Insurance isn’t exciting (until you need it), it rarely gets in the way of a home purchase, and it can be challenging to understand. As a result, 1) the Property Insurance Objection contingency in the contract is often glossed over, and 2) buyers will most often choose a policy based on price. This may work out fine, but not giving this portion of the home-buying process more attention might also come back to haunt you. Consider:
When buying a condo or townhome, your HOA fee will almost always cover the “Master Policy.” This policy includes liability and property coverage for the HOA, and it covers the buildings from the studs out. However, this policy doesn’t cover the condo’s interior, nor does it include coverage for deductibles that result from HOA claims. When buying an attached dwelling, you will want to add an “HO6” policy — which covers the unit’s contents and any damage from the studs in (for example, a grease fire in the kitchen that damages the inside of the condo would likely be covered). Further, the Master Policy usually covers the building’s exterior. Still, when there is a large insurance claim (hail damage to the roofs, for example), the deductible is split amongst the homeowners. Previously, this deductible was small/manageable and paid by the HOA, but now the deductible can be 10% (and possibly more) of the total cost of the work. The most recent case we’ve seen had each condo owner paying $2500 for their portion of a deductible. Not good news for these owners, unless they had added what’s called a “Loss Assessment” endorsement. This endorsement adds about $10-$20/month to the cost of the HO6 policy and covers $5000-$10,000 for the owner’s portion of the deductible.
Because buyers often select a policy based on cost, some insurance agents strip their estimates down to the bare essentials (to show a lower bottom line than their competitor). If you’re not dealing with an agent who is willing to take the time to explain the possible coverages to you, you may end up with an inexpensive policy, but one that might also lack sufficient protection. For example, it may be wise to add an endorsement for “service line” coverage (for damage to underground service lines) or maybe “water backup of sewers or drains” (for damage caused by water entering from outside the plumbing system that enters through sewers or drains, or water which enters into and overflows a sump pump).
These are only two examples of possible insurance problems/gaps—there are others. We suggest you ask your agent lots of questions. First, we think it’s a good idea to ask what isn’t covered in the policy they are quoting, and we suggest you follow that up with a question about where the agent most often sees gaps in coverage. These questions will likely lead to a good discussion and, hopefully, end with purchasing the policy that best fits your specific situation.
(My goal with this post is to encourage greater consideration of something that is often overlooked–property insurance. The prices and examples referenced are based on conversations with insurance agents, but options/prices can vary based on the company, and prices/coverage can change industry-wide. Please talk to your insurance agent for specifics.)