Can You Have Two Homeowners Insurance Policies?
Gain clarity on having multiple homeowners insurance policies. Understand the practicalities, implications, and how coverage functions.
Homeowners insurance serves as a financial safeguard for individuals who own property. This type of property insurance protects against financial losses stemming from damage to a residence and its contents. Homeowners insurance also provides liability coverage for certain accidents that may occur on the property. Owning reliable homeowners insurance is important for mitigating unexpected events that could lead to significant financial burdens.
Permissibility of Multiple Policies
It is permissible to have more than one homeowners insurance policy on the same property. While not illegal, duplicate coverage is generally not necessary or advisable. The principle of indemnity dictates that insurance restores the policyholder to their financial position before a loss, preventing profit. Therefore, a homeowner will only be compensated for the actual value of the damage or loss incurred, even with multiple policies.
Scenarios for Multiple Policies
Several situations might lead a homeowner to temporarily hold more than one insurance policy on a property. During a property transaction, such as buying a new home while selling an old one, there can be a period of overlapping coverage. Insurance for the new home may be required upon exchanging contracts, while coverage for the old property remains necessary until ownership officially transfers.
Different types of properties or specific coverage needs can also result in multiple policies. An individual owning multiple homes, like a primary residence and a vacation home, will need separate insurance policies for each. Similarly, a landlord might maintain a policy for the rental property’s structure, while tenants often purchase renters insurance to cover their personal belongings and liability.
Specialized coverage needs can necessitate additional policies. A standard homeowners policy might not adequately cover unique risks, such as flood or earthquake damage, or high-value items like rare art or business equipment. In such cases, a homeowner might secure a separate policy or rider tailored to these specific risks or assets. For instance, if a business operates from a home, a separate business insurance policy might be needed to cover business-related risks not included in a standard homeowners policy.
Claim Procedures with Multiple Policies
When a claim arises and multiple homeowners insurance policies cover the same property, insurers engage in “coordination of benefits” or apply “contribution clauses.” Instead of each insurer paying the full loss, they work together to determine their respective shares. The goal is to indemnify the homeowner for their actual loss without allowing them to receive more than the incurred damage.
For example, if a home sustains $100,000 in damage and is covered by two policies, each with a $100,000 limit, the insurers will likely split the cost proportionally. One policy might pay 40% and the other 60%, depending on their terms and limits. The homeowner usually files the claim with one primary insurer, who then initiates communication with the other involved companies. This inter-company settlement process can sometimes lead to delays in claim resolution due to discussions over liability and proportional payments.
Insurers have “pro-rata” or “other insurance” clauses in their policies that outline how claims are handled when multiple policies exist. Homeowners must disclose all applicable policies when filing a claim. Failure to do so can complicate the claims process or lead to issues.
Factors to Consider
Having multiple homeowners insurance policies incurs higher costs without providing a proportional increase in benefits. Paying premiums for two full policies means double the expense for coverage that will only pay out the actual loss suffered. This can strain a household budget, as additional premiums do not translate into receiving double compensation in the event of a claim.
Disclosure to insurers is a fundamental obligation. Policyholders should inform all insurers about the existence of other policies covering the same property. Non-disclosure can lead to complications, delays, or even denial of a claim, as insurers have mechanisms to detect duplicate coverage.
Avoiding over-insurance is important. Over-insurance occurs when coverage exceeds the actual value or replacement cost of the insured property. This results in paying unnecessary premiums, as insurers only pay for the actual loss incurred. The administrative burden and potential for confusion during a claim process also increase with multiple policies, making it less efficient than a single, comprehensive policy.