When Homeowners Insurance Won't Protect You

Surprised by holes in insurance coverage? Keeping records and fighting back can mean a happier ending.

Insurance can help pay for home damage caused by a fire.
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Shortly after Aditi Haridat's parents bought the home of their dreams, a lamp overheated while they were out of the house. Not only did they lose their pet cockatiel in the resulting fire, but the inside of their home was partially destroyed. That was only the beginning of their nightmare. After their insurance company arranged for a contractor to redo the inside of the house, that contractor ended up inadvertently causing a major flood in the basement, which led to a black mold infestation.

Haridat's parents, who live in New Jersey, were frustrated when the insurance company offered less than the estimated cost to repair the home. The stress took a toll: "My poor parents couldn't sleep. They were completely distraught," says Haridat, a documentary filmmaker. Eventually, the family decided to hire a public adjustor to help them negotiate a higher settlement.

Since homeowners insurance is something many people buy but few are forced to actually use, the average consumer is far from being an expert in comparing policies in advance or navigating the claims process when the unexpected does happen. A new report from the Consumer Federation of America says consumers are often on the hook for more costs than they realized, including deductibles and coverage gaps for certain events, such as flooding, that private insurance rarely covers.

"It's very difficult for consumers to read a policy and understand it," says J. Robert Hunter, director of insurance for the Consumer Federation of America and head of the National Flood Insurance Program in the 1970s. That means many consumers don't understand the details of their policies and can be unpleasantly surprised when disaster strikes.

A hard-to-decipher clause called "anti-concurrent causation," for example, refers to the fact that if an event that is not covered by the policy, such as flooding, occurs at the same time as another event, such as wind damage, which is covered, then the policy might not cover damage from either event. CFA also says many insurance companies have increased their deductibles by 2 to 5 percent, along with increasing rates. In fact, according to CFA's research, insurers in 11 states are currently requesting homeowners insurance rate increases of 18 percent or higher.

Michael Barry, spokesman for the Insurance Information Institute, a nonprofit funded by the insurance industry, says that the industry has paid out billions in claims in response to near record-breaking weather events over the past several years, including the 2011 Joplin, Mo., tornado. He adds that the anti-concurrent causation clause has been around for many years.

"Agents walk people through that," Barry says, adding that consumers can ask questions if they don't understand part of their policy. If consumers want earthquake coverage, for example, they probably need to take out an additional policy for that. Similarly, consumers who want flood insurance generally need to get it through the federal government's National Flood Insurance Program, which is run by FEMA.

Here are six more tips to consider when shopping for homeowners insurance:

Check out buyer's guides. Before buying homeowners insurance, Hunter suggests doing some reconnaissance work online. The National Association of Insurance Commissioners' website offers a database that includes information about complaints filed against insurers, and many states offer buyer's guides with additional information on their state websites.

Get at least three quotes. Barry suggests getting at least three different quotes before settling on one. "Sit down and compare each page side by side," he suggests, so you understand what is covered and what isn't. If you don't understand something, Barry suggests asking your agent or the insurance company itself to explain how it arrived at the quote.

Online comparisons and websites that offer quotes can be useful, but Hunter says they are often paid for referrals, which means insurers that don't pay commissions are left out, even though they might be the best company for you.