Before finalizing a mortgage, lenders will require buyers to purchase a minimal level of “hazard insurance.” Hazard insurance covers damage or destruction by fire, smoke, theft, vandalism or other similar events of loss. To protect your own interest as the buyer, you will want to investigate a more comprehensive homeowner’s insurance that includes liability and a higher level of hazard coverage above the lender’s requirements.
Homeowner’s Insurance Coverage
Typically, the hazard portion of the homeowner’s insurance policy covers the house itself, furnishings and personal items within the home and any other structures on the property like the pool or detached garage/pool houses. Most standard policies won’t protect again damage caused natural disasters so you’ll want to purchase additional insurance if your home is in a high-risk area for fire, floods, earthquakes and more. Also, if you have expensive art or jewelry in the house, you need to consider having them additionally insured.
The homeowner’s insurance policy also covers some types of personal liability if someone should sustain injury on your property. If your cousin Millie trips on a loose floorboard in your home, the policy will pay for medical expenses and other losses up to a certain amount. Again, this portion isn’t required by your lender, but it’s a good idea to safeguard your interest.
Insurance Due Diligence
As soon as escrow opens on the house you are about to buy, your real estate agent should set you forth on shopping for an insurance policy. Chances are, your agent will have strong relationships with several insurance agents that he/she can refer you to. If you are a long standing client with a company for other types of insurance such as car or life insurance, it would be beneficial to investigate a homeowner’s policy with that company for added discounts and perks.
Finding good and cost-effective homeowner’s insurance has become increasingly difficult in California due to high payouts for mold, fire and other disasters. If the house that you are looking to buy has a history of water damage (precursor to mold) or have issues that may make it difficult for you to obtain insurance on it, you might want to consider incorporating an insurance contingency into the purchase agreement.
Here are a few things to keep in mind when looking for a homeowner’s policy:
1) Know your home’s value – Establish your home’s replacement cost with a local builder.
2) Shop around – Insurance companies differ and therefore can offer you different coverage at different pricing. Shopping around could save you money.
3) Investigate the company beyond pricing – Some companies take a long time to service claims. If you are in a situation where you have to file a claim, it’s better to have a solidly-backed company with a great reputation on your side.
4) Study the policy’s coverage – Make sure everything that you want protected is covered and covered sufficiently in the policy. Don’t assume that “personal property” includes every exceptional item you own. Find out how to get coverage for the things you really care about.
5) Ask for discounts – Insurers can get creative with their fees so always ask to see if you qualify for any discounts
6) Avoid making small claims – A history of claim-making will make you a “riskier” client and prevent you from securing a favorable policy.
7) Review your policy annually – Keep your policy updated so that the coverage is appropriate and adequate for current value.
As with most components of lending and escrow, insurance vetting can be tedious. In shopping around, you will find that it’s difficult to compare apples to apples with policies. Make sure you understand each proposed policy and that the coverage is adequate for your needs. As always, your real estate agent should be assisting you through the process of obtaining appropriate insurance for the property you are about to buy.