Personal Lines of Insurance: A Complete Guide (Updated 9/4/21)

Buying insurance for your home, automobile, motorcycle, boat or other personal assets seems like one of those routine, necessary things that everyone must do but no one wants to do.  You are bombarded with messaging telling you that it is all about the price, the convenience, the time and the name.

No one is telling you that the difference between a policy that meets your needs and one that misses the mark is in the coverage details and how you choose to make the policy fit your needs.  In this article, we’ll discuss the common “personal lines of insurance and give you straightforward and realistic information to help you buy the right insurance for you.

Homeowners Insurance

Your home is likely the largest purchase you will ever make.  There is a broad range of coverage available out there today with tremendous variation in coverage, each one being sold under the same label as a Homeowners Insurance Policy.

To add to the confusion, there are different types of Homeowners Policies for different types of ownership situations.  The chart below illustrates the various types of Homeowners Policy forms.

Form Known As Used For
HO-3, HO-5 Homeowners Policy Fee simple ownership (you own the land and the dwelling). Must be owner occupied.  May be one or two family structure.
HO-4 Homeowners Policy

Tenant Homeowner

Rental Policy

Tenant in an apartment, house, room, or condominium that they do not own.
HO-6 Homeowners Policy

Condo Unit Owners

Those who reside in a condominium unit that they also own. In some cases, this form may be used for an owner of a condominium that is occupied by a tenant.

Moreover, there are many versions of each form, some standardized and some carrier specific.  It is very difficult to determine if the policy being sold to you as a “Homeowners” Insurance Policy meets your needs or not unless you delve into the specific coverages in more detail.  For purposes of this article, we will focus on the HO-3 and HO-5 forms for fee simple ownership.

Keep in mind that the Homeowners Policy is built to serve the average homeowner.  An average policy probably has too much coverage for half of the people and too little for the other half.  Let’s break down what coverage is included in the Homeowners Policy.

Coverage on the dwelling is typically stated on the declarations page.  Most insurance companies will increase this limit each year to keep up with inflation in building materials and costs. One of the most important issues in designing a Homeowners Policy is to determine the correct limit to carry on the dwelling.

This section of the policy covers the actual building and all the items attached to the building such as electric wiring and fixtures, pipes, fixtures, flooring and more.  It is most often insured on a Replacement Cost basis – which means that the insurance is intended to pay for the cost to replace the damaged property or item with no penalty for the physical depreciation of that property.

It is important to remember that replacement cost has little or no relationship with the market or sales value of the property.

What Is Replacement Cost?

Replacement Cost coverage does not mean what most people think.  This is a form of settlement that is outlined in your insurance contract.  In its simplest form, Replacement Cost means you get “new” for “old”.  To be more technical, it is a payment without a penalty for physical depreciation.

Most insurance contracts, including homeowners policies, include an insurance to value clause that forces you to insure for some percentage of the actual replacement value of the structure in order to receive full benefits from the insurance policy at the time of a loss.  For most homeowners policies, the important threshold is 80%.  So, if you do not insure for at least 80% of the replacement value your loss will have a depreciation factor applied.

Let’s review an example of how this works.  Say that you have a home that is about 3,000 square feet in area.  Based on the type of construction, your State and county, the age of the house and other physical characteristics we calculate that the full replacement cost of the house is $750,000 (or $250 per square foot).

However, your homeowners policy shows a limit of coverage for the home of $550,000.  In a strong gust of wind during a rainstorm, your 20-year-old roof is damaged and must be replaced.  The estimate you receive to replace your damaged roof is $10,000.  If you insured the house for at least 80% of replacement cost, your loss settlement would be at replacement cost and you will receive $10,000 less your deductible.

Because you did not insure for at least 80% (which would have been $600,000), your loss settlement is at a depreciated value (we call this ACV or actual cash value).  A 20-year-old roof is probably through two-thirds of its expected life (if your roof has 30-year rated shingles), so the loss settlement will be $10,000 less two-thirds, or $3,300 less your deductible.  Imagine the effect on this if you have a partial fire loss of $100,000 or more.

It is important to carefully consider the amount of insurance that you purchase.  Keep in mind that when it comes to insurance, you are dealing with construction costs and not market value.  Market values tend to fluctuate and can go up and down depending on the economy and many other factors.

Construction costs generally trend upward based on inflation, but they rarely ever go down.  It is not unusual in these times to see a home where the construction or replacement values is much higher than the market value.  We also remember times when the opposite was true, and you could insure a home for much less than the purchase price.

Questions on Replacement Cost & How to Pick the Limit on Your Homeowners Insurance

Most “on-line” quotes you receive will be for a HO-3 Form.  We prefer to use a HO-5 form whenever possible.  The HO-3 form includes Special Perils for the Building and Broad Perils for Personal Property (contents).  Special perils are better, and the slight price difference is usually worth it!

If you spill fingernail polish on your hardwood floors, your sofa and on your expensive oriental rug is it covered?  Under a HO-3 form only the hardwood floors are covered.  If you purchase a HO-5 form, all those items are covered.

Deductibles: Watch Out For The Hidden Ones!

It is normal to have a deductible of $1,000 or higher for property losses on your Homeowners Policy.  There are some excellent points to consider even higher deductibles.  We do caution you for two types of deductibles that you may not even know that you have (and you may have to dig down to the very fine print on the on-line quote you received).

Hurricane Deductible.  This is a higher deductible that applies only to damage done because of a named storm or hurricane.  Often these deductibles are 2 – 5 percent of the coverage limit on the dwelling or higher.  If your home is insured with a limit of $700,000 on the dwelling, that could be a deductible as high as $35,000.  Some carriers place hurricane deductibles on all New Jersey and most Pennsylvania policies regardless of proximity to the coast.

Age of Roof Penalty.  While not listed as a deductible, some carriers are sneaking into their quotes a limitation on replacement cost coverage for older roofs.  In this case, you receive a depreciated value rather than the replacement value for the damage.  For example, if you have a roof that is 30 years old with 40 year rated shingles, you may only collect 25% of the cost of the new roof because of depreciation.  This acts like a 75% deductible on your roof.  You would certainly want to be aware of this limitation in advance.

Jewelry & Other Special Items

Most Homeowners Policies have limitations for loss by theft on jewelry and other valuable items such as silver, gold, silverware, guns, stamps, coins and money.  There are different ways to increase the limits of these items either by adding specific coverage for each item or by adding to the overall limit of coverage on the type of item.

We suggest that you consider adding a special coverage endorsement (sometimes called a rider) on these items to get both full value for the item and broader causes of loss.

More Info On Jewelry & Special Items Coverage, Plus Why A Rider Makes Sense

There are certain categories of property that are limited in your homeowners policy. Some types of property are limited to a dollar amount for all perils while others may be limited to a dollar limit for only theft.

For example, there is no limitation for jewelry for the peril of fire, but you may only have $2,500 of coverage for the peril of theft. All policies are different, so make sure to read yours to review these limits, but here is a chart that may be useful to identify the kinds of property that are generally limited.

Property (limited for all perils) – Money, bank notes, bullion, gold, accounts, deeds, letters of credit, passports, tickets, stamps, watercraft, trailers, property used for business purposes, electronic apparatus and accessories while in or upon a motor vehicle.

Property (limited for theft) – jewelry, watches, furs, precious stones, firearms, silverware, goldware, platinumware, pewterware, and gold, silver, platinum, or pewter plated items.

Why Purchase A Rider?

You may add coverage for all the items listed above on an endorsement we often call a “rider” or “floater”. There are many advantages to do this. You may expand the coverage – the actual perils that are covered for that property. A rider is usually an economical way to get the higher limits of coverage that you need on a cherished item.

In addition to the items listed above, it may be advisable to consider special coverage for collectibles, glassware, antiques, fine arts, paintings, musical instruments taken off the premises and sporting equipment. In general, think about any personal property that has a high value, special meaning or you cannot replace and consider a customized coverage solution.

For more in-depth information on property that may need special coverage, look at our blog post on the subject.

Coverage For Your Finished Basement

You will find huge variations in the coverage offered by different insurance companies for Water Back Up Coverage.  This is a very important coverage if you have a finished or partially finished basement.  We routinely see policies that exclude this coverage.

Most policies will allow you to purchase some limit of coverage for this – a typical limit may be $10,000.  We have options as low as $5,000 of coverage up to an unlimited amount (subject to the building coverage limit).  This is an area where it is important to make sure the policy fits your needs.

There are many other important coverages that are not often included in the quote you may receive when you are offered a cookie cutter solution for your home insurance needs.  We think these are some of the very important ones.

Service Line Coverage

This is a special coverage to cover damage to underground utilities and appliances for which the homeowner is responsible. This is a relatively new coverage that has become available.

Items targeted by this coverage are water, sewer, and electric lines that may run under your property to the municipally owned connection point. We have had many cases where an insured is reimbursed for thousands of dollars of damage to such an underground line.

Equipment Breakdown

Equipment Breakdown coverage fills a gap that is not otherwise covered by property insurance. This contemplates the breakdown of mechanical or digital systems that may be subject to unusual losses.

Some examples of this would include electrical arching, explosion or tearing asunder of a pressure vessel (boiler, hot water heater, etc.), or breakdown of an air conditioning compressor. This coverage is not a product warranty and generally does not coverage normal wear and tear or aging.

Flood Coverage

Flood is a peril that is excluded from homeowners and other forms of property insurance. There is a federally backed system of flood insurance available in the United States which you may purchase through our agency. The cost of flood insurance varies greatly depending on the location of the property.

There is a federal program of flood zone mapping that largely determines the cost of flood insurance and may determine if a flood insurance policy is required by your mortgage company. We have strong relationships with flood insurance programs for federal coverage, private carrier coverage and excess flood coverage.

It is important to note that each year there are millions of dollars of flood damage to homes not in a flood zone. We suggest that you review the benefits of a flood insurance policy regardless of the requirements of your mortgage company.

Earthquake and Earth Movement Coverage

Earthquake and earth movement are excluded causes of loss in the typical homeowners policy. Depending on the location of your home, we may be able to add this coverage for an additional premium to your policy.

Did you know that New Jersey is near a major fault line?

Sinkhole Collapse Coverage

Sinkholes are another excluded cause of loss from the homeowners policy. The issues of sinkholes are usually a geographic concern as they seem to be more prevalent in some areas of the country than others.

There have been instances of isolated sinkhole issues which have generally been traced to mining operations and abandoned mine shafts nearby. If you live on Coppermine Road, or Mine Street – you may want to think about adding this coverage to your policy.

The Homeowners Policy Also Provides Very Broad Personal Liability Coverage

The Liability coverage does what you think it does – protects you if someone gets hurt or injured on your property.  But it also provides protection if you cause bodily injury or property damage away from the premises during your personal (not business) activities.

For example, if your child is playing golf and accidentally hits another golfer causing some injuries that result in needed medical attention, loss of work, and ongoing treatment – the Homeowners Policy provides coverage (defense and settlement/judgement up to your liability limits).

Make Your Liability Coverage Fit For You

We think it is important to make sure that your Liability coverage includes some extra coverage that you can add to your policy – you’ll be surprised at the low cost of these enhanced coverages.

Personal Injury Liability

Personal Injury liability extends your liability coverage beyond Bodily Injury and Property Damage. Typically included in Personal Injury coverage is slander, libel, false arrest, and wrongful eviction. Often, this coverage is included for first dollar protection on a personal umbrella policy.

We think that in our litigious society, it is important to add Personal Injury Liability to your coverage program either through your homeowners policy or a personal umbrella policy.

Incidental Farm Liability

The typical homeowners policy excludes liability coverage from any and all business operations. Farming, even if not for a profit, is considered a business operation. Therefore, it is critical to make sure that your homeowners policy includes liability for farming if you have any farming exposure.

Farming exposure would include any or all the following:

  • You get a farmland tax exemption from your municipality or township
  • You raise, breed, or board any animals
  • You grow, raise, or sell crops, hay, eggs, fruit, vegetables, animals, or any other farm product to others
  • You lease land to others for farming purposes
  • Ownership of tractors or other equipment for farm use
  • Anything else that looks like farming

Not all insurance carriers will add this specialized liability coverage to a homeowners policy and many small farms may need another form of insurance called a Farmowners Policy for adequate coverage.

We have more than 30 years of experience in agricultural insurance. Call us if you are not sure if you need farming liability coverage.

Short-Term Rental Liability Coverage

If you are using any portion of your home or your premise for short-term rental (such as Airbnb, or VRBO) you may not have liability coverage for this portion of your exposure. Some of the rental platforms may include limited coverage for the property owner but we urge you to consult your attorney to gauge the adequacy of any coverage provided.

Some insurance carriers will endorse your policy for an additional premium to pick up this liability exposure.

Personal Automobile Insurance Policy (PAP)

It is no secret that New Jersey ranks quite high in the nation for the cost of personal automobile insurance. We spend a lot of time working with and for our clients to make sure that they have the best possible deal for their automobile insurance. But it is worth a few minutes to consider the coverage represented by this significant expenditure. We are outlining the major sections of the Personal Automobile Insurance policy with some special emphasis on important coverage details.

Liability Coverage

Liability insurance is mandatory for all registered automobiles in New Jersey. We call liability insurance a “third party” coverage in that you are purchasing insurance that ultimately pays benefit to a party other than you, the person who purchases the policy. There are two major categories of injuries that we are concerned with in automobile liability insurance, and they are bodily injury and property damage.

Bodily injury is the responsibility that you have if your negligence in an automobile results in injury to another person or persons. Property Damage relates to your responsibility for another’s property arising from an automobile accident.

A very important consideration in liability insurance is the cost to defend yourself from allegations of negligence. You may get sued for bodily injury or property damage, even if you are not responsible for the damages. We call this “Defense Costs”, and it is included in the Personal Automobile Insurance policy with no dollar limitation. It’s also outside of your selected limits of coverage.

Limits for liability on a Personal Automobile Insurance Policy may be written on either a single limit or a split limit basis. A single limit includes damages for all bodily injuries and property damage within the limit. Split limits separate the coverage into a limit for bodily injury to any one person, a limit for bodily injury for all people injured in the accident, and a limit for property damage.

What Limit Should You Purchase?

The minimum limits for liability in New Jersey as mandated by State Law are $35,000 on a single limit basis and $15,000/$30,000/$5,000 on a split limit basis. We believe that these minimum limits are probably much too low for most established adults or families.

Here’s an exercise to help you understand the consequences of low limits. The next time you stop at a red light, estimate the value of the car in front of you, the car behind you, and the car next to you. This gives you a concept of what sort of limit you may need for just property damage.

Our recommendation is to purchase a limit that is enough to qualify you to purchase a Personal Umbrella Policy. That would give you a limit of at least $1,000,000 plus your personal automobile limits. Typically, you need to purchase a liability limit of $300,000 (single limit) or $250,000/$500,000/$100,000 (split limits).

Automobile owners with little or no personal assets should also consider limits more than State required minimums because it is possible for a judgement over your automobile insurance limits to be paid over a twenty-year period from future earnings.

We have seen young drivers have wages garnished to satisfy a judgement that came in higher than their insurance limit. In other words, having a low limit does not excuse you from meeting the standard of responsibility for damages that is established by a court.

An example of this would be if a driver, who is just starting a first job after college, rear ends a vehicle when approaching a traffic light. If that vehicle happens to be a new Mercedes Benz and the driver has State minimum split limits, the insurance company is only responsible to pay up to $5,000 for damages to the Mercedes. The driver may be responsible for paying the balance even if they have no assets to speak of. If the damages to the Mercedes are $30,000, the driver faces the prospects of starting a first job now being $25,000 in debt. That doesn’t even include any college loans, etc.

Uninsured Motorist Coverage

This is another mandated coverage in New Jersey and most other States. Uninsured Motorist is a coverage that steps in when you are hit by an uninsured vehicle. Your damages are then paid by your policy which fills in when the responsible party has no insurance.

There are a high percentage of uninsured vehicles on the road in most highly populated regions in our country. We recommend you match your Uninsured Motorist Coverage to the same limits that you purchase for Liability.

In NJ, our Uninsured Motorist Coverage also includes what we call Underinsured Motorist Coverage as well. This provides coverage when the party that hits you has lower limits than you and your policy serves to fill that gap.

Personal Injury Protection

New Jersey is called a “No-Fault State”. That simply means that if you are involved in an automobile accident, your medical coverage is provided by your automobile insurance coverage regardless of who is at fault.

There are two ways to purchase Personal Injury Protection (PIP) coverage in New Jersey.

You may purchase this with a Lawsuit Limitation, which is the most common way to purchase the coverage. When you do this, you are agreeing to waive your rights to sue the other party to collect your benefits. There are thresholds that, if met, allow you to bring suit even when you select this more restricted coverage.

The other way to purchase this coverage is with No Lawsuit Limitation, which gives you the right to collect benefits and sue the other party with no restrictions. This is a more expensive option.

There are many more options regarding the benefits under PIP which are outlined in your Buyers Guide, which you receive with your insurance policy each year. We are happy to review all these options for you. A more detailed description of PIP will be provided in a future article.

Physical Coverage Damage – Coverage For Your Scheduled Vehicles

This is an optional coverage from the State’s perspective. If you have a loan on your vehicle, the lender will certainly require you to have both Comprehensive and Collision coverage. This is a “first party” coverage since the insured is the one who receives the benefit or payment from the policy in the event of a loss.

There are several types of Physical Damage Coverage.

Comprehensive Coverage

Comprehensive Coverage is a very broad coverage for damage to the vehicle arising from an accident that includes pretty much everything other than a Collision. The way the policy is written, this coverage includes everything unless they specifically excluded it in the policy.

The major perils that fall under Comprehensive include theft, fire, vandalism, hitting an animal, and glass damage. You purchase this coverage with a deductible.

Collision Coverage

Collision Coverage is for damage resulting from a collision (hitting another vehicle or object) or upset or overturn. This coverage is purchased with a deductible.

Both Comprehensive and Collision coverage are settled based on the vehicle’s Actual Cash Value or book value. The important thing to understand is that it incorporates the depreciation in value over time for the vehicle.

Towing Coverage

This is typically available if you purchase Comprehensive coverage. Towing coverage provides coverage for towing or roadside labor you need for the vehicle because of mechanical breakdown or other causes. Typically, you do not need to be involved in an accident for this coverage to apply.

Rental Coverage

Rental Coverage is extra coverage that you purchase to pay for the use of a rental vehicle to replace your covered automobile if it is damaged in an accident. You may select the limits for this coverage, and we suggest you review current daily rental rates in your area when you choose this limit.

Other important Physical Damage coverages usually added to your policy with an endorsement include:

Stated Amount Coverage

This is an endorsement that some insurance carriers add to your policy. But remember, it is not a coverage. It is a limitation!

Normally, for physical damage, the policy pays you the lesser of the cost to repair or the Actual Cash Value (book value). When you have a Stated Amount Endorsement, you get whichever is less between the dollar limit on the State Amount Endorsement, the cost to repair, or the Actual Cash Value.

We find that often when this endorsement is used, the limit shown on the endorsement is less than the projected book value of the vehicle. We rarely recommend the use of this endorsement.

Replacement Cost Coverage

Some insurance companies offer a replacement cost endorsement for certain vehicles. Generally, these vehicles need to be newer and in good condition. This endorsement eliminates the depreciation factor from the loss settlement. Under this endorsement, you get new for old. Contact us if you are interested in this coverage.

Gap Coverage

We have spent some time describing the effect of depreciation on the loss settlement on a vehicle. It is quite possible to owe more for a car loan than the car is worth on an Actual Cost Value (depreciated basis).

We call the difference between what you may owe on a vehicle and what the vehicle is worth the “gap”. Many of our insurance companies offer this coverage as an endorsement to the policy. This gap coverage can apply to either a loan or a lease. Keep in mind, when you negotiate the purchase or lease of a new vehicle, you can often get the finance company to include Gap Coverage for no additional cost.

Purchasing The Right Auto Insurance Coverage Is Important

While your home may be the largest investment you make in your life, driving an automobile may be the most hazardous activity that you do. Most of our lifestyles are driving-centric and our cars are literally our home away from home.

We believe that you should pay close attention to the coverage you have on your policy and carefully consider your limits. For a small extra premium, you can more adequately protect yourself from the threat of financial ruin arising from an activity that most of us take totally for granted.