Beware of These Common Holes in Homeowners Insurance Coverage

Homeowners are often surprised to learn that earthquakes, flooding, and a sump pump malfunction are not covered.

A flooded house with water covering the main floor deck from a swollen river after a severe rainstorm. The water level is nearly six feet and there will be significant damage to the home’s basement, kitchen and living room.
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Earthquakes, unexpected deductibles, and flooding are just a few of the costs your homeowners policy might not cover. But if you're like most Americans, you probably don't realize it. According to the MetLife Auto & Home Insurance Literacy Survey, many homeowners are clueless about the ins and outs of their policies, which means they could easily end up paying a lot more than they expected after damage to their home.

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That's what happened to Aditi Haridat's parents, shortly after they bought the home of their dreams. A lamp overheated while they were out of the house, creating a fire. Not only did they lose their pet cockatiel, 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.

Almost half of all homeowners in the MetLife survey didn't know how much insurance coverage they had for the contents of their home, and 1 in 3 didn't know how much their home was insured for. MetLife warns that this "knowledge gap" can lead to costly surprises and recommends that homeowners review their policies more closely.

Here's a quick way to test your knowledge on six common coverage gaps: 

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Do you think your insurance policy would reimburse you for earthquake damage?

The answer, according to MetLife, is almost always "no," unless you purchased a separate earthquake policy. Almost 30 percent of survey respondents thought the answer was "yes," and another 30 percent didn't know.

If your sump pump backs up and your house floods as a result, will your homeowners insurance policy reimburse you for the damage?

Despite the fact that most people believe the answer is "yes," it is unfortunately not the case. That means homeowners could have to shell out cash for costly repairs, unless they specifically added (and paid extra for) coverage for sump-pump failures.

If new building codes mean you need to upgrade undamaged parts of your house, will your policy reimburse you for those costs?

While nearly 2 in 3 survey respondents said "yes," the answer is "no," according to MetLife. In most cases, policies don't pay for upgrades, even those that are mandated by new laws, in undamaged parts of homes, unless you take out additional "ordinance or law" coverage.

If you go away for the winter and your pipes freeze and break, will your policy cover that damage?

While policies remain valid even when you're on vacation or away for a long time, you have to take certain steps to protect your home, or you might be liable for the costs. For example, if you fail to keep the home heated or pipes drained, MetLife explains that any damage that results from freezing might not be covered.

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Say you have auto and home insurance with the same company, and both get damaged in a tornado. Will you pay one deductible or two separate ones for each item? 

Chances are, you need to pay two deductibles, even if both the house and car are damaged by the same storm. (Although MetLife adds that a handful of insurance companies, including MetLife itself, offer exceptions to this rule.)

If a fire destroys your house, will insurance pay the full cost to rebuild?

The answer is most likely "no," because most insurance policies cap their coverage—and take depreciation into account when calculating the value of personal possessions. That means homeowners could be insured for far less than they think. Seven in 10 survey respondents said they thought their policy would pay the full cost to rebuild after a natural disaster.