All homeowners insurance has six primary coverages:
Your policy outlines what events, or perils, trigger each coverage and how much your insurance company pays in each type of claim. However, your insurer isn’t necessarily responsible for paying for your entire loss. Its responsibility is capped at a certain dollar amount, called the limit of liability.
Your insurance company’s limit of liability is different for each of the primary coverages. For example, the limit of liability on your dwelling coverage is the amount your insurance company thinks is necessary to rebuild your home based on the location and building costs. But the limit of liability on other structures’ coverage is usually a percentage of the dwelling coverage ﹘ often about 10 percent.
You want to understand the limits of liability on a homeowners policy before you buy it because they tell you if you have enough insurance. Once you hit your policy’s limits in a claim, your insurance company has met its responsibility and will not pay anything else. That leaves you to cover whatever is left.
First, make sure you’re getting enough dwelling coverage to rebuild your home in a complete loss. Next, check the limits on the other structures, personal property, and loss of use coverage. These are typically percentages of your dwelling coverage, so you want to decide if you’re comfortable with each amount. For instance, review your personal property limit to see if it covers the majority of your belongings.
Finally, you want to pick a limit for your personal liability coverage. We usually recommend homeowners get about $100,000 for personal liability, but you may need a higher limit if you have a high net worth or own an attractive nuisance.
The declarations page of your insurance policy lists the six coverages with your insurer’s limits of liability next to them. For example, you may see your personal liability coverage with $100,000 listed next to it. This means your insurance company’s limit of liability is $100,000, and it will pay claims up to that amount as long as the details fit what’s outlined in your policy. Your insurer typically pays for your defense and covers court awards if you’re sued, but only up to its limit of liability.
Additionally, your policy may have special limits of liability for certain items, such as:
For high-value items like these, your policy may only cover a specified amount, sometimes only $1,500. That may not be enough for expensive items, so you may need a scheduled personal property endorsement or an additional insurance policy.
You may have the option to increase certain limits in your insurance policy. The dwelling limit is one that you might be able to increase, but many insurers discourage it. They use a proprietary formula to determine their limit of liability, so if your home was properly underwritten, then you’re paying the correct premium.
However, there may be situations where upping the limits of liability on your home insurance makes sense. Let’s say you have a full guest house on the property. Then the default limits on the other structures coverage may not be enough. The same may be true for the personal liability limit. People often increase that limit as their income and assets increase because they have a greater risk for lawsuits.