item at the start of the policy.
They may also take depreciation into consideration and use the Actual Cash Value (ACV) of the item to determine the amount they will pay the policyholder.
The dwelling policy is the part of a homeowner’s insurance that covers the costs to rebuild or repair the home when it is damaged by a covered peril.
Dwelling coverage would include all the structures attached to the home–the porch, garage, built-in features such as water heaters, and the like.
Emergency measures are the repairs or actions taken to prevent further damage to the property by a covered peril.
Also called a “policy rider”, an endorsement can be added to a homeowner’s policy to add or alter the coverage of the policy.
This is done when the policy does not provide coverage for certain perils for which the policyholder would like to be covered. The same applies when the coverage offered by the basic policy is not enough.
Exclusions are the events or situations that are not covered by the insurance policy.
Some of the most common exclusions are as follows:
- Earthquakes, sinkholes, and mudflows – especially for areas that are prone to earthquakes
- Floods and water damage
- Windstorm – in areas where this occurs frequently
- Intentional or preventable loss
- Luxury items
- Mold damage
- Defamation of character
- Business-related claims
Floater insurance typically covers property that is easily movable such as expensive jewelry, wine collection, silverware, and similar items. It provides coverage for valuable items that are normally not covered by standard policies.
Having floater insurance provides peace of mind to the homeowner. It gives the assurance that their valuables will be replaced to its full value in the event of loss, theft, or damage.
Homeowners insurance is a type of property insurance. It provides financial reimbursement to the homeowner in case of damage or loss to the property or its contents, due to a covered peril.
Coverage includes personal belongings within the structure and reimbursement to another person if that person is injured while on the homeowner’s property.
An independent insurance agent is someone who can represent more than just one insurance company.
Insurance is a contract represented by a policy whereby the insurance company guarantees to compensate the insured/policyholder for loss or damage to property as indicated in the policy, in exchange for premium payments.
Its purpose is to provide financial protection to the policyholder against a possible eventuality in the future that could potentially mean huge losses.
Also known as the commissioner of insurance, the insurance commissioner is a government official whose role is to regulate the insurance industry. The insurance commissioner is a member of the executive branch of the state or territory. And as such, the powers granted to the office of the insurance commissioner may differ from state to state.
Insurance fraud is the illegal act of attempting to make money by exploiting the insurance contract. It can be committed either by the seller or the buyer.
Examples of Insurance Fraud by the Seller
- Selling insurance policies from companies that do not exist.
- Changing the buyer’s insurance policy without the policyholder’s knowledge in order to earn a commission.
- Failing to submit premiums when the buyer courses premium payments through the agent.
Examples of Insurance Fraud by the Buyer
- Purchasing an insurance policy to make a claim for an incident that had already happened.
- Exaggerated claims – i.e., claiming reimbursement for a medical procedure that wasn’t necessary for an accident that occurred, overpricing repair costs, exaggerating an injury, and the like
- Falsifying medical history
Insurance to value (ITV)
Insurance to value (ITV) is a concept used by insurance companies to establish the amount that should be paid for covered losses. It is the amount of coverage listed under “Coverage A” on your policy declarations page. Often referred to as “Dwelling Coverage” or “Coverage A – Dwelling”, ITV refers to the amount required to completely reconstruct your home in the unfortunate event of complete destruction.
The required Dwelling Coverage would generally be 80% of the value of your home, and if coverage is less than the required amount, then the amount of the claim (replacement cost less deductible) will also be reduced accordingly.
In more concrete terms, let’s look at the example below:
In a homeowner’s insurance policy, the “insured” is the legal owner of the property. This means that only the person or persons whose names appear on the deed of the property can be the named insured on the insurance policy.
Liability is the state of being accountable for something. It can be a legal or financial obligation. It is being responsible for injury to a person, or damage to another person’s property.
Liability insurance pays or renders services when the policyholder or a member of the household is legally responsible for property damage or bodily injury caused to another person.
In a homeowner’s policy, liability insurance can potentially cover repair costs of another person’s property, legal costs when the policyholder is sued for damage to property or bodily injury, and the medical expenses of an injured party.
Loss of Use
Loss of use pertains to the event that the insured property cannot be used due to damage.
Your home’s market value is what your real estate agent would probably list your home for if you put it up for sale. It is based on the current market and economic conditions which are out of your control and are affected by several factors such as the following:
- Supply and demand
- The level of competition in the market
- Economic outlook – when the country’s economy is booming and there’s a rise in employment rates, this generally means that people also experience an increase in purchasing power. When this happens, property market values tend to go up.
- Location – Are there schools, hospitals, supermarkets, train stations? You will notice that as a property’s surrounding area gets developed, its market value also increases.
Ordinance or Law Exclusion
An ordinance or law exclusion means that the homeowners’ policy covers the building “as it exists”. The insurance company’s responsibility is limited to the payment of the repair or replacement of the building according to the standard of its existing materials, regardless of current building codes.
A package policy is an insurance policy that covers more than one type of insurance.
A homeowners insurance, for example, includes property insurance, liability insurance, and theft coverage among others.
Peril is a term used in property insurance to refer to the possible cause of damage or loss–i.e., flood, hailstorm, fire, etc.
Personal liability is the policyholder’s financial obligation over property damage or bodily injury.
Personal property includes any tangible and movable possession of the policyholder that is not considered real estate.
The insurance premium is what the policyholder pays the insurance company in exchange for the protection or coverage as specified in the policy. Homeowners’ insurance premiums are generally paid annually.
Property coverages refer to the insurance covering damage to the property or its loss.
An insurance rate is the amount that needs to be paid for a specific amount of insurance. It is the “unit price” of insurance, and it is determined by the insurance company and state regulators.
Real property is the land and any property directly attached to it; this includes anything growing from the land, the building built on it, and other structures directly attached to it such as wells.
Insurance regulation pertains to the government ensuring that business practices are professional and fair. This includes the approval and monitoring of insurance rates, the approval of policy forms, the review of financial statements, and the investigation into insolvent insurers or insurance companies who are unable to payout claims.
Renters insurance is a form of homeowners insurance that provides coverage for personal liability and personal property.
Replacement value is the cost to replace an insured property, whether real property or personal property, without taking depreciation into consideration.
A rider is an additional coverage that can be purchased on top of the standard policy. It is also called an “endorsement”.
For the insurance company, risk pertains to the possibility of a loss, damage to property, or bodily injury that might result in a claim.
For the policyholder, risk pertains to the possibility of loss or damage to property due to a covered peril.
The underwriter is a representative of the insurance company who is responsible for reviewing insurance applications. It is the underwriter’s responsibility to make sure that the applicant is eligible and that the insurance coverage is appropriate and fairly priced.
For any questions or suggestions, please don’t hesitate to call or email us. We’d love to hear from you!