Most Common Home Insurance Mistakes That Could Cost You A Lot of Money

One of the most common claims that home insurance has on a house is water claims. There's also lightning strikes. There's also earthquakes and hurricanes and all of these weather related issues that could happen to your home. 

But what are the most common mistakes, weather or non-weather related, that most people are making? in this review article, we're going to go over the most common mistakes that could cost you a lot of money on your home insurance.

1. Being Underinsured

This is something that happens a lot. 

A typical home value in the US is about 350 technically closer to $400,000 and the rebuild cost is closer to 450 to 500,000. 

So when your house is worth 400,000 to rebuild it might cost you 550 to 600,000. In those cases, most people don't have the right coverage because we're all taught to get the cheapest deal. 

If you're not under $1,500 or under $2,000 every year, then you're paying too much for your insurance. But the thing that most people don't understand is when you do that, when the agent that sold you their house or the person that is helping you get the insurance doesn't understand the value, the safety net that you're building, then you're going to be underinsured, especially with your personal belongings.

 We'll dive into that here in just a moment. But on common, you're going to have about $100,000 out of pocket if something major were to happen.

2. Choosing the Cheapest Policy Without Checking Coverages

Is the roof fully recovered? 

If that's a concern for you, you can cover it that way. If you absolutely have to cut cost, there's something called a scheduled roof. Be careful because there are some agents that are quoting scheduled roofs right off the start. 

And that means that your home's roof is worth less every single year. That means they cover less every single year. So a brand new roof might be 5 years old, but you might only be covering 75% of that roof. And then another 5 years passes. Now you're only covering 40 to 50% of that roof.

 If you have a claim on the roof, now you're out of pocket like $15,000, which could cost you a ton.

3. Water Backup and Sewer Backup Not Covered

Water backup is not commonly covered on a home policy. 

That's the most common issue that we see for example in my home state, we have some pumps that might fail. 

In other states where water starts coming in, where you flush the toilet and it starts overflowing, someone put a rag down there that nobody knew about. All of those things happen. 

Sewer backup is also a separate coverage, technically part of the water backup, but some companies exclude that. 

So, be very careful when you're talking to your agent that they understand that it's water backup and sewage backup. Those are two different systems that can go into two different pipes and those can be two different claims. So make sure that it includes water backup and some pump or water backup and sewage backup.

4. Personal Property Coverage (ACV vs Replacement)

The fourth piece in the main category is personal belongings and that's called personal property. 

There's two versions of personal property. There's replacement and there's actual cash value. It's called ACV. 

If you look at your policy and if it says ACV, the couch that you might have paid $1,000 for might be worth $200. That's the actual cash value. That's what a garage sale price would be.

If your house burns down tomorrow and all of your belongings go up in smoke, now you realize: oh my gosh, I'm only covered for half of what I own. Yes, I can replace my silverware and get a little bit of value. Yes, I can replace my couch. I have to buy used now. Yes, I can replace all those things.

 But if you have replacement cost, it's the value today. That means that $1,000 couch might have appreciated in value. So to buy that same model couch five years later, instead of a 1,000 might be 1,500. That means you're getting the 1,500, not the 200 that it's worth now.

Now, if that couch depreciated in value, let's say that 1,500 couch was remade and now they got it cheaper and it's an $800 couch, you're covered for the 800. It's the replacement value of the couch, not the appreciated value. 

So overall, you're essentially covered to buy all your new belongings, your new couch, your new silverware, your new shoes, your new blankets, your new towels, your new iPad, all of those pieces, whatever the value is today. 

That's the most important, one of the lesser cost pieces that's going to give you the most coverage.

5. Not Having Sewer Water Backup Coverage

 We kind of explained that a little bit ago. It's one of the most common uncovered claims because again, people don't understand it. 

The average cost to clean up on a house is 10 to 25,000. I just had a family member go through it. They had one scenario where it's probably close to 10,000, but then they looked at the pipes, they realized there's some plants growing in it. So that might be even more expense and that piece could cost some extra money.

So, the water backing up, make sure that if it's on a second floor, if a toilet overflows, you're closer to that 25,000. Some people carry 50 and 100,000. It's commonly $40 to $100 per year to add that coverage. And then if you go beyond that, you're adding 200 300, you can pay $400 more for the $100,000 worth of coverage. It just depends if you need it. If you don't necessarily need it or see the value in it, then just get the standard at $10,000. At least you have some coverage if it happens.

6. Assuming Flood is Covered

another insurance mistake that could cost you thousands is assuming that flood is covered. 

This is a difficult scenario and I'll be honest with you, most people don't go this route. But if you're in a heavy rain area, if basement could get flooded and you're in a bowl of clay, which is common in some states, and the river overflows, you're near that, the snow melts and it starts flooding into your house, 

flood damage is usually 25 to plus thousands of dollars. It can be 10,000, it can be 100,000, it can be $500,000 because it can damage your house pretty extensively.

 Now, flood is the National Flood Insurance Program. It's a completely separate policy. It is regulated, so there's common pricing. You can choose to cover your contents. You can choose to cover the house. 

In most cases, people aren't going to necessarily cover this. This is one of the ones that could cost you hundreds of thousands, but it's not a common one for people to carry.

7. Roof Settlement Type (Actual Cash Value vs Replacement)

 we mentioned earlier having the roof settlement type.

 So, same thing as your contents. Your roof can be the same actual cash value. That's essentially the scheduled replacement cost of your house. So, the longer you have your house, the less the roof is worth. Typical cost of a roof is about $20,000 depreciated down to 12,000. That means you're on the hook for about 8,000 plus.

If it's worth it and you get the extra $5, $10 off per month, great. There you go. Get the actual cash value.

 Personally, I'm a big fan of the full replacement value. That way, it doesn't matter what it is, my roof's covered.

8. Not Updating Coverage After Renovation

 If you did a kitchen remodel, if you finished the basement, if you added or had an addition on the home, you added solar panels, you added a pool, some of those are risks that could increase the price either way and you're supposed to tell your insurance anyways, but others are value ads. 

And if the replacement cost of your house is designed around a certain spec and a certain material, if there is a major claim and you go to replace it again today, they're going to use the data they were given, not the data that you didn't give them. 

So, they're not going to know that you have granite countertops versus the laminate countertops. And you're only going to get the value of a laminate countertop versus the granite countertop that you've now replaced. Be very careful.

That could be tens if not hundreds of thousands of dollars depending on the renovations that you've improved.

9. Deductible Mistakes (Too Low or Too High)

We're going to talk about this on both ends because a common way for you to save money on a policy is just raise your deductible.

 The very thing that you got to be very very careful with is there's two types of deductibles. There's the all peril deductible and then there's the wind and hail deductible.

And the all peril deductible is generally everything. It's your home. It's if a pipe burst, it's if the house caught on fire. That's your all perils deductible. 

Your wind and hail is typically your roof. It's your siding. It's whenever the wind comes, knocks off shingles, there's hail damage that come down, and that's a different coverage.

 Now, the wind and hail is the most common claim. So then they allow you to separate those two.

The part that I'm telling you to be careful with is if you go too low, you're just paying more. And if you don't have the money, then keep it low. 

The problem that most people don't realize in the home insurance, when you file a claim, it doesn't have anyone else to blame but the house. It's the house's fault. Yeah, the wind came and knocked the roof off. It's technically the wind's fault, and that's what they're claiming, but that means that the shingles weren't strong enough to hold on to the wind.

That being said, there's always going to be a rate increase when you file a home claim. So, if you have a 500 deductible, that makes you want to file the claim more versus keeping it as a safety net in case something major happens. So, now you're filing $800 claim on a $500 deductible and the house goes up 15%. And you're like, "What the heck? I don't like this. This is not cool, guys."That's the reason that is on the opposite spectrum. 

What a lot of these agents, I don't want to say they're shady, but I don't think it's in the benefit of the consumer unless they explain it really heavily and you just chose this. They do a percentage deductible. That means that wind and hail instead of it being a $1,500 deductible, they set a 2% deductible. 

Think about that. If 2% of coverage A, that's your dwelling, that means 2% of my $500,000 house, that's 10 grand. So if you have the roof ripoff, if you have anything happen, if that's the case and you have a 2% deductible, that's $10,000 out of pocket for a $500,000 house.

you would say, that's crazy. I don't have a $500,000 house. So, I have a 250. Great. What's 2% of 250? 

That's still five grand. So, it's 5,000 out of pocket. If you can't afford that and it saves you enough on your insurance, great. There you go. I've got a few customers that do that, but in most cases, it's not affordable.

10. Not Covering High-Value Items

another mistake t that most people are missing that's costing them thousands is some claims aren't covered because you didn't add value items. 

That means that your high value items, they're typically not covered on a policy. We're talking about jewelry over $1,500. Firearms that are over $2,500, cash if you care about that part, if it's over $200. Usually don't cover much anyways. Collectibles if they're limited, if you have engravings, if you have sports cards, if you have paintings, if you have art, all of those things have to be listed and scheduled on your insurance policy beyond a certain limit.

Each company does different amounts and talk to your agent for the details or look in your policy. It'll tell you what the amount it covers. And if you have more than that and you care more about that, even computers, 

I carried for years extra coverage more for my computers because we had like six computers in my house and they were all MacBooks and I feel like I paid a billion dollars for them and I didn't want to lose the money in case I had a fire. 

In those cases, you're only going to get coverage for the amount they give you per item and then anything beyond that you have to schedule on top of.

There is a little bit of a hack to that. If you have it's only a little bit above the limit, you can do what's called a blanket coverage and that covers all the items. So if you're buying new stuff constantly, you don't have to worry about adding. 

Commonly, I'll use jewelry. For example, if you have a typical price of a jewelry item is 2500 and you have $30,000 worth of jewelry. You can just add a $30,000 blanket or a $50,000 blanket. It's a little bit less expensive and then it raises the limit in most cases of how much per item can be covered. Just a little hack for you in case you have a lot of paintings, jewelry items, or things that you can add on that will save you some costs.

11. Liability Limits and Denials

You're going to get denied for these things, guys, if you did not. Make sure that your liability limits match what you should be carrying. 

What I mean by that is if somebody's going to sue you and that lawsuit's going to be over 5,000, 500,000, 500,000, half a million, and you don't have enough coverage, there's blankets that you can add on. There's umbrellas that you can add on, but if you're not checking your liability limits, that's probably the most important piece of the policy is not just covering your house, it's covering lawsuits.

It's a sue happy world. People are suing for dog bites, slip and falls, trampoline injuries, pool accidents. If you're carrying 300 to 500,000, that's pretty common. But beyond that, just know that if you have a larger income, they're likely going to go after you instead of the insurance because there's more money in your bank than what you have coverage for your insurance. They might actually go after both, but it makes more sense to sue you directly because they can get the money from you.

12. Not Reviewing Your Policy

Construction costs have changed. A lot of people are so shocked when we say it's $20 and something dollars per square foot to rebuild a house. Can you do it yourself? Sure. Are you a contractor? Are you removing the debris? All those things. Great. That's a different scenario. You can do what you want there.

The discounts have changed. Discounts constantly are updated. They're trying to add more, but prices have changed based on discounts, based on the cost of material, shipping, the likelihood of getting the material on time. Those pieces are changing over time. Coverage forms have changed. So, you may have noticed that your policy goes up and down and when it goes down, you might have gotten a better deal. 

They might have decreased the cost, but also look at that renewal to make sure they didn't take off a coverage. They can add and remove coverages. You're signing for them every time you renew the policy. So, just be aware that is a change that could happen and you might lose a coverage that that company no longer carries that you thought you had. It's very unlikely, but in those cases, just know that that's available.

Bonus: Should You File a Claim?

 If you have a homeowner's claim, $2 to $3,000 in losses, you'll see an increase. You're going to see a possibly a non-renewal, especially if it's two claims of water claims. Most companies will drop you right after that. Going to be difficult switching companies.

The question is, should you file that claim? Especially if you're paying over $2,000 a year for insurance. $2,000 a year, we'll just say it's 15% increase. So, you're going to be able $300 a year increase. That's $900 over three years and you have a $1,500 deductible. So, that $3,000 claim, technically, you saved $500. So, yay there. But now, you have to fight finding the insurance. You might have gotten dropped. All of those pieces.

So, one of the benefits that a lot of people do is they use the insurance for what the insurance was designed for. It's not an investment. If you never used it, you won. It's a safety net. If something major happens, there's a $5,000 claim, there's a fire in the house, pipe exploded, all of those things are meant to make you whole and put you back the way you were.

If you're filing a lot of claims on your home, you're going to find that you're not going to find a place to ensure the home, let alone what's the price that you're going to pay. These are the tips that you should be able to use to save you guys the thousands in coverage, the denials that I see all the time, and the pieces that are going to help you the most.