Despite how often you hear the term, there’s no such thing as a “full coverage” policy for your home insurance or car insurance. People often use the phrase to describe an auto insurance policy with liability, comprehensive, and collision coverage, or broad protection for homes. However, no insurance policy covers every loss.
The National Association of Insurance Commissioners (NAIC) clarifies this misconception in its auto insurance shopping tool. We also discussed it in our recent Law & Ethics class as part of the continuing education for our agents. For cars, the phrase usually refers to liability, comprehensive, and collision coverage. For homes, people often mean, “My house is covered for anything.” However, not every loss qualifies for payment.
What Does ‘Full Coverage’ Mean on a Car Insurance Policy?
“I thought I had full coverage. Why didn’t my claim get paid?” That question relates directly to a common misconception about car insurance coverage: even a thorough policy has coverage limits.
Liability coverage pays for injuries and damage you cause to other drivers, passengers, and property after an at-fault accident. It can cover the other party’s medical bills and your legal fees if someone sues you. Property damage liability handles the other person’s vehicle or property. Collision coverage pays to repair your car if you crash or roll over. Comprehensive coverage handles non-crash losses like fire, theft, or hail. And, important to remember, each would pay only up to your policy limits.
Lenders and leasing companies usually require comprehensive and collision coverage, but meeting their minimum requirements doesn’t guarantee that your liability limits are high enough. Optional coverage can fill other gaps:
- Rental reimbursement: Pays for a rental car while yours is in the shop after a covered loss, up to your policy limits
- Roadside assistance: Helps with towing, jump-starts, and lockouts
- Uninsured/underinsured motorist coverage: Pays if another driver has too little or no insurance
- Medical payments or personal injury protection: Helps with your own medical expenses after a car accident; requirements and availability vary by state
- Gap insurance: Helps pay the difference between your car’s actual cash value and what you still owe on your loan or lease if the car is totaled or stolen
Consider this example: You total your financed car. You owe $28,000, but it’s worth $23,000. After a $1,000 deductible, insurance pays $22,000. You still owe $6,000; however, gap insurance could help cover that difference.
Is Your Home ‘Fully Covered’? Where Homeowners Insurance Stops
Homeowners insurance covers specific causes of loss, but every policy has exclusions and conditions that limit what it pays. Standard homeowners policies do not cover flood damage. According to the Federal Emergency Management Agency, even one inch of floodwater can cause about $25,000 in damage.
Water or sewer backup usually requires an endorsement, which is an amendment that adds or changes coverage. If sewage backs up into your finished basement and damages flooring, drywall, and furniture, your policy may not pay unless you have this endorsement. Even with backup coverage, a separate limit and deductible often apply.
Settlement terms make a difference. Actual cash value means the insurance company subtracts depreciation for age and wear. Replacement cost pays for comparable new materials, but only up to the policy limits.
For example, a storm destroys an older roof that costs $20,000 to replace. If the insurer deducts $8,000 for depreciation and your deductible is $2,000, you receive $10,000 under actual cash value. Replacement cost coverage can pay the difference, but most insurers require you to finish repairs before releasing those funds.
Replacement cost does not mean unlimited funds for rebuilding. Check if your dwelling limit matches today’s labor and supply costs. Rebuilding cost is not the same as your home’s sale price or mortgage balance. Ask about extended replacement cost and ordinance or law coverage, which can help pay for building code upgrades after a covered loss. Earthquake and similar causes of loss usually need separate coverage.
Covered Doesn’t Mean Covered in Full: Limits and Deductibles
Even when a loss is covered, you may still have out-of-pocket expenses. Policy limits cap what the insurer pays. Deductibles are your share of the loss. Some home policies have separate wind or hail deductibles. Review each deductible so you know what to expect when you file a claim.
For example, $5,000 in covered collision damage with a $1,000 deductible leaves $4,000 payable, assuming no other adjustments. Choosing a higher deductible can lower your auto insurance premium, but you’ll pay more out of pocket after a loss.
Most personal liability policies have no deductible. If you owe damages above your policy limits, you are responsible for the difference. An umbrella policy can increase your liability limits, but it only pays as its terms allow.
How To Check What Your Policies Cover
Start by reviewing your policy documents, beginning with the declarations pages. For auto insurance, look for bodily injury and property damage liability, comprehensive, collision, optional coverage, limits, and deductibles.
Check which forms apply to your roof, dwelling, and contents. Are they settled at actual cash value or replacement cost? The declarations page summarizes your coverage, but the policy and endorsements include exclusions and conditions.
Ask your Brooks, Todd & McNeil insurance agent::
- Do I have rental reimbursement, roadside assistance, and gap or loan/lease payoff coverage?
- Would a higher deductible lower my premium without leaving me too exposed?
- What does my water backup endorsement cover, and up to what limit?
- Do my dwelling, roof, and contents have replacement cost coverage?
- Does my dwelling limit reflect today’s rebuilding costs?
- Could bundling auto and home insurance lower my costs?
Trade ‘Full Coverage’ for a Coverage Review
The term “full coverage” is more about perception than reality. Gather your declarations pages; they will show exactly what you have purchased. Then contact us to schedule a coverage review. As independent agents, we work with several insurers, so we can walk you through each line in your insurance policies, compare coverage options, and help you find the right coverage for your car and home, to protect your assets and lifestyle.
About the Author
Stephen G. Todd, CPCU, CIC, is the owner, president, and CEO of Brooks, Todd & McNeil, with more than three decades of experience in underwriting, claims, and agency leadership. He began his career with Travelers Insurance Company, where he held roles in Home Office Finance and National Account Claims litigation, before serving as a commercial lines underwriter with American States Insurance Company. Since joining Brooks, Todd & McNeil in 1991, Stephen has led key operational areas and helped drive innovation, including developing the insurance industry’s first real-time personal lines comparative rating system. A recognized industry leader, he has served on numerous carrier advisory councils and remains actively involved in both professional and community organizations.
About Brooks, Todd & McNeil
Since 1839, the independent agents at Brooks, Todd & McNeil have been pleased to offer our community policies from a variety of providers. To learn more about our products and services, contact us today at (800) 448-4567.