It can be tempting as a homeowner to only take out a “basic” insurance policy for your house, but doing so without understanding what is and isn’t covered can prove extremely costly.
Most home insurance policies comprise three main sections:
- The building
- Personal belongings
- Liability
You need a broad range of coverage—because home insurance involves so much more than fire and theft protection.
A major leak at the neighbour’s, a fall on an icy patch, or a damaged object can result in an expensive claim (sometimes far beyond what the owners had imagined).
The Replacement Value: A Common Source of Confusion
One of the most frequent mistakes homeowners make is to confuse market value and replacement value.
The truth is that home insurance doesn’t cover the property’s prospective sale price, but rather the actual cost of rebuilding it from scratch in the event of a total loss. More precisely,
- The market value represents your house or condo’s potential selling price at a precise point in time and within a specific market.
- The “replacement value” or reconstruction cost corresponds to what it would cost to rebuild your house or condo exactly as it was (excluding the price of the land). It must take the current cost of materials and labour into account. The amount must also cover pre-construction fees: demolition, clean-up, etc.
The Reasons Behind Underinsured Homes
So how does a property end up underinsured even when the owner regularly renews their policy?
It’s not generally due to negligence!
In many cases, this comes down to how insurance policies are renewed and updated over time. For example:
Renewals based on indexation and not a comprehensive reassessment.
When renewing the policy (every year or every two years), the insurer generally adjusts the coverage amounts according to average indexes. They update the current figure without recalculating in detail the actual cost of rebuilding the house; that is, without going through the lengthy questionnaire process!
Renewals based on general indicators that don’t necessarily reflect the property’s particular characteristics.
- The index rates reflect global trends, but not necessarily
- the exact region;
- the type of building;
- the specific construction materials; or
- the building’s architectural complexity.
Renovations the homeowner omits to declare or declares late.
Work like updating the kitchen, finishing the basement, adding a bathroom, installing nicer finishes can all raise the property’s replacement value. But the insurance policy won’t cover this new value if the homeowner doesn’t inform their insurer of these changes.
Reconstruction costs that are higher than building new.
As mentioned above, a home insurance policy should also cover pre-reconstruction fees. The process of rebuilding a damaged house is far more involved than that of a new standard construction. It usually includes
- demolition and debris removal;
- very tight deadlines;
- temporary labour shortages;
- upgrading to current standards (building codes, energy efficiency).
Water Damage: The Insurable Risk With the Most Grey Areas
Another aspect which requires particular attention is your water damage protection. Water damage is among the leading causes of insurance claims as well as one of the most potentially complicated types of protection to navigate.
Home insurance policies don’t automatically cover events such as sewer backups, water seeping in through the foundation, or water pooling around the house due to heavy rainfall. Homeowners must add all kinds of extra optional protections to their policies, and even then, if the damage results from a lack of maintenance, the insurer will deny the claim.
Personal Belongings: Watch Out for Maximums
Furthermore, personal belongings are rarely insured without restrictions. Certain items, such as jewellery, art, professional work tools, and electronic equipment are frequently subject to indemnity limits.
A theft or fire may reveal a substantial gap between the actual value of the property lost and the indemnity paid. In some cases, homeowners may need additional protection to avoid a significant financial loss.
Liability Insurance: Not to Be Neglected
Imagine your neighbour suing you for hundreds of thousands of dollars. What a nightmare!
For a homeowner, liability coverage amounting to $2 million is widely considered a minimum, especially in a house with children, a swimming pool, a pet, or if the residence is located in a risk-prone area.
How to Make Sure You’re Properly Protected
When shopping for home insurance, the Autorité des marchés financiers recommends that you
- check the insured amounts match to your needs;
- confirm that the selected protection options correspond to your situation.
What does that mean in practical terms?
It means using your policy’s renewal date as an opportunity to re-evaluate your coverage instead of letting it automatically carry over to the next year.
- Compile an honest inventory of your home and its contents: recent renovations, special materials, actual value of contents, risk factors (swimming pool, spa, fireplace, finished basement).
- Ask your insurer straightforward questions (like specific examples of what situations are covered and not covered, namely regarding water damage and weather events).
- Compare coverage rather than premiums. For instance, look at deductibles and check that the replacement value is up to date.
Taking the time to review your coverage, to ask the right questions, and to adjust your protection are simple steps that will ensure you’re never underinsured.
