Understanding Your Insurance Coverage

You've found your perfect beach house.  You have a signed contract.  Everything is going along smoothly.  But you still need to tackle the rather complicated issue of insurance.  Wind and hail.  Flood.  Dwelling/fire (DP2) or Homeowner's (HO3)?  There are so many things to consider! 

Insurance on the Outer Banks can be quite complex.  Which means finding a good agent, one willing to walk you through the details, is imperative.  In fact, when it comes to insurance there is no truer saying than "you get what you pay for".  Often, people will shop for the cheapest policy up-front, only to have it cost them money because of its limited coverage down the line. 

Second homes and homes used in rental programs provide a perfect example.  There are two main types of policies: a homeowner policy (HO3) or a dwelling/fire policy form (DP2). 

While both the dwelling/fire policy and the homeowner policy provide the basic coverage required by a mortgage company, the homeowner policy (HO3) provides much broader coverage and has several endorsements that are simply not available on the standard dwelling/fire policy (DP2).  Most homeowner's across the country have their primary home insured on the HO3 policy because of its superior coverage, but then often, for reasons of price, go with a DP2 policy for their second and rental homes.  However, the following table outlines the limitations of the DP2 policy:

Type of Coverage

HO3

DP2

 

 

 

Coverage for wind driven rain

X

n/a

Liability Coverage

X

**

$25K water backup and sump overflow

X

n/a

Theft**

X

**

Contents of your home covered at full replacement cost

X

***

Specified Additional Amount of Insurance

****

n/a

                 
*Wind driven rain is the number one source of claims in the Outer Banks
**Separate policies may be purchased for this coverage
***DP2 offers actual cash value on a depreciated basis.  Meaning, electronics you purchased 5 years ago for $2000 may now only be worth $200 on a depreciated basis.
****This endorsement provides an additional 25% of coverage, based on the value the home is insured for

In the end, while the HO3 policy is usually slightly more expensive than the DP2 policy, most people will find themselves very unhappy with the shortfalls of their DP2 policy should the need arise that you are making a claim. 

Remember, a home, primary or other, will be one of the largest investments you ever make.  Make sure you choose an insurance policy that will reflect that!