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Guess What You're Not Insured Against

Quick -- can you guess what kind of claim accounts for about a quarter of all settlements made by homeowner insurance companies? Would you believe dog bites?

We're all familiar with so-called "ambulance-chaser" lawyers who often advertise on late-night television. But did you know that there's another interesting and somewhat related field: dog-bite law? It's true -- and it's big business. At the illinois-dog-bite-attorney.com website, for example, I found these statistics:

  • "There are approximately 5 million dog bites per year (nearly 2% of all Americans are bitten by a dog each year)."
  • "About 800,000 victims per year require medical attention for dog bites."
  • "1,000 dog-bite victims per day are seen in hospital emergency rooms with 6,000 requiring hospitalization each year."
  • "Dog bite losses exceed $1 billion per year with $345 million paid by insurance companies."

While we may see this information and briefly think, "that's interesting," insurance companies have noted it and decided to take action. Some have dropped coverage for dog bites (at least for those who own more aggressive breeds, such as pit bulls), some charge extra for such coverage, and some are offering discounts to homeowners who don't own dogs.

Dog bites aren't the only thing you should think about regarding your homeowner insurance. Many of us mistakenly assume that we're covered for a lot of things that may be excluded in our policies. If you expect Allstate (NYSE: ALL  ) or MetLife (NYSE: MET  ) to offer you a big check and a smile if you end up in the path of a destructive flood or earthquake, think again. Those are the kinds of things that are often excluded in policies.

What is covered
What you can expect from many policies is compensation if your home or property is damaged in a less exceptional storm, perhaps via wind or rain or falling trees. What you shouldn't automatically expect, says a University of Minnesota guide, is coverage against floods, sewer back-ups, or tree removals. Similarly, claims related to things such as your swimming pool, tool shed, or trampoline may also be excluded. Some coverages being phased out by many insurers include those for building-code upgrades.

Don't take this article as your guide, though, since policies can vary widely. Find out exactly what is and is not covered from your insurance company. Get it in writing. If you're in the market for a new plan, have each contender spell out exactly what the policy covers.

If you want some protections that aren't there, ask how much it will cost to add them. On my own homeowner policy, for example, earthquake damage isn't covered. It's true that my corner of America isn't a hotbed of earthquake activity, but they can happen anywhere, and some of the biggest ones have been in places you might not expect, such as Missouri. To add earthquake coverage to my policy would cost an additional $100 or so. I haven't opted for it yet, but I consider signing up now and then.

Don't be underinsured
Many homeowners aren't even protected adequately when it comes to damages the insurer does cover. For example, if your home is destroyed by fire and you need to completely rebuild it, you may be covered, but perhaps not for as much as you assumed.

According to researchers at Marshall & Swift /Boeckh, about three in five American homes are underinsured -- by an average of roughly 25%! That's a lot of money when we're talking about dwellings valued at $100,000, $200,000, $400,000, etc.

Why are so many homes underinsured? Well, there are several reasons -- and we shouldn't necessarily blame insurers here. They stand to benefit if you're fully insured, as you'll pay higher premiums. Instead, homeowners themselves are often at fault. If you added a room to your house or overhauled your kitchen in a big way and your home is now worth a lot more, does your insurer know? Did you increase your coverage accordingly? You should have, but many people ignore this step, thinking they're saving money. By that logic, they might forego homeowner insurance altogether and save a bigger bundle. Still, some insurers may let us down, by undervaluing our homes in order to offer a lower a premium and attract our business.

Another culprit is the cost of building materials. If you don't routinely traipse down the aisles of Home Depot (NYSE: HD  ) or Lowe's (NYSE: LOW  ) , you may not have noticed that wood, steel, drywall, and other materials cost a lot more today than they did just a year or two ago. This means that it would cost more to rebuild your home.

In a St. Petersburg Times article, Helen Huntley noted that, "Carrying adequate insurance is essential for maintaining replacement coverage, which pays the full cost of replacing a roof instead of deducting for depreciation based on the roof's age. Insurance companies generally require insurance limits that are at least 80% of full value in order to maintain replacement coverage."

She added, "But be aware that even replacement coverage isn't guaranteed to be enough to rebuild a house that's been destroyed. Policies typically are capped at the policy limits or, if you have "extended" replacement coverage, at 20% to 25% above those limits. If you live in a house that's more than a few years old, it's important to buy "law and ordinance" coverage that would pay the extra cost of rebuilding in compliance with upgraded building codes, up to 50% more than your policy limit."

Be an informed consumer
You can -- and should -- learn much more about insurance (all kinds of it) in our Insurance Center -- it's not the most exciting topic, but you can save yourself and your loved ones a lot of trouble and money by making sure you have the coverage you need. See what advice and experiences Fools are sharing on our Insurance discussion board, too -- we're offering a free trial of all our boards right now.

Finally, you may find the following articles of interest:

SelenaMaranjian'sfavorite discussion boards include Book Club, The Eclectic Library, and Card & Board Games. She owns shares of Home Depot. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.


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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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