The ABCs of Home Insurance
By Peter Diekmeyer • Bankrate.com

In recent years, Canadian home insurance providers have gone to great lengths to simplify their forms and make their policies easier to understand.

Despite this, like most financial product information, insurance documentation can be tough to understand, and buyers often don't take the time to get informed about their home policies. The results of this inattention can be disastrous.

"Unlike car insurance, which is heavily regulated by the provinces, homeowners insurance is more wide open," says Henry Blumenthal, vice-president, client services, at Meloche Monnex, the home insurance arm of TD Canada Trust. "Customers need to pay close attention to the kind of coverage they have, and they need to keep their policies up-to-date when events change."

Even an old tree could be worth insuring

Blumenthal cites the recent experience of the Halifax hurricane, which destroyed numerous houses. Although most homeowners were covered, few insurance companies reimbursed the costs of trees that were destroyed or damaged.

It might not sound like much, but "a maple tree that is 20 years old can be worth several thousand dollars," says Blumenthal. "That's a lot of money."

According to Blumenthal, the key parts of a home insurance policy that buyers need to be informed about are the extent of the coverage, the exemptions and the deductibles.

Be clear about the coverage and exemptions

By far the most important part of a homeowners insurance package is the coverage. Most insurance policies provide protection in case of fire, but coverage for water damage from a backed-up municipal sewer system varies from one provider to the next, particularly if the damage occurs in pipes outside the owner's property.

Homeowners insurance policies have become more flexible in recent years, leading to a substantial increase in the variety of options available.

But you must make sure your house is insured for the right amount. For example, many buyers are insured only for the replacement cost of the property.

Replacement cost insurance may be fine for cars, which depreciate quickly, but with the run-up in real-estate prices, the market value of many homes may be substantially higher than what it would cost to rebuild the house if it were destroyed or damaged. The result could be an unpleasant surprise in the event of a claim.

There are also important distinctions between a proprietor's principal residence and rental properties. In the latter case, certain damages, such as vandalism, are not automatically covered.

Home insurance buyers should also make sure they are adequately covered for additional expenses, such as hotel rooms and other costs in cases where they lose use of their home for an extended period.

Another potential pitfall is the amount of coverage allocated to a home's possessions, which in many cases is set at a default amount of $20,000. Although this may sound like a lot of money, according to Blumenthal, family possessions tend to add up over the years.

"When we write a cheque for $20,000, we are not usually very happy," says Blumenthal, "because we know that the client's possessions were often worth more than that."

Blumenthal counsels home insurance buyers to take a realistic inventory of their possessions and allow a substantial margin of error to make room for new possessions that accumulate over time.

Lower the premium by raising the deductible

Another key part of a home insurance policy is the deductible, usually set at $200, which is the portion of each claim that is not covered by the insurance company.

One of the innovations in insurance policies during the past decades is that deductibles are no longer set in stone. Clients can save substantial amounts on their premiums by raising the deductible to $500 or $1,000.

About 80 percent of home insurance sold in Canada is paid for in monthly installments. But it won't hurt to check the interest rate built into those monthly payments, which varies from provider to provider. And since those interest payments are not tax deductible except in the case of rental properties, it likely makes more sense to pay your premiums in one lump sum.

According to Blumenthal, the most important piece of advice any consumer can follow when buying home insurance is to not panic and to get informed.

"The central coverage in most policies is fairly standard," he says. "But if you have any questions, all you have to do is ask. We'll be glad to answer all your questions."

Shop around to get the right policy

Although the major Canadian home insurance players tend to be large and reputable firms, it pays to ask around about rates and claims experience. As in most sectors, a word-of-mouth recommendation from a friend or two, especially from those who have filed claims in the past, is worth its weight in gold.

Peter Diekmeyer is the management columnist at Montreal's The Gazette and writes regularly for numerous Canadian trade publications.