Homeowners insurance policies offer both you and your mortgage lender protection in the investment of your new house. Often overlooked in the long list of things to do before buying and moving into your new home is getting home insurance. But getting homeowners insurance before closing is an important step in the home buying process and should be a priority. Landlords may also require tenants to show proof of tenant insurance before allowing tenants to move in.

In general, homeowner's insurance is purchased before closing on a home. Purchasing a homeowners insurance policy keeps a home safe from the expense of disasters, such as a burst pipe or fire.

If an accident happens, expenses are paid by the insurance company versus from the homeowner's pocket. That means homeowners can relax knowing their home will be repaired- a small price to protect the biggest financial investment of most people's lives.

Protecting Yourself and the Lender

If there’s a mortgage on the property, just like a loan on a car, the asset isn't fully owned by the individual. Having invested their money to help you buy your new home, your lender wants to know their investment is safeguarded.  

Your lender’s required amount of coverage may differ from other lenders. Most financial institutions won’t fund a mortgage, or home equity lines of credit, without the home being insured. In fact, some lenders may require that you purchase extra coverage in addition to a basic homeowners policy.

What a Homeowner's Policy Provides

Although the home insurance policies can be customized, there are certain standard elements that provide what costs the insurer will cover.

Contents

Insurance coverage is not just for the dwelling that you are buying, but also for the contents of the home. The Insurance Bureau of Canada recommends having a complete list of the items in your home for insurance purposes, and reviewing it each year at renewal. Policies have riders or add-ons to cover unique, expensive items like antiques, art, jewelry or electronics or items that frequently leave the premises such as laptops and bikes. Coverage for furnishings and other possessions can be increased if needed. Carefully consider the value of your possessions and decide if the suggested contents coverage is enough, should your home become damaged, destroyed, or burglarized.

Liability

Basic homeowners policies usually include liability coverage to protect against legal action, in the event someone is injured on your property and sues for medical costs.

Replacement Cost

The amount required for rebuilding is not the same as the value of your property, which is the basis for determining property taxes. Your insurance policy should cover the entire replacement cost of your home, even though it could exceed the limit of your plan.  

With costs to rebuild homes continuing to increase due to growing costs of building materials and fossil fuels, some insurance policies have a clause that allows for the increasing cost of construction to rebuild a home if disaster strikes. This is called "Extended replacement cost". It typically pays up to 120% to 125% of the policy limit. Keep in mind, a "guaranteed replacement cost" policy has no limits. Some policies may state that they cover "actual cash value." Actual cash value means value minus depreciation.

Ensure your broker or agent fully explains any coverage before buying a home insurance policy.

Condominium Owners

Property insurance isn’t limited to freehold homeowners. Owners of condominiums are responsible for their own unit while the condominium board is responsible for the exterior and all shared spaces. Similarly, home insurance for condo owners includes everything within the walls of the unit (contents and structure included.)

The insurance policy purchased by the Condominium Association offers coverage for the common areas and, in most cases, the basic structure of a condominium or townhouse complex. Pools, tennis courts and playgrounds are usually covered in this policy.

Any loss costs in excess of the Association’s coverage limits are generally passed onto condo owners, as they are a part-owner of the community. Extra coverage added to a personal insurance policy may be an option to help protect condo owners, in the event the Association’s insurance is insufficient to cover the community expenses related to a covered loss.

HOA and Homeowners Insurance

If your new home is in a subdivision or planned community, you are likely required to pay a homeowners association (HOA) fee. This money helps cover the upkeep and maintenance costs of the community where the home is located. Your home's portion of an insurance policy for the community and/or complex is usually included in this fee.

Keep in mind this does not cover the structure of your home or its contents. A personal home insurance policy is needed for this.

Exclusions

Uninsured perils are generally not included in a basic home insurance policy. Common exclusions include:

• Damage caused by wear and tear, rust, corrosion or gradual deterioration
• Water damage caused by flood, underground water or water that enters through foundation cracks
• Damage caused by the freezing of indoor plumbing; if you are away from home for more than four consecutive days over the normal heating months, you must drain the plumbing or arrange to have your home inspected on a daily basis by a competent individual to ensure heat is maintained
• Damage caused to the exterior of your home as the result of freezing, melting or moving snow or ice and heaving frost
• Damage caused by snowslide, landslide and other forms of earth movement
• Damage caused by insects and rodents such as mice and termites
• Intentional or criminal acts

Risks Specific To Your Location

Most homeowners insurance policies cover flooding from a burst pipe or other water leak in your home, but they usually do not cover flooding from storms. Homes that are built on a floodplain, or are in commonly-flooded areas, often benefit from flood insurance. Your lender may require additional coverage for flooding if you live in a floodplain.

In March of 2022, Canada's Emergency Preparedness Minister Bill Blair spoke about plans to implement a national insurance program to provide coverage to the estimated 800,000 Canadian homes that are at such high risk of flooding that private insurance is unaffordable, or not available. He plans to roll this out over the next 18 months. See what Ottawa has planned for National flood insurance.

In the meantime, if your home is close to lakes or lies within a floodplain, you may need flood insurance.

When Does The Policy Become Active

After determining that your desired policy meets your lender’s requirements, you can purchase the insurance. This should be done sometime before you go to the meeting to officially close on your home. The insurance company will normally pre-approve the policy and then wait for your escrow/title company to send a request for "Proof of Insurance" when the final closing date is near. The escrow company will usually require the first yearly payment at closing. The insurance company will then email or fax the confirmation of coverage before the closing date.

Some lenders offer or require a monthly escrow impound account to pay for annual expenses like property tax and insurance. This means extra money gets paid alongside the monthly mortgage payment, and the lender automatically pays the homeowners' insurance and other costs when due.

Factors That Affect Home Insurance Premiums

Just like auto insurance, home insurance can fluctuate for many reasons. Here are a few that can cause your premium to go up:

• If your home is located in a flood zone
• Age of home
• Age of roof
• Age of electrical wiring
• If the home has a fireplace- especially wood burning
• Deductible amount- the amount that you pay in the event of a claim regardless of cost of damage

When considering the affordability of your home, consider that home insurance, like property taxes, will almost certainly rise, due to factors out of your control. Below are considerations that will help keep your home insurance premium as low as possible:

• Get a statement from the previous owner documenting any upgrades or replacements done to the home
• Having smoke alarms
• Having a monitored alarm system
• Having a clean claims record
• Senior citizen discount
• Not living in a flood zone
• Close proximity to a fire hall
• Bundling, which pairs different types of insurance together such as home and auto. See our recent blog post about how bundling insurance can save you money.

How A Home Inspection Can Help

It’s smart to get a home inspection done before you purchase home insurance. Having a professional inspection report provides valuable information as to the working systems in the home. This information will give your insurer accurate data so they can put a price on the cost of your home to replace, as well as assess the risks of certain features of your home.

Shopping For Quotes

Like car insurance, you can shop for home insurance quotes by phone or online. For online quotes, expect the questionnaire to be extensive and specific. You may need to provide information you don't have readily available, so make sure you have as much detail about the home as possible.

Getting into specific details about how you intend to use your space is critical, as well. Ask your agent or broker about in-law apartment insurance, Airbnb rental insurance, or landlord considerations, if applicable. If the home is high-value with unique or historical features, like antique moldings or millwork, be sure to find out how these details may affect insurance replacement costs.

A good agent will inform you about all of the features that a homeowners policy can offer, and make appropriate recommendations within your budget.

Think Bigger Picture

It’s easy and natural to get caught up in the excitement of house hunting. But it's important to consider insurance coverage needs within the context of your overall risk profile. In many instances, home insurance may need extended coverage. Things like pools, treehouses and trampolines can add liability exposure, while living in a flood plain has its own kind of risk.

Even if you're not ready to pull the trigger on extra coverage right now, it’s important to educate yourself about these add-ons that can always be purchased in the future. Buying a home is a major financial commitment, which means opening yourself up to a major financial loss if you’re ever named in a suit that exceeds your home insurance liability limits. Unfortunately, many of today’s lawsuits do just that.

Request An In-Depth Quote

Once you've provided all of the above information, it's time to receive your home insurance quote. Keep in mind that online quoting tools and calculators have limitations, which aren’t designed to provide a firm and final number. Home insurance is much more complicated than typing in an address and hitting “submit.”

You need to know if the quote you’re getting represents replacement value coverage or actual cash value and if important endorsements are included such as sewer backup.

Working With A Broker Versus An Agent

Brokers don’t carry contractual obligations with any one provider, meaning they can reach out to any number of insuring companies to find the best fit and least expensive policy for their client’s custom needs.

Many brokers work for smaller companies that represent big insurance companies, which means their service is typically more personalized, with better quality support.

Most brokers can complete an insurance policy and provide insurance documents in less than 24 hours. This can vary based on the insurance company and the type of insurance being purchased. Read about more benefits of working with an insurance broker versus an insurance agent.

Key Takeaways

• Homeowners insurance policies generally cover destruction and damage to a residence's interior and exterior, the loss or theft of possessions, and personal liability for harm to others
• Three basic levels of coverage exist: actual cash value, replacement cost, and extended replacement cost/value
• Policy rates are largely determined by the insurer's risk that you'll file a claim; they assess this risk based on past claim history associated with the home, the neighbourhood, and the home's condition
• Bundling insurance products can lead to discounted premiums
• Be cautious of online quotes as they may not include everything you think they do
• When shopping for a policy, using a broker will get you multiple quotes from multiple insurance companies quickly, to make sure you're getting the best deal

If you're looking for insurance coverage from a trusted broker, discover why people in Ontario have relied on Best Buy Insurance for over 60 years. You can find the best insurance rates online or by calling Best Buy Insurance at 877-813-5710.

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