Insurance match-ups: “Named perils vs. all risk homeowner’s insurance policies.”
There are plenty of ways to save money on your homeowners insurance policy. Some are good and some may make you uncomfortable once you understand why they cost less.
You can expect the type of insurance company whose program you “fit” to be relatively in line with other companies whose “risk appetite” you fit. However, it makes sense to shop, as “relatively in line” can mean a difference of up to $300 or more per year.
Of course, there are some big name companies out there that spend hundreds of millions on advertising to convince you their higher rates are due to them offering more coverage than the next guy, which couldn’t be further from the truth.
With the “no-brainer” of shopping around to save money out of the way, let’s discuss a particular coverage difference that can make a significant premium difference on your homeowner’s insurance policy.
Specifically, the “cause of loss form,” with which you choose to insure your dwelling (fancy insurance word for home) and contents.
What is a Cause of Loss Form?
Good question. Your homeowners insurance policy doesn’t only dictate the amounts of coverage they are willing to offer you, but the types or “Causes of Loss,” also referred to as perils, they are willing to insure you against.
That’s right. The insurance company will detail exactly what they will and won’t insure you against. Earthquakes and floods? Guess again. Flood insurance is only available through the NFIP program and earthquake insurance is usually only available by policy endorsement.
What are My Options?
There are really only two options out there as far as cause of loss forms go. There are the “named perils” and the “all risks” policy forms, also known as the “broad” and “special” form policies, respectively.
In short, “named perils” is less expensive and less comprehensive than “all risks” coverage.
For you insurance junkies out there; there is also a “basic” coverage form, with coverage limited to insurance claims resulting only from fire and lightning, and “removal” of your items from a property that is in undergoing a loss from the first two perils.
The basic form is old school and shouldn’t be offered on a homeowner’s policy anywhere. You may see it only for vacant property insurance; either personal or commercial lines.
Named Perils Coverage (Broad Form)
Named perils means that your homeowners insurance policy will pay for property damage that results ONLY from an exact list of perils (causes of loss) in your insuring agreement. Before you panic, the broad form is usually a list of the losses to which the average home is subjected.
Take note that exclusions are not necessary here, as the insuring agreement only covers the list of named perils. There is no need to exclude items that aren’t covered…they simply just aren’t “named” as perils.
And don’t forget that the “basic” fire, lightning and removal ARE included already. Here is an example list of the perils insured against on a named perils policy (remember the acronym WHARVVES):
Wind: Hurricane, tornado, “micro bursts.”
Hail: No explanation necessary.
Aircraft: Watch the news. This happens. Even if infrequently, can you afford to pay off your mortgage or rebuild your home with funds from your checking account?
Riot: Type “Los Angeles Riots” into Google to determine if your home would withstand this cause of loss.
Volcanic Action: Flood? No. Earthquake? Almost certainly “No.” Volcano? For some reason…”Yes.”
Vehicles: Cars hit houses…it happens. Ask Billy Joel. Do not mistake this cause of loss for YOUR car hitting YOUR house. That is an auto insurance property damage claim you would make on your auto policy.
Explosion: Ever heard of gas utilities?
Smoke: There is more damage caused by smoke than fire (assuming the whole house isn’t burned down). Smell your clothes after leaving a bar or an overnight camping trip. Now imagine that smell and soot on every wall in your home.
Insurers may add additional perils or exclude perils as they see fit. You might find an insurer who adds or excludes theft or vandalism and malicious mischief to their list of “covered perils.”
Don’t assume that if you pay your premium your home is covered against anything that could possibly happen.
All Risk Coverage (Special Form)
The more expensive and more comprehensive all risk, or special form policy, “covers” your home against EVERYTHING that can damage it…other than what is specifically excluded in the policy.
The exclusions are typically few and far between, but make sure your aware of them. The insurer is not running a scam here. The excluded causes of loss are usually the same with every insurer.
Here is a list of common exclusions on a special form policy:
Flood: Learn more about flood insurance.
War: All bets are off at this point. We realize it is hard to fathom in the U.S., but imagine being on the hook financially for all of the bombed homes in Iraq…
Earth Movement: Read more about earthquake insurance here.
Pollution: This one is highly contested. The definition of pollution may include Chinese Drywall.
So What’s the Real Difference?
The real difference here is where the responsibility falls for determining if coverage is available. On a named perils coverage form, the guy or gal who bought the policy must prove the “loss” was a result of a “covered peril,” assuming there is a dispute.
But don’t picture having to stand in front of a judge with pictures of your burnt house trying to explain that a fire occurred. If the cause of loss is obvious…it’s obvious. Nothing to worry about there!
On an all risks policy, the insurer must prove the cause of loss was SPECIFICALLY excluded in order to deny coverage…again…only if there’s a dispute and the cause of loss is not obvious.
What Else Should I Consider?
Understand that both the dwelling and your home’s contents don’t necessarily need to be insured the same way. It’s possible to have “special form” coverage for your dwelling (the house itself) and “basic form” coverage for your homes contents.
Special form coverage for both the house and everything in it would be the more expensive (and more comprehensive) coverage.
The reality is; we can’t, or don’t, all want to pay for that. Insurance professionals always point out that the most comprehensive coverage form can be added to almost any policy for less than a third of the cost to purchase or operate an iPhone for one year. Take your pick as to what’s more important.
Related: Types of homeowners insurance