Insurance Riders: Do I Need One?

By Stephen Hadhazi, our guest insurance blogger, public insurance adjuster, and publisher of DocuDamage.com

You pay your homeowners premiums on time and feel reasonably comfortable that you are well covered should disaster ever strike, right? Wrong. Even if you think you have adequate coverage, you could be drastically underinsured. The typical homeowner’s insurance policy includes the basics that most people need and places limits on the coverage.

The basic policy offered should be considered a starting point, not the final solution. Endorsements (or riders) are important (but often overlooked) tools that modify the insurance policy to better meet your insurance needs. They don’t usually add a significant amount to your premium and most are put into effect immediately though this will vary from company to company.

Structural Limits

Does your policy cover water damage from burst pipes? Many bare bones policies don’t contain this important coverage and policyholders don’t find out until they file a claim.

1. Most policies cover water damage from windstorms such as when the wind blows out a window and the rain gets in – unless you live in a hurricane or tornado prone area where you might need to purchase windstorm coverage or pay extremely high “hurricane deductibles” which average 2% of the value of the home but can be as high as 5%.

  • At an average home value of $200,000 this equates to some $4000 to $10,000 right off the top of any damages you incur. In effect, the cost of your roof has been deducted.

2. Floods and earthquakes are excluded from standard policies.

  • This could even include flooding during a hurricane if it’s not wind related. In the Katrina disaster, many engineering firms were caught changing their reports to reflect the cause of loss to be from Flood rather than Wind, which is what the insurance companies needed to be able to justify the denial of millions of dollars in property damage claims.

3. Another potential problem with your coverage involves the cost of rebuilding.

  • Do you have enough insurance to cover the cost to completely rebuild your home using current construction costs? If your home is older, you may be forced to upgrade to current building codes which can be cost-prohibitive.

Endorsements to consider:

  • Earthquake insurance - usually covers earthquakes, volcanic eruptions, and landslides
  • Flood insurance
  • Inflation guard - ensures that your policy keeps up with inflation including building costs
  • Law and code enforcement - pays to get your house up to current code during rebuilding
  • Mold rider
  • Sewer backup

Personal Property Limits

The contents of your home are generally insured for 50% to 75% of the total dwelling limits. If you carry $100,000 of insurance on your home, you may have personal property coverage of $50,000 to $75,000 depending on your policy’s provisions. Is it enough?

Further, depending on the type of replacement coverage you carry, the contents of your home could be dramatically underinsured. There is a huge difference between Replacement Cost Value endorsement which will replace your possessions with brand new, like-kind items and Actual Cash Value, which depreciates the possessions and pays only a fraction of their original cost.

In many cases, however, the term Replacement Cost Value reimbursement can be a slight misnomer both on personal property and structural claims. Nationally, many Replacement Cost Policies state that they will pay only the Actual Cash Value until such time replacement has been completed and you send them proof of the replacement.

Under such circumstances, you should also be aware that reimbursement of the full depreciated amount is also contingent on you spending at least the amount of the replacement cost amount allowed by your insurance company.

For example, you filed a claim for damage to a five year old sofa and your insurance company allowed a Replacement Cost Value (RCV) of $2000. You agree that the average useful life expectancy of the sofa would be ten years. The adjuster then depreciates the sofa at the rate of 50% leaving you an Actual Cash Value (ACV) of $1000.

The adjuster then writes you a check for $1000 and then tells you that you have a certain amount of time, usually 6-12 months, to replace the sofa and file for reimbursement of the $1000 they held back in depreciation under the Replacement Cost benefits of your policy. You then find a suitable replacement couch on sale for $1,500.

You eagerly send in your receipt to your insurance company expecting to receive the $1000 they held back in depreciation. However, you’re also limited by what you actually spent for replacement so instead you get a check from your insurance company for an additional $500 with a thank you note for saving them $500.

Policy Limits

In addition, certain items such as jewelry, firearms, coin collections, furs, fine art, computers, and electronics are subject to policy limits. To make sure you’re adequately covered, inventory your possessions and compare the value against your personal property coverage and any related limits.

The following list represents common policy limits:

  • Business personal property - $2500
  • Computer equipment and electronics - $1000
  • Firearms - $2000
  • Jewelry, furs, fine arts - $1000-$1500
  • Money (including coin collections) - $250
  • Silverware - $2500
  • Structures other than dwelling such as sidewalks, driveways, fences, permanent yard structures, and swimming pools – 10% of the dwelling limit
  • Trees and landscaping – 5% of the dwelling limit

Endorsements (riders) to consider:

  • Individual floaters for valuable items
  • Replacement Cost Value coverage (not available for personal property on flood policies)

Personal Liability Limits

Most policies offer liability limits of $100,000 to $300,000. While this sounds like a lot of money, it might not be enough especially if you have a high net worth or own expensive assets, a dog, a swimming pool, or your own business.

Most policies offer liability limits of $100,000 to $300,000. While this sounds like a lot of money, it might not be enough especially if you have a high net worth or own expensive assets, a dog, a swimming pool, or your own business.

If you have a home-based business, your liability is limited. For example, if a customer or business contact is injured in your home, your homeowners insurance won’t necessarily cover injuries, medical costs, or lawsuits.

Endorsements (riders) to consider:

  • Home business endorsement
  • Increase liability limits to match or exceed your net worth
  • Umbrella policy

Because all situations are different it’s important to understand your policy and address any shortcomings before disaster strikes. Review your policy annually and add or remove endorsements as needed to reflect any changes in your situation.

In addition, you may want to call a Public Insurance Adjusting company in your area and ask them what insurance company is writing the best policies and is which company would be easiest to deal with if you were ever faced with a claim. Then, keep that company’s number handy just in case you ever need them.