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Insurance

Homeowner's Insurance
When you buy a home, most lenders require that you purchase homeowners insurance. Nobody likes to spend money for insurance. But if something could cause you a financial catastrophe, you should spend a relatively small amount of money to protect against losing a great deal of money.

In addition, if someone were injured or killed in your home, your home can lead to a lawsuit. The following sections tell how to get the homeowners coverage that you need.

The cost of rebuilding

If your home is destroyed, which most frequently happens from fires, your insurance policy should pay for the cost of rebuilding your home.

  • The portion of your policy that takes care of this loss is the dwelling coverage section of the policy.
  • The amount of this coverage should be equal to the cost of rebuilding the home that you own.
  • The cost to rebuild should be based on the square footage of your home.
  • Your policy's dwelling coverage amount should not be based on what you paid for the home or the amount of your mortgage.

If you're buying a condominium or cooperative apartment, examine the coverage that your building's homeowners association carries.

Guaranteed replacement cost

Get a policy that includes a guaranteed replacement cost provision. This provision ensures that the insurance company will rebuild the home, even if the cost of construction is more than the policy coverage. Find out how your insurance company defines guaranteed replacement cost coverage -- each insurer defines it differently.

The most generous policies, for example, pay for the full replacement cost of the home, no matter how much the replacement ends up costing.

Other insurers set limits -- for example, they agree to pay up to 120 percent of your policy's total dwelling coverage.

Lawsuit protection

Liability insurance protects you against lawsuits arising from bad things that happen to others while they are on your property. For example, suppose a litigious passerby happens to slip on something that was left on your driveway. Carry enough liability insurance to protect at least two times the value of your assets.

Personal property protection

The amount of personal property coverage is usually set at about 50 to 75 percent of the amount of dwelling coverage. If you are a condominium or cooperative apartment owner, however, you'll generally need to choose a specific dollar amount for the personal property coverage that you want.

Some policies come with personal property replacement guarantees that pay you for the replacement cost of an item rather than for the actual value of a used item at the time that it's damaged or stolen. If this feature is not part of the standard policy sold by your insurer, you may want to purchase it as a rider (add-on provision), if such a rider is available.

If you ever need to file a claim, having documentation as to what personal property you had helps. The simplest and fastest way to document your personal effects is to make a videotape of your belongings. But be sure to place any documentation somewhere outside your home in case of a fire.

Title Insurance

Title insurance assures homeowners and mortgage lenders that a property has a marketable (valid) title. If, for example, someone makes a claim that threatens your ownership of the home, the title insurance company protects you and the lender against loss or damage, according to the terms and provisions of your respective title insurance policies.

Most of your title insurance premium, which is based on the sale price of the home, is spent on research to determine who legally owns the property that you want to buy and to find out whether there are any unpaid liens or judgments recorded against it. Because title companies do a good job of eliminating title risks before folks buy property, only about 10 percent of the premium goes toward indemnifying homeowners against title claims after the closing. You pay this premium only once at closing to insure yourself as the owner for as long as you own the property.

If you refinance your mortgage, your new lender will require a title insurance policy for themselves insuring that their mortgage lien is in first place on the property. The premium due at the refinance closing will be based on the new loan amount and will protect the lender from title risks (such as income tax liens or property tax liens, for example) that may have been recorded against your property between the time your previous policy was issued and the date of the refinance.

Two kinds of title insurance

As a homeowner, you have a choice of two different kinds of title insurance. Depending on the extent of the coverage that you desire, you can either get a standard-coverage policy or an extended-coverage policy.

Standard title-insurance policy is less expensive than an extended policybecause its coverage is more limited. Standard policies are limited to certain off-record risks (such as fraud in the chain of title, defective recordings, and competency) plus recorded (at the local County Recorder's office) mechanic's liens, tax assessments, judgments, and other property defects that a search of public records can uncover.

Extended title-insurance policies cover everything that standard policies do, plus they provide expanded coverage for off-record risks that could be discovered through an inspection of the property or by making inquiries of people in actual possession of the property, as well as defects such as unrecorded (never recorded at the County Recorder's office) mechanic's liens, leases, or contracts of sale.


Paying for title insurance

Title insurance costs vary somewhat, depending upon the geographic area in which your home is located, the home's purchase price, and the type of coverage that you get. In addition to the owners policy that we recommend you purchase to protect your investment, you'll also need to buy a policy to protect the mortgage lender against loss on the loan amount.


Local custom and practice determine who usually pays for title insurance. The payment for title insurance is a negotiable item. Regardless of local custom, if you're in a strong buyer's market, the sellers may offer (or you could ask them) to pay your title insurance costs in order to put the deal together. If, conversely, you're bidding against several other buyers for a particularly desirable house, you'd be smart to sweeten your offer by paying for title insurance, even though local custom prescribes that sellers pay for it.

Title Risks

All sorts of irregularities in the history of the various people who have owned the property since it was originally constructed can affect a property's title. Learn about some causes of these hidden risks to titles:

Secret spouses: Sometimes a present or former spouse no one knew about will show up out of the blue and file a claim against the property. This explains why title-company representatives are so curious about your marital status. They must know whether you're single, married, divorced, or widowed in order to keep ownership records accurate.

Undisclosed heirs: When property owners die without wills, probate courts must decide whom their rightful heirs are. Court decisions may not be binding on heirs who weren't notified of the proceeding. Even when there's a will, probate courts must sometimes settle questions concerning the will's interpretation.

Questionable competency: Minors and people adjudged to be mentally incompetent can't enter into binding contracts unless the transaction is handled by their court-appointed guardians or conservators.

Human errors: This category covers everything from clerks who overlook liens recorded against property and other important documents while doing title searches, to surveyors who incorrectly establish property boundaries.

Forgery and fraud: Sellers are sometimes fraudulently impersonated. By the same token, signatures can be forged on documents.

Name confusion: A lot of title problems are caused by people who have names similar (or identical) to the buyer's name or seller's name. If you have a fairly common last name, you'll probably have to fill out a Statement of Information to help the title company distinguish you from other people with names like yours. If you have an ordinary name like Brown, Chen, Garcia, Gonzalez, Johnson, Jones, Lee, Miller, Nguyen, Williams or Smith, expect to be asked to complete a Statement of Information.


What type of information is requested in a Statement of Information? You (and your spouse if you're married) will have to provide your full name, Social Security number, date and year of birth, birthplace, date and place of marriage (if applicable), residence and employment information, previous marriages, and the like. This information will be used to differentiate others with names similar to yours.