Yes. Insurance is your protection against the many property and liability risks you face as an owner or renter. For example, if somebody sued you for an injury or damage caused by you or your property, the cost of defending that suit could run into thousands of dollars just for legal fees-regardless of the outcome of the suit. And if you were to lose your home due to a fire or to have the contents damaged or stolen, you probably could not afford to replace everything all at once. That’s why mortgage lenders, as a rule, require homeowners insurance.

With about 900 insurance companies writing property/casualty policies in the United States, individual homeowners policies vary. However, 80 percent of homeowners policies are based on a standard form, and all homeowners policies cover two important areas: property and liability. Moreover, your policy may cover you for additional living expenses should your home not be livable for a period of time due to a covered peril.

At a minimum, homeowners insurance usually covers damage caused by:

– Fire or lightning
– Windstorm or hail
– Explosions
– Aircraft
– Vehicles
– Smoke
– Theft or vandalism
– Falling objects
– Weight of ice, snow or sleet
– Freezing of a plumbing, heating, air conditioning or other such household system

Many homeowners policies cover damage caused by “just about anything,” unless specifically excluded. Most catastrophes are covered. For example, wind damage from hurricanes or tornadoes is covered as a windstorm peril. But, flood damage and earthquake damage are NOT covered by a standard homeowners policy. A separate policy is required.

The common methods are:

• Actual Cash Value. The replacement cost of the item minus depreciation. For example, a new television set may cost $500. But if your 7year-old TV set gets damaged in a fire, it might have depreciated 50 percent prior to the damage. Therefore, you would be paid $250 for that set.
• Replacement Coverage. The cost of replacing an item without deducting for depreciation, but limited to a maximum dollar amount. Today’s cost for a TV set with features similar to the 7-year-old one damaged by fire would determine the amount of compensation. If it still costs $500 today, that would be the replacement coverage. (It’s important to remember that there are limits on this policy and you need to keep up-to-date on your coverage).
• Extended Replacement Cost. An extended replacement cost policy, one that covers costs up to a certain percentage over the limit (usually 20%). This gives you protection against such things as a sudden increase in construction costs.
  
  

Important Note: Replacement value should not be confused with market value. The market value is what your house, for example, would actually sell for and is generally more than the replacement cost. This is because replacement value does not include the land-which almost always does not need to be replaced.

Check your policy. If you prefer replacement or extended replacement coverage and do not already have it, this coverage can be added to your policy. Typically, the difference in premiums is 10 to 15 percent to upgrade from actual cash value coverage to replacement coverage. Your agent can advise you of the costs and benefits.