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What does a homeowner fire policy cover?

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fireHomeowners insurance typically pays out more money for fire, lightning and debris removal claims than any other loss type, including body and property damage, according to the Insurance Information Institute.

Every year, more than a half a million properties are destroyed by fire, according to the National Fire Protection Association (NFPA). In 2014, the last year for which statistics are available, 78 percent of those fires were in residential properties, the NFPA reports.

Overall, fires have declined sharply over the past few decades with greater emphasis on fire safety. But one type of fire is on the rise -- wildfires. 

Wildfires have burned more than 80 million acres over the past decade. In recent years, wildfires have destroyed homes and millions of acres of forest in the Pacific Northwest and California. In fact, 2015 was one of the worst fire seasons in decades with more than 10 million acres burned, according to the National Interagency Fire Center (NIFC).

What if one of those fires happens in your home? Your homeowner's insurance should help you replace what was destroyed and rebuild your home. But it's important that you keep your policy up-to-date and have adequate coverage if you want to be fully-protected.

Fire and homeowners insurance

Fire damage claims are the costliest. The average homeowners insurance claim for fire is nearly $40,000, according to Loretta Worters, a spokeswoman for the Insurance Information Institute (III). However, fire claims are only the fifth most common after wind and hail, water damage and freezing, other property damage and theft.

"You can buy a fire-only policy, but those policies do not cover liability or theft," says Worters. A standard homeowners policy covers not only fire or lightning, but also usually wind, ice and snow damage as well as freezing pipes and more. 

Weighted average claim costs, 2010-2014

fire claim amounts

Source: Insurance Information Institute

What does a homeowners fire policy cover?

Most homeowners insurance policies protect your home and its contents in the event of a fire. Here are three items protected by standard policies:

  1. Dwelling. Typically, your home insurance covers fire and smoke damage to your dwelling and any structures attached to it, such as a porch or garage. Should you leave a pot unattended that causes a kitchen fire, the repairs to your home should be covered, minus any deductible. Typical deductibles are $500 and $1,000, Worters explains.
  2. Detached structures. Your homeowners policy should also cover structures on your property that are not attached to your home, such as sheds, detached garages and fences, should they be destroyed by fire. Standard homeowners policies are likely to offer coverage for landscaping as well.
  3. Personal property. Most homeowners insurance includes personal belongings, such as furniture, appliances, and clothing that could be ruined in a fire. It's important that you keep an inventory of your belongings, advises Dave Phillips, a spokesman for State Farm. Some policies are written so that you are covered for the loss of contents based on a percentage of the policy, typically 40 to 75 percent. For example, if you have a $200,000 policy and are entitled to 40 percent of that amount for damaged contents, you could receive $80,000.

Actual cash value vs. replacement value

You have two choices when it comes to insuring your home and your belongings, Worters explains:

  1. Actual cash value. Actual cash value pays to replace your home or possessions, minus a deduction for depreciation, up to the limit of your policy.
  2. Replacement cost. Replacement cost pays the true cost of replacing your home or possessions (no deduction for depreciation) up to the limit of your policy.

Most standard homeowners policies offer actual cash value protection, as it costs 10 percent more, on average to buy replacement cost coverage.

Worters illustrates the difference between actual cash value and replacement cost, in this scenario:

replacement cost insurance

Suppose a fire destroys a 10-year-old TV set in your living room, originally purchased for $500, and now worth about $50. If you have an actual cash value policy, insurance is likely to pay only a fraction of the cost of a new TV set because the television has been used for 10 years and is worth a lot less than its original cost.

If you have a replacement cost policy for the contents of your home, the insurance company should pay to replace the TV set with a new one of similar quality."Some replacement cost policies also replace the item and deliver it to you," according to Worters.

replacement insurance costGenerally, the price of replacement cost coverage is about 10 percent more than that of actual cash value, she notes.

Hotel expenses and home insurance

What happens if you can't live in your home while it's being repaired or replaced?

This is where the Additional Living Expenses (ALE) part of a homeowners policy comes in. ALE pays the additional costs of living away from home if you cannot live there because of damage from an insured disaster. It covers hotel bills, restaurant meals and other costs incurred, over and above your usual living expenses, while your home is being rebuilt.

"Keep in mind that the ALE coverage in your homeowners policy has limits -- and some policies include a time limitation," Worters cautions. However, you can generally increase the amount of ALE coverage for an additional premium.

Your ALE coverage limit is separate from the amount available to rebuild or repair your home. Even if you use up your ALE, your insurance company should still pay the full cost of rebuilding your home up to the policy limit.

How much homeowners insurance coverage do I need?

There is no formula or amount that fits every situation, Worters claims. "Set your coverage based on the value of your home and its contents and your deductibles on what you can afford to pay out-of-pocket should you suffer a loss." Evaluate your personal property and dwelling coverage needs.

Personal property. "Think you need more coverage than what is provided in a standard policy to replace your belongings in the event they are damaged by fire? Increase your limits for personal property. If you have valuables, such as jewelry or paintings, you may want to buy a rider so that they are covered separately in the event of a fire or other loss," Phillips suggests.

Dwelling coverage. How much it costs to rebuild after a fire and what you paid for your home may not be the same. "The market value could be higher than the replacement cost," Phillips says. Construction costs and home values can fluctuate. Consider current rates when determining what it may cost to rebuild or repair your home after fire damage, Worters recommends. If you need help determining how much it would cost to rebuild your home, you can hire a professional appraiser, Phillips adds. "An appraiser can give you a tangible value to work with."

"Don't include the land when calculating how much you need to insure your home for," says Phillips. The land is not at risk from fire or other perils. If you were to include its value, you would pay a higher premium than necessary.

Saving on home and fire insurance

Here are four ways to save on home and fire insurance:

  1. Shop around. Get home insurance quotes from different insurance companies on this site. Compare not just price, policy limits and what would covered in the event of a fire or other loss.
  2. Raise your deductible. The higher your deductible, the lower your premiums.
  3. Bundle insurance policies. Most companies offer home and auto insurance bundle discounts. Your premiums can be as much as 5 to 15 percent less if you combine two or more insurance policies with the same insurance company.
  4. Ask for discounts. In addition to multi-policy discounts, some companies offer discounts for home monitoring systems, certain types of roofs and a variety of other items. Carefully consider all home insurance discounts that may apply to your situation.

Be careful: Cooking equipment is the leading cause of home fires, according to the NFPA. Heating equipment is second. The best way to save on home and fire insurance is not to have a fire in the first place. Make safety a priority.

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