Property Insurance: well known, little understood

Property insurance is a fairly popular term among many social circles, but few people understand why property insurance is necessary and not just a luxury. This is probably due to several misconceptions about property insurance and insurance policies in general. What many people see when they hear about property insurance is “a place to throw excess money you don’t know what to do with.” In reality, it is a form of security for your physical assets to prevent you from being stranded in an emergency. Here, we will explain property insurance and some of the important things you should know about it. 

What is Property Insurance?

Property insurance is a policy or series of policies that protect you from financial loss when your physical assets get stolen or damaged. It provides you with either property protection or liability coverage in case of theft, fire, or damage caused by weather conditions, whether you are the owner of a property or a renter. Policies under property insurance coverage can include homeowners insurance, renters insurance, flood insurance, and earthquake insurance. 

A property insurance policy usually covers specific incidents spelled out in the policy. These incidents may be damage caused by weather conditions like lightning, ice, snow, wind, hail, and so on. It can also be theft or damage caused by fire or vandalism. The policy may cover the property and its content. It can also cover instances when a third party gets injured while on the property and decides to sue the property owner or renter. 

Property insurance aims to offer protection against events that are likely to happen in the ordinary course of life, which a property owner may not be prepared to face. This is why most insurance policies do not cover damage from rare events like floods or tsunamis or damage caused by structural defects leading to drainage or sewer blockage, seeping groundwater, standing water, or any source of water that could have been prevented. Some policies exclude damage caused by mold or earthquakes. Also, damage caused by normal wear and tear or extreme situations like nuclear events, war, and terrorism is not covered by property insurance policies. 

Types of Property Insurance

Property insurance policies are grouped into three based on how they reimburse claimants. The three groups are replacement cost, actual cash value, and extended replacement costs.

Replacement cost

This type of policy covers the cost of fixing or replacing the damaged or stolen property rather than the actual value of the property. For example, if a replacement cost policy covers a house that has been destroyed by fire, the insurance company will pay for how much it costs to rebuild the house rather than how much the house will be valued if it is sold. 

Actual cash value

By contrast, an actual cash value coverage pays for the replacement cost minus the item’s depreciation. So rather than pay the amount it will cost to repair the item, this coverage pays for the item’s monetary value when it is stolen or damaged. If the claimant has lost a ten-year-old piece of jewelry, the insurance company will pay for that same ten-year-old jewelry, not the price of a new one.

Extended replacement costs

This type of coverage is different from the first two because it takes other factors into consideration asides from the value of the insured item. Insurance policies usually have a coverage limit, that is, the maximum amount of money a person can claim under the policy. An extended replacement costs coverage considers that replacement costs for the property may be higher than the coverage limit. So the insurance company pays up to 25% extra if the replacement costs have gone up. 

Property insurance coverage

Property insurance is also classified based on the coverage it applies to. Based on this classification, we have property coverage and public liability coverage.

Property coverage

Property coverage includes damage to loss of personal property or harm inflicted on third parties. It includes home insurance, auto insurance, travel insurance, financial insurance, public liability insurance, marine, aviation, and railway insurance, industrial insurance, and agricultural insurance.

Public liability coverage

Public liability coverage caters to professional groups like doctors, lawyers, investment advisors, and entrepreneurs. 

There are many property insurance policies, and not all property insurance is the same. You must know which policy you are signing up for to make sure it covers everything you want it to cover. You may also use a hybrid insurance policy, which can cover specific situations that are not typically covered under standard policies. These are called insurance riders. 

An insurance rider helps you protect more than the coverage limit for your property insurance package. A good example is the scheduled personal property rider. This rider provides additional coverage for certain valuables such as furs, jewelry, collectibles, or antiques. 

If, for example, your standard property insurance policy has a coverage limit of $1,000 for jewelry – meaning that if your jewelry gets damaged or stolen, you can only receive a maximum of $1,000 to replace it – a scheduled property rider can increase the limit to $1,500, which means you get additional coverage for your jewelry. Also, a rider can include coverage for incidents not included in your standard insurance policy, for example, losing or misplacing the insured item. 

Another example of a rider is a business property rider. This coverage can cater to people who run a home-based business or keep a business property in their home and need extra protection. An identity theft restoration rider covers instances where your identity is stolen, and you must cover legal fees or other charges. 

Before choosing a property insurance policy, it is vital that you carefully take note of what exactly you want to insure, what kind of policy you can afford, and what type of company provides the policy you need. Property insurance reduces the risk you have to face and helps you maintain your financial bottom line both as a business owner and as a private property owner.