Homeowner's Insurance: What You Need to Know

It may not cover damage from floods or earthquakes.
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Editor's note: As a special feature for April, TheStreet.com offers a 20-part series on virtually everything about real estate. This installment is Part 12.

Once you find your dream home and figure out how you're going to pay for it, the next step is to get homeowner's insurance. This is an insurance policy covering the structure of your house and other structures on the property, such as a shed or fence, as well as the contents of your home, such as your furniture and other personal belongings.

Homeowner's insurance may also cover you against lawsuits in the event that you or a family member cause bodily injury to someone else or damage someone else's property.

It's important to note that ordinary homeowner's insurance, also known as hazard insurance,

does not cover damage caused by floods or earthquakes

. This can't be emphasized enough. Even though the insurance declarations for hazard policies specifically state that any damage caused by flooding is not covered, many people who suffered damage in Hurricane Katrina expected to have their flood damage covered, only to have their claims denied.

Flood insurance is sold exclusively through the National Flood Insurance Program, found at

FloodSmart.gov. Most private insurance companies will sell you a separate earthquake policy, except in California, where the

California Earthquake Authority provides this coverage.

For most people, homeowner's insurance is not optional. If you take out a mortgage, it is very likely that the lender will require proof of insurance at closing. In fact, lenders prefer you to escrow your homeowner's insurance premium and property taxes as part of your monthly mortgage payment. This way the lender or loan servicer will pay your annual insurance premiums and property taxes and adjust your loan payment accordingly.

Your lender is required to inform you if the home you are purchasing (or refinancing) is in a flood zone. If it is, the lender will require you to obtain flood insurance coverage sufficient to replace the structure if it is destroyed by flood, with a maximum requirement of $250,000. According to the Insurance Information Institute, the average cost of coverage for a home in a flood-prone area is $400 a year. But even if you live outside a flood zone, you should consider getting coverage.

While federal law stipulates that the lender must require sufficient flood insurance coverage if your home is in a flood zone, it is up to the lender to decide how much hazard coverage will be required.

Know Your Servicer

After closing, the bank or mortgage company that made your loan will likely sell it to another institution or sell the loan-servicing rights. You might be told at your loan closing who the new servicer will be. You might also be informed later on that your loan has been sold or that the servicer has changed. In any event, it is very important that you know who is servicing your loan and who is responsible to pay your annual insurance premiums and property taxes.

Make sure the servicer pays your insurance premium on time. Call the servicer at least two weeks before any insurance premium is due, and ask if the payment has been sent. Then call and ask your insurance agent to confirm that the premium payment has been received. If the servicer fails to pay the premium on time, the insurance company might drop your policy, and you might pay a lot more to secure an equivalent policy with another insurance company. This is especially true of you live in an area prone to hurricanes or other natural disasters.

It is also critical that you inform your insurance agent if your loan servicer changes. This may happen more than once, if your loan is sold or if your lender contracts with another company to service the loan.

Handling the Claim

What if you have an insurance claim?

If you have a mortgage, the lender usually requires that it be listed on your insurance declaration as a loss payee. If this is the case and you suffer damage to your home, the insurance claim check will likely be made payable to you and to the lender or loan servicer. In this case, you need to contact the lender or loan servicer and ask it to endorse the check so you can access the funds for your repairs.

Many lenders have policies to release only a certain dollar amount to the borrower and dole out the rest as repairs are made. This can be an arduous process, so make sure you keep careful records of all estimates and repair receipts, and stay in contact with the lender or loan servicer throughout the process.

One more thing: If the damage to your home results from a hurricane or other large-scale disaster, call your insurance company as soon as possible. You will need to get in line and wait for a claims adjuster to visit. If you don't place your claim immediately, the wait might be several months.

Coming up next: Renovations that pay.

Philip van Doorn joined TSC Ratings as a banking analyst in February 2007. He has a varied background, with a B.S. degree in business administration from Long Island University. He previously worked as a loan operations officer with Riverside National Bank in Fort Pierce, Fla. Before that he was a credit analyst, monitoring banks and thrifts at the Federal Home Loan Bank of New York.