Homeowners insurance, read as six limits rather than one policy

A homeowners policy is not one promise; it is a small stack of them, each with its own ceiling. The California Department of Insurance sets the structure out plainly: the homeowners policy contains two sections, Section I providing property coverages A, B, C and D, while Section II provides liability coverages E and F. Reading a declarations page well is mostly knowing which letter is which, and which ceilings you chose rather than inherited.

The six lettered coverages, in the order they appear

Coverage A — Dwelling

Major property coverage protecting the house and attached structures against a covered peril.

Coverage B — Other Structures

Structures on the residence premises that are not attached to the dwelling, such as detached garages and tool sheds.

Coverage C — Personal Property

The contents of the home and other belongings owned by you and by family members living with you.

Coverage D — Loss of Use

Help with additional living expenses when a covered peril damages the home badly enough that you cannot live in it.

Coverage E — Personal Liability

Legal responsibility for injury to others.

Coverage F — Medical Payments to Others

Reasonable medical expenses for people accidentally injured on your property.

Two ceilings nobody chose on purpose

Two of those letters are usually set as a percentage of the first one rather than picked. Coverage B is normally limited to 10% of the Coverage A limit, although the Department notes you may purchase more coverage for an additional premium. Coverage D is normally limited to 20 percent of Coverage A. Normally is the guide’s word in both places, so both are worth checking on the declarations page rather than assumed. If a detached workshop went up last spring, or if a rebuild would mean a long stay somewhere else, those are the two lines that quietly decide the answer.

Setting the dwelling limit, and what it is not

The Department is direct about the hardest number: the dwelling limit should be the amount it would cost to replace your home. It then sets that figure apart from the numbers closest to hand: the limit may have nothing to do with the purchase price or the current market value of your home, as homeowners insurance does not generally cover the value of the land upon which your dwelling sits. What is left is the cost of labour and materials needed to rebuild, and the guide advises reviewing the limit initially and on renewal, knowing the construction type and special features of the house, asking local general contractors the current price per square foot for a similar home, and keeping records of updates and renovations.

How completely a policy rebuilds depends on which kind you hold. Under an actual cash value policy on a total loss, recovery is the policy limit or the fair market value of the structure, whichever is less. A replacement cost policy gives better odds, but the phrase to test is the strongest one: a policy cannot be sold as a “guaranteed replacement cost” policy unless it will pay to completely rebuild the home regardless of the coverage limit. Other kinds pay the limit plus a stated percentage above it. Some policies have no building code upgrade coverage at all, and cities and counties periodically change their codes.

Contents: a guideline, not a rule

The contents limit is generally around 50% of the dwelling amount, and the guide labels that figure honestly — this is a guideline only, because the most reliable source of information on the replacement value of your personal possessions is you. Certain categories carry their own internal caps: jewellery, firearms, fine arts, computer hardware and software, silverware, antiques, money and collectibles are limited inside the contents limit rather than in addition to it, which is why the Department suggests scheduling valuable items by endorsement. It also asks you to count the unglamorous half of a household: small appliances, kitchen utensils, linens, window coverings, clothing and shoes.

The perils the standard form leaves out

Earthquake, flood, mold, earth movement, and wear and tear are some of the perils that are usually excluded from a homeowners policy. Two of those have their own arrangements in California. When an insurer writes homeowners coverage, it is legally obligated to offer earthquake coverage for an additional premium, which may be written by that insurer, by a separate insurer, or through the California Earthquake Authority. Flood is a separate contract altogether, and both have their own guides here.

Sixty days, and what changes after them

After a residential policy has been in effect for sixty days, the insurance company can only cancel it for reasons specified by law, which the Department lists as nonpayment of premium, fraud, material misrepresentation, or physical changes in the insured property that increase a hazard insured against. Notice of cancellation must be mailed or delivered at least 20 days before the effective date, and 10 days for nonpayment or fraud, though a policy may promise longer, in which case the policy language applies. A written notice of nonrenewal must be sent at least 75 days before the expiration date, and both kinds of notice must contain the reason.

The guide also records what went wrong after past California wildfires. Two major problems experienced by homeowners in the aftermath were that many of the dwellings were underinsured, insured for amounts inadequate for rebuilding, and that the increased cost of construction was evident in many situations. When rebuilding, homeowners have to comply with new building code requirements. Both are limit problems, and both are visible on a declarations page long before they matter.