The Importance Of Property Insurance
The basic goal behind buying insurance is to make you financially whole following a loss. You agree to pay a (relatively) small fee to an insurance company today, causing a small but certain loss to you now, in exchange for a guarantee from the insurance company that it will bear the burden of a large but uncertain loss in the future.
Let's say that you have a house that you own, free and clear - with no insurance. As long as you continue to pay your property taxes, you have every right to enjoy the use of that house for as long as you like, as guaranteed by law. You may live there, rent it out, leave it vacant or even sell it if you like. However, if that giant tree in the backyard falls on your house causing severe damage, it is still up to you to cover the cost to repair the house. This is the basic reason to carry property insurance, which would have paid for your property to be fixed or replaced
Who Needs Insurance?
Thankfully for those of us who might be negligent in our responsibility to have insurance on our property, we are forced in many cases by either law or contract (the mortgage contract) to carry insurance. While not many, if any, U.S. state laws require you to carry property insurance, they do often require some form of liability insurance, especially for cars. This covers repair or financial restitution to someone else besides the individual at fault. For example, the person at fault's liability insurance pays to have their car fixed, or pays their medical bills. Fortunately, when most of us purchase the required liability coverage, we are given the opportunity to purchase the property insurance (i.e., comprehensive or collision insurance) rather easily, thus saving us from financial hardship if our own car is damaged in the accident.
Coverage
According to a survey published in the Journal of Financial Planning, many homeowners have vastly misguided views of what their homeowner's insurance actually covers. According to this survey conducted by the National Association of Insurance Commissioners, " One-third of homeowners believe flood damage will be covered by their standard policy. Over half think their policy covers them in the event of a water line break. Thirty-five percent say they will be compensated for an earthquake, and a slightly lesser proportion thinks mold is covered."
In actuality, the typical perils (causes of property destruction) that are typically not covered are:
Flood damage (this is a separate policy)
Earthquake (this is also a separate policy)
Mold
Acts of war
Parts of the property in disrepair (Including worn-out plumbing, electrical wiring, air conditioners, heating units, and roofing).
Policies are often written so that for something to be covered, it must be "sudden and accidental," meaning that it wasn't a slow leak that caused damage over many months. Often this is not covered by insurance. If your roof caves in from old age, and not from storm damage, it will likely not be covered.
The typical perils which typically are covered include:
Fire
Wind (tornado or hurricane)
Hail
Theft
Liability Coverage
In addition to covering the value of your home or other property, many insurance policies also include an important provision for liability coverage. You may not think this is very important, being the careful person that you are, however, there are scores of eager lawyers in every city searching high and low for lawsuits against people such as yourself. Liability coverage is well known to owners of automobiles, but may be lesser-known to homeowners.
If your neighbor's house catches fire because you left your charcoal grill unattended, who do you think will pay for the damage caused by the fire? You will. You have paid the insurance company your premiums so that they will pay for larger claims when they do occur. The same goes for someone who is hurt and requires medical attention while on your property.
If you are on vacation and your property is stolen, such as a diamond ring, you may be entitled to reimbursement. Be sure to document the theft with evidence that you owned it and you should be able to provide a police report to the insurance company.