How Home Fire Insurance Coverage Works
Whether you get your fire insurance protection from your homeowners policy or a separate fire insurance policy, you’ll need to make sure that you get a policy that protects you from all the types of damage you fear. Before you can determine whether or not your policy covers these various types of damage, you need to know whether it’s a “named peril” or “all-risk” type of policy.
Named Peril Insurance Policies
A named peril policy only covers the dangers that are specifically mentioned in the policy. So if a named peril homeowners insurance policy lists fire damage as being covered but doesn’t mention smoke damage, then smoke damage would not be covered by the policy.
If a particular type of damage is included in a named peril policy, it’ll be covered even if the root cause of the covered damage is something that doesn’t appear on the named peril list. For example, if fire damage is not covered by your homeowners insurance policy but water damage is included, then the water damage from the firefighters’ hoses in the previous example would be covered by your insurance carrier.
All-Risk Insurance Policies
An all-risk policy, sometimes also called special form insurance, covers all types of damage except for those that are specifically excluded from the policy. Since an all-risk policy could potentially extend to types of damage that the insurer never considered (alien invasion?), these types of policies are considered riskier by insurance carriers and generally cost more than equivalent named peril policies.
Once you figure out whether your policy is a named peril or all-risk policy, you’ll know how to check for fire damage coverage and other related types of coverage. If it’s a named peril policy, check the list of perils to make sure that fire, smoke, water, and related damages are included on the list. If it’s an all-risk policy, check the list of exclusions to make sure that these types of damage don’t appear.
If your homeowners insurance policy does include fire damage and all the related types of damage, you’re still not out of the woods yet: you’ll need to confirm whether the policy will provide full replacement cost coverage or actual cash value coverage after a fire.
Full Replacement Cost Coverage Insurance
An insurance policy that provides full replacement cost will pay the entire amount needed to replace the damaged or destroyed item with an equivalent item. For example, if your garage burned down in a fire and your homeowners insurance included full replacement cost coverage, the carrier would pay you however much it would cost today to build an exact replica of your old garage.
Be aware that even full replacement cost coverage is subject to whatever your coverage limit may be. If your coverage limit is $200,000 and it would cost $300,000 to replace the destroyed structure, you’ll still only get $200,000 from the insurance carrier.
Actual Cash Value Coverage Insurance
Many insurance policies provide actual cash value coverage (also known as fair value coverage) rather than full replacement cost. The actual cash value will only pay up to the market value of the destroyed or damaged item, based on how much it was worth just before it was damaged. For example, if your garage burned down and the most recent appraisal indicated it was worth $50,000, the insurance carrier will only pay you $50,000 to cover the damage—even if it would cost much more than that to replace the garage.
Actual cash value coverage may be further limited by depreciation, meaning how much the value of the item has dropped based on its expected lifespan. For example, if your five-year-old riding mower was in the garage and was destroyed when it burned down, an actual cash value policy would pay you based on the mower’s current value minus five years’ worth of depreciation for the mower.