Sources & Types of Homeowners Insurance: Know the Basics
Lines of Insurance – What’s Right For You?
Several lines of insurance are available to cover various perils. The most appropriate insurance for you depends primarily on your type of dwelling.
1. Owning a Home – If you own a home, there are two policy forms that are available to you: homeowners and dwelling forms. The main difference between these two types of forms is that the homeowners form combines property coverage with liability coverage. Dwelling forms only cover property losses. Both types of policy forms have the various peril coverage available for both your dwelling and your contents.
2. Owning a Manufactured Home – There are policy forms specifically designed to cover property for manufactured homes. This type of policy covers both dwelling as well as contents.
3. Owning a Condominium – Policies designed for condominium owners primarily cover contents. However, there is a small provision included to cover the portions of the dwelling that are your insurance responsibility as defined by the governing rules of the condominium. Generally, additional dwelling coverage may be purchased if the provision included in the package is not sufficient.
4. Renting a Residence – If you are renting a residence, coverage for your contents is available through renter’s insurance.
5. Owning a Home on a Farm – If your primary dwelling is on a farm or ranch, you may not qualify for standard homeowners insurance. A farm owners policy may be the most appropriate form to cover losses to your home as a result of tornadoes or hail. Additionally, a farm owners form provides coverage for both the personal and commercial exposure of farms, and contains both property and liability coverage.
Two exceptions worth noting – Earthquake and flood policies typically need to be purchased separately, or as additional endorsements to your standard policy, regardless of your dwelling type. The limits of these policies can match the homeowners or renters policy, or they can be set as separate limits.
Buying Insurance in the Voluntary Markets
Generally, insurance may be purchased from property casualty insurance companies through the voluntary market, meaning that the insurance companies voluntarily provide coverage to customers who meet the underwriting requirements. Availability and types of coverage can vary across different states and companies, so consumers should research available coverage for specific perils in their particular area, similar to the research they do when purchasing other types of insurance coverage, such as auto.There are four main distribution systems that are employed by property casualty insurance companies in the U.S.:
1. Independent Agency System – Independent contractors who are usually free to represent multiple insurance companies.
2. Exclusive Agency System – Independent contractors who may only represent a single insurance company.
3. Direct Writer System – Sales agents who are employees of the insurance companies.
4. Direct Response System – Insurance is sold through direct mail, telephone or Internet.
Buying Insurance in the Shared Market
Involuntary market mechanisms (sometimes referred to as “shared markets”) have been developed to provide coverage for entities that do not qualify for coverage in the voluntary market. There are many reasons why coverage may not be available through the voluntary market in a particular place. Living in a high-risk area, such as a designated brushfire zone, near a coastline or a recent catastrophic event, may lead to reduced availability of coverage. The following kinds of property market mechanisms exist in certain areas:
1. Fair Access to Insurance Requirements (FAIR Plans) –These plans make property insurance available to persons who could not otherwise obtain it through the voluntary market. Coverage provided varies from state to state.
2. Joint Underwriting Associations (JUA) – These plans exist in only a few states. How they are funded, and the available coverage will vary.
3. Beach and Windstorm Plans – These plans exist in the coastal states, in the hurricane belt of the Gulf, and along the South Atlantic coasts. Windstorm Plans provide the needed coverage that is often excluded from voluntary insurer policies. Each coastal state from Texas to North Carolina (except Georgia) has a beach and windstorm pool to provide windstorm coverage in the coastal areas. How these plans are funded and coverage provided varies by state.
Although it is not truly an involuntary market mechanism for earthquake coverage, the California Legislature established the California Earthquake Authority (CEA) as a privately financed and publicly managed risk bearer to help California residents protect themselves against earthquake losses. The CEA is the world’s largest residential earthquake insurer, and it collaborates with other organizations that operate in the public interest to help achieve the CEA’s goals.
In some states, market conditions have resulted in voluntary insurers not being able to
provide coverage at a reasonable cost in an area. In those circumstances, coverage may be available through a FAIR plan. If, as a consumer, you find that you are unable to obtain
insurance through the voluntary market, your insurance agent may work with you to help you find coverage through the involuntary market. Or you can contact the plans directly. Because operation of these types of mechanisms varies by locality, your state insurance
department is a good source of information on how to obtain coverage through the involuntary market in your state.
Please visit www.naic.org/state_web_map.htm for your state’s insurance department’s contact information.