Home insurance is equally as important as car insurance when it comes to protecting yourself financially. Coverage for the home includes its contents as well as the structure itself. Damage from extreme weather events or fire are covered, as well as liability coverage for any accidents that may occur on your property.
Mortgages in Canada usually require the borrower to show proof of home insurance before they let you take out a mortgage. Because the bank technically owns the house, they want to make sure their asset is protected.
The most basic level of coverage usually covers just fire and theft—additional coverage is required to insure against earthquakes, sewer backup, overland water, and high-value items. Furthermore, there’s an endorsement available called “additional living expenses” that will cover the cost of a hotel while your home is under repair.
There are two types of home insurance coverage: all-perils and named-perils. All-perils means everything is covered in your policy unless it’s specifically listed as excluded. Named-perils is the opposite: only the things specifically listed in your policy are covered—everything else is excluded.
However, if there’s something of especially high value in your home, it’s important to make sure you discuss it with your broker. They’ll make sure it’s covered, and if it isn’t, find coverage for it.
Another thing you’ll want to know is the difference between replacement cost and actual cash value (ACV). Replacement cost means when a loss occurs, whatever it is will be replaced by a new item of similar kind or quality—depreciation is not factored in. ACV does factor in depreciation: if you lose a stereo system, the insurance company will compensate you for an old stereo system; however if it were a replacement cost policy, they’d cover you for a new one.
Finally, there’s an important distinction between the replacement cost and market value of your home. Replacement cost means if you lose your home, the cost to rebuild it is calculated from materials and labour—the market value of the home is not used.