Quick insurance history lesson; a long, long time ago, property insurance was limited to covering our property (whether a building or personal property) against fire and lightning. Thus, the term “fire policy” was born. You were out of luck if anything besides a fire caused damage to your property.
So the term “dwelling fire” refers to a basic fire policy designed to insure a dwelling, which is another word for a shelter or structure people may live in. Notice that it is not called a “dwelling and stuff inside fire policy.” More on that in a minute.
Why a Dwelling Fire Policy?
Nowadays, the dwelling fire policy still has a place in property insurance. Namely for landlords, who don’t have any interest in insuring the “contents” of a particular dwelling. However, most insurers will offer a small amount of coverage for “contents” on this type of policy. Often, landlords may require a few thousand dollars to cover appliances they may furnish to a renter.
Note: The person(s) renting the dwelling (or apartment for that matter) should always purchase a renters insurance policy to protect their “stuff” inside the dwelling. Believing your personal possessions are covered by your landlord’s insurance policy is a common insurance myth that leaves several thousand people without insurance for their destroyed belongings each year in the U.S.
Vacant properties are insured using the dwelling fire policy form as well. These properties are inherently more risky for an insurer, so the coverage they are willing to offer is more restricted – which is the dwelling fire form.
For the record, it is possible, but NOT recommended, to purchase a dwelling fire policy for a home you own and occupy as a primary residence. As we just discussed, the coverage is usually a little more restrictive than the homeowner’s insurance policy you should purchase in this instance.
What Does a Dwelling Fire Policy Cover?
We now understand that the dwelling fire policy covers the “structure,” but property insurance is a little more complicated than that. When considering any insurance policy, you must look at the loss settlement method, the perils insured against, and the limits of coverage.
A billion dollar policy limit isn’t worth the paper it’s printed on if the insurer denies your claim because the peril that damaged your property isn’t insured against. Let’s break that down into easier to chew pieces.
Loss Settlement Method – There are two main loss settlement methods your insurer will offer you. You may either purchase a “replacement cost” or an actual cash value policy for your dwelling.
You will likely be required to purchase a replacement cost policy if you have a mortgage, as this ensures the bank (who really owns your property) that their asset will be rebuilt in the event of a total loss.
Actual cash value loss settlement policies are typically associated with lower value properties, those in less-than-good condition and certainly those properties with no mortgage.
Perils Insured Against – You may also choose the perils against for which you are insured. Think back to the original “fire” policy here. There are two basic types of coverage form with regard to what types of damage you are insured against. These are referred to as the “named perils” and “special perils.” The special perils coverage form may also be referred to as “open” perils or “all perils.”
Insurers are shying away from using the term “all perils” because NO policy covers you against “ALL” possible causes of property damage. Insurance consumers have started legal battles in the past over the fact that they purchased an “all perils” policy form and were denied coverage for certain losses, thus insurers don’t like to use that term anymore because it is misleading.
The short answer is that you would prefer to have the “special” perils coverage form.
Limits of Coverage – The unfortunate reality of property coverage limits is that most people are underinsured as far as their property limits go. This is caused by people wanting cheaper insurance premiums. Of course, the less coverage you purchase, the cheaper the overall premium. This is not necessarily a good thing.
Too many agents are willing to sell us lower coverage amounts to “win” a sale with a lower premium. However, you may lose out big-time in the event of a total loss if our property is underinsured.
Not only may you not have enough money to rebuild your property, but you may incur a coinsurance penalty if you are “too” underinsured.
Tip: The cost to rebuild your home from scratch (after paying to have the previous debris removed) can differ substantially from your home’s current market value. In fact, a study recently revealed that 50%-70% of homes in Texas are underinsured. There’s a good chance this is the case in almost every state.
To Sum It Up…
Make sure to consider the cost of “proper” insurance as part of your overall evaluation of any real estate investment. Too many landlords forget to factor in the cost of insurance when they are making a decision to purchase a particular property.
This often leads to cutting corners on the insurance side of the equation. Finding a property and getting qualified for a loan are just the beginning. The right insurance will protect you for the life of your investment. An “uncovered” property loss that occurs well into the future can ruin the entire investment.