The Ugly Truth about Sublimits

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For the majority of people, purchasing a home is the biggest single investment of their lives. To protect their home and its valuable contents, they purchase a homeowners insurance policy. When buying a homeowners policy, most people think “everything” in their home is covered by their policy, and when I say everything, I mean everything. I know I did before I became a licensed insurance professional. Many times I have talked with clients who got several proposals for homeowners insurance coverage, but when I ask them what type of coverage they were proposald, they have no idea. The agents who proposald them did not even explain the coverage to them. It is difficult to believe someone would choose an insurance agent who only gives price as a solution.

After a homeowner chooses their homeowners insurance policy, they sign what is commonly called an insurance application. These applications are actually legal contracts and will determine coverage should a coverage question ever arise. Once these insurance contracts are signed, the homeowner receives a multi-page bound policy document filled with language enumerating the conditions of the insurance agreement. The first few pages of this new insurance policy includes a “Declaration of Coverage.”

Declaration Page

This insurance declaration summarizes your coverage and includes a list similar to this:

  • Dwelling
  • Other structures
  • Personal Property
  • Loss of Use
  • Liability
  • Medical Payments

It also usually has several endorsement numbers at the bottom of the page. No one knows what these numbers mean, but they can make a big difference in coverage.

Once you view these numbers, it’s easy to think you’re all set. The number of clients who NEVER open their policy to check the accuracy of the information is astounding. These are the same clients who don’t have time to meet with their agent to review their coverage and make certain their biggest assets are properly protected. This reminds me of a client who wouldn’t take the time to make an appointment, and then experienced a claim. Their coverage was limited because they had not purchased any additional coverage. After the claim, the client requested a copy of their policy. As I say every day, claim time is the wrong time to discover what type of policy and coverage you have.

Anyway, if you’ve scanned the declarations page and gone over the numbers beside each category on the page, you’re pretty sure you see the big picture. Yet, even studying the declarations page in-depth might not provide the total picture of your homeowners insurance coverage. An insurance policy is actually a complex, legal contract with definitions, exclusions, and limitations. Many policies mirror to the industry-standard Insurance Services Organization form which follows a consistent, regimented layout, but many other policies are also company specific. Fully understanding your insurance coverage can be decidedly difficult.

Sublimits

One area where I see a lot of misconceptions arise is in personal property coverage. The declaration page of your homeowners insurance policy lists a total amount of coverage for personal property. This is the maximum limit the insurance company will pay on a loss. However, the declarations page does not necessarily define the sublimits, the amount of coverage, for specific categories of items. These sublimits are usually placed on high fraud items like jewelry, guns, and artwork. Sublimits can vary wildly ranging from $1500 per item with a $2500 total limit to $5000 per item and a $10,000 total limit. If you have a gun collection, sports memorabilia, or are keeping business property in your home, sublimits place a ceiling on your coverage unless you purchase specific, supplemental coverage for each of these categories of items.

When one of my clients was prey to a home burglary, they had several thousand dollars-worth of computers and cell phones stolen including hundreds of dollars in computer and charging cables alone. Fortunately, we had discussed their insurance coverage needs beforehand, and they were fully covered by their protection plan. You probably don’t think about the total cost of your connected household on a daily basis, but this is just one example of the extra home insurance coverages that should be discussed prior to purchasing homeowners insurance. Another claim saw $15,000 of jewelry stolen from one of our clients, and that homeowner only had $2500 total of jewelry coverage. We discussed additional coverage in her account review, but she declined the additional coverage. She thought her jewelry was secure because she kept it in a safe at home. The thieves walked out with the safe, and she lost $15,000 worth of jewelry. The total for the additional jewelry coverage would have been $120 per year. The total cost of her insurance coverage that year was more than $15,000, and she could have saved most of it by spending an additional $125.

Know Your Options

Many clients are not given any options for additional coverage when purchasing a homeowners insurance policy. Either the agent is not thorough and doesn’t ask enough questions up front to fully understand the client’s needs, or perhaps low policy price is the only consideration of the transaction. Be sure you are considering the difference between the PRICE of insurance and the COST of insurance when choosing your homeowners coverage. A low price may cost you thousands of dollars at claim time.

Internet raters and 1-800 numbers are certainly convenient for getting a quick proposal, but they are not always adequate in assessing the unique individual needs of most homeowners. If additional insurance coverages are not discussed upfront, it usually doesn’t come up for discussion because a lot of insurance agents don’t complete periodic account reviews with their clients. And I can’t say this enough—the worst time to discover restrictive personal property sub-limits or any other policy limitations is at claim time.

Named Peril vs. All Risk

Purchasing additional personal property insurance coverage provides homeowners with broader protection advantages and greater peace of mind. You must consider the major differences in a named peril policy and an all risk peril policy for personal property. All risk is an older term describing comprehensive coverage. It means you are protected in the event of any peril or risk unless it is specifically excluded in your policy. Yes there are exclusions, but an all risk policy is much broader than the named peril policy. Named peril means it must be listed on the policy to be covered. You can see how restrictive this coverage could be.

Scheduling items (listing specific items on your policy with their value) is also important for more expensive items. This scheduling allows for mysterious disappearance coverage. Mysterious disappearance refers to loss of an item that you can’t explain or identify the cause of when no evidence of theft exists. I advise my clients if they use items often, they should schedule the items. If an item is not used often, then a safety deposit box might be a better option for protecting it. With firearms, a gun safe that is permanently bolted to a floor or wall in the home is always a great option.

If you own specialty items or think you might need extra coverage for your household, make sure you consult with your agent so that you are not surprised at claim time. I am ok if a homeowner does not want additional coverage as long as they are informed about it. My problem occurs when a client is totally surprised at claim time because they didn’t understand sub-limits.