Insurance: Why would I want personal liability coverage? What does it cover?

Accidents happen…and there are plenty of attorneys who specialize in recovering for victims whenever they do. Litigation has become a fact of life. Anyone with assets must take steps to protect what has taken so long to acquire. For most people, the front line in the war to protect assets is home or rent insurance.Liability coverage pays when you are legally obligated for damages that occurred as the result of something that happened on your property (your neighbor slipped and fell on your entryway rug, for instance). It also covers damages caused by your personal activities (hit a baseball through your neighbor’s double-paned window). This coverage would pay the claims as well as a lawyer to defend you in the event of a lawsuit. In addition to protection for claims and lawsuits arising out of non-auto incidents that occur at your premises, these policies often provide protection for incidents that occur off the premises. Keep in mind that unlike other coverage in your policy, liability insurance does not have a deductible. There is no amount that you must first pay before your insurer picks up the tab.

How much is my home worth?

Before buying home insurance, you’ll have a choice: insuring property for "actual cash value" or for "replacement cost". Both offer the same kind of liability, but they differ in the amount and type of property protection coverage. This difference often results in very different dollar amounts in the event of a loss.Actual cash value: "Actual cash value" refers to how the value of the property is determined in the event of a loss. Actual cash value takes into account depreciation -- that an item purchased new is worth less after having been "in-service" for a number of years. For example, you bought a sofa three years ago for $2,000. Fire destroys the sofa and you put in a claim with the insurance company. The insurer determines that the actual cash value of a sofa that is three years old is currently $500, and that is what they would pay you. If your policy has a $1,000 deductible, you’ll collect nothing.Replacement cost: "Replacement cost" likewise refers to how the value of the property is determined in the event of the loss. But the fundamental difference is that the value is set at how much it will cost you today to go out and buy a new item to replace the one that has been lost. In the example above, that $2,000 sofa may cost $3,000 if it were bought new today. With replacement cost coverage, when that sofa is destroyed today, after you have paid your deductible, the insurer pays you $3,000 to go out and buy that same new sofa replace the one which has been destroyed. Replacement cost policies are more expensive than actual cash value policies.

Am I required to purchase earthquake or flood insurance?

These losses are specifically excluded in all policies. So if you live on the San Andreas fault or on the banks of the Mississippi, or anywhere where earthquakes or floods are probable, your mortgage lender will require you to buy separate insurance covering your particular risk – especially if such a catastrophe has happened previously in your area. If either is a distinct possibility where you live, you will probably want to buy such insurance even if it isn’t required. But these are expensive coverages.The National Flood Insurance Program (NFIP) offers flood insurance in many areas. Local insurance agents also sell NFIP flood policies, and can describe the program in your area. The Federal Emergency Management Agency provides information on its website. Earthquake insurance is offered by state agencies in earthquake-prone areas. However, check to see if your current insurer will provide this coverage as it will probably be less expensive.Depending upon where you live, hurricane, windstorm or damage caused by hail may be excluded from a standard policy also. A homeowner may have to buy special coverage for these risks.By the way, most standard policies also exclude termite damage, damage caused by insects, rats, or mice, wear and tear, water damage caused by repeated and continuous seepage, and a few other risks. These perils are controllable and homeowners should examine their homes and do what is needed to correct them.For information about insurance law, check out the FreeAdvice Insurance Law FAQs.