5 myths about homeowners insurance (© Michael A. Keller/Corbis; George D. Lepp/Corbis)Click to enlarge picture

© Michael A. Keller/Corbis; George D. Lepp/Corbis

Homeowners insurance is one of the most common types of insurance and one of the least understood. Many homeowners believe that their policies will cover them for practically any damage to the house or contents. The reality is that homeowners policies contain many exclusions and restrictions on coverage that can leave you with a coverage gap. (Bing: How much can you generally expect to pay for homeowners insurance?)

Here are five areas where homeowners assume they have coverage but may not.

1. Loss-of-use coverage
If you have damage to your home severe enough that you cannot live in it while it is repaired, you may expect that the insurance company will put you up in a hotel while the work is being done. But not all policies include a loss-of-use provision. If you have to pay for a hotel, meals and other services out of pocket, it can add up quickly and put you at financial risk. If loss of use is covered, it will be stated explicitly in your policy, along with any limits of coverage. For example, your policy may state a maximum per diem amount or restrict the length of time the expenses will be paid.

Read:  10 things that can raise or lower your homeowners insurance rates

2. Replacement cost
Replacement cost in a homeowners policy refers to valuing the loss at the amount it will cost to replace the item. For example, if your four-year-old computer is lost in a fire, replacement-cost coverage would allow you to purchase a new one with similar features. Most homeowners believe that is what will happen if they have a claim, but most policies do not carry this clause. If not included, losses will be valued at what they were worth in their condition before the calamity. The 4-year-old computer might be valued at $250 — not enough to purchase a new one. Replacement-cost clauses are a valuable inclusion in a homeowners policy.

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3. Flood coverage
Almost all homeowners policies exclude flood coverage, along with earthquakes and other natural disasters. Floods can occur from a number of causes, such as a hurricane, burst pipes or sewer backup. A flood is one of the most common causes of home damage and the destruction of contents. Some companies specialize in flood coverage. If you live in a susceptible area, look into having a separate flood policy. Your mortgage company may require this additional coverage.

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4. Termites
Termites live all over North America but are most destructive in Southern climates where their life cycles are not affected by cold weather. Termites eat wood — lots of it — and can eat the supports in your house as easily as fallen leaves in the forest. They live in large colonies and, collectively, can destroy the structure of your home. Repairing termite damage and eradicating them can cost thousands of dollars. Most policies exclude termites and other pest damage. If you live in a susceptible area, the best insurance is to have the house regularly checked and sprayed by a professional.

5. Valuation of loss
When you have a claim, the insurance company will send out an appraiser to determine the extent of the damage and the best way to fix it. The appraiser will assess a value to the loss, which will be the minimum the insurance company can pay in order to meet its contractual obligations. However, you do not have to take that value as final. If you can prove your loss should be valued higher, you can negotiate the settlement with the company. Keeping receipts and pictures of valuable items will help you back up your claim.

To know what is in your homeowners policy, you should read it thoroughly. Look for exclusions to coverage and decide how you will cover those risks. In some cases, your insurance company will have separate add-ons that it can attach to your policy, or you can get specialized insurance from another company. For risks that cannot be insured, analyze how you will financially cover those risks if they should happen.

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