Building a Household's Insurance Program

Each personal policy answers a defined set of losses, and each leaves a defined set to someone else. A household program is the collection of policies chosen so that every likely loss lands on a policy and no loss is paid twice or not at all. One Michigan household’s program is built below and then tested against nine losses. The people and figures are invented for practice. Policy references are to the standard homeowners 3 form (edition 05 11), the personal auto policy (edition 09 18) and the NFIP dwelling form (October 2025 manual).

The Household

Tomasz and Renata Wojcik live in a river town in Michigan. They own a house with a basement and a sump pump, and a mortgage. Its full replacement cost is $320,000. They own two cars, and their 17-year-old daughter has a license. They keep a 17-foot runabout with a 115-horsepower outboard motor and a trailer, and a snowmobile. Renata’s engagement ring is worth about $8,500. Renata sells handmade furniture from a workshop in the garage. The household’s net worth is about $850,000 and its income is $140,000. A federal flood map places the house in a high-risk flood zone and the lender requires flood insurance.

The Program, Policy by Policy

Homeowners

• Coverage A. Insure the dwelling for 100% of its $320,000 replacement cost. The 80% condition would require $256,000, but a limit at 100% leaves no room for a penalty and covers cost growth. Coverage B, other structures, is 10% of A, or $32,000, and covers the garage.
• Coverage C and replacement cost. Contents are paid at actual cash value unless a replacement cost endorsement is added. The Wojciks add it. Coverage C is typically 50% of Coverage A, or $160,000, and Coverage D typically 30% of A, or $96,000.
• Water backup. The form excludes water that backs up through sewers or drains, or that overflows or is discharged from a sump or sump pump. A sump pump failure that is not a flood is paid only if the policy carries a water backup endorsement. With a basement and a sump pump, the Wojciks buy it.
• Ordinance or law. The form includes up to 10% of Coverage A for the increased cost of complying with an ordinance after a covered loss. A house of this age may need upgrades to meet current codes when it is rebuilt, so they ask for a higher percentage by endorsement.
• Liability. Coverage E is set at $300,000, which is the underlying limit the umbrella will require.
• Home business. The form limits business property on the residence premises to $2,500 and excludes liability from business activities. Renata’s workshop needs a home business endorsement, or a business policy, with its own property limit and liability. Without it, a theft of $6,000 of lumber and finished chairs pays $2,500 before the deductible.

Flood

The flood policy covers what the homeowners policy excludes. The Wojciks carry the maximum NFIP building limit of $250,000 and $60,000 of contents. The maximum is $70,000 less than replacement cost, so a flood that destroys the house would leave a $70,000 gap that only a private excess flood policy or the client’s savings could fill. Because the building limit is the maximum the program offers, the replacement cost settlement is still available. Coverage in the basement is limited to a list of items, so the finished basement is mostly uninsured against flood and should not be sold as covered.

Auto

Michigan’s default liability limits are $250,000 per person, $500,000 per accident and $10,000 for property damage (MCL 500.3009(1)). The Wojciks keep them. They also choose the level of personal protection coverage for allowable expenses on the form the Director approves (MCL 500.3107c), and the choice depends on the household’s health insurance. A 17-year-old driver raises the household’s liability exposure sharply, which is why the next step is the umbrella.

Boat, Snowmobile and Ring

• Boat. The homeowners policy pays at most $1,500 for the boat, motor and trailer, and gives no liability for an owned outboard over 25 horsepower unless the motor was acquired during the policy period, declared at inception or reported within 45 days of acquiring it. The Wojciks buy a boat policy with liability at $300,000.
• Snowmobile. An owned snowmobile is a motor vehicle under the homeowners form, and liability applies only on an insured location. The auto policy excludes vehicles designed mainly for off-road use. They buy a policy or endorsement for the snowmobile, with liability at $100,000.
• Ring. Theft of jewelry is limited to $1,500 on the homeowners policy. They schedule the ring for $8,500, and scheduled coverage typically carries no deductible. They review the appraisal in a few years.

Umbrella

An umbrella provides excess limits and broader protection, and an insurer typically requires specific underlying limits before it will write one. This example uses an invented insurer that requires $250,000 and $500,000 on each automobile and $300,000 on the homeowners and watercraft policies. Sizing is judgment, not law. One approach is to cover net worth plus several years of income: $850,000 plus 3 times $140,000 is $1,270,000. The Wojciks choose a $2,000,000 umbrella, because a teen driver, a boat and a snowmobile add exposure that the arithmetic misses. The snowmobile policy’s $100,000 limit is below the stated requirement, so the Wojciks raise it or accept that an umbrella may not sit above it.

Testing the Program

Each row below states a loss and where it lands. A row with a gap in it is a conversation to have now, not after the loss.

Loss	Policy that pays	What is left
Kitchen fire, $60,000 of damage	Homeowners Coverage A, with Coverage D for living expenses	The deductible
River floods the first floor and basement	Flood policy	Both deductibles, basement finish, the amount above the limits
Sump pump fails with no flood	Homeowners water backup endorsement	The deductible, and everything if the endorsement was declined
Guest falls on icy steps, $180,000 of damages	Homeowners Coverage E	Nothing, within the $300,000 limit
Daughter causes a crash injuring three people, $620,000 of claims	Auto liability pays $500,000 per accident, and the umbrella pays the other $120,000	Nothing, within the umbrella
Snowmobile hits a trail rider, $300,000 of damages	Snowmobile policy pays $100,000 and the umbrella pays $200,000 only if it sits above that policy	$200,000 if it does not
Boat damaged at the dock, $11,400	Boat policy, less its deductible	The deductible
Ring stolen	Scheduled ring	Any value above the scheduled amount
$6,000 of workshop inventory stolen	Home business endorsement	The deductible if the endorsement’s limit is high enough; $3,500 plus the deductible if not endorsed

The crash row repeats the three-claimant case of split limits. A $620,000 loss exceeds the $500,000 per-accident limit by $120,000, and the umbrella absorbs it.

Where the Policies Overlap

A good program has few overlaps, and each one is worth understanding.

• The ring. The homeowners form does not cover articles separately described and specifically insured, so the scheduled ring is not also insured under Coverage C. The $1,500 theft limit and the schedule never compete.
• The boat. The homeowners policy would pay at most $1,500 for a boat, but once the boat policy describes and insures the runabout, the homeowners form does not cover it, as with the ring. The boat policy alone answers a garage fire, so the $1,500 limit and the boat policy never compete.
• Flood and homeowners. The two are built not to overlap. A flood in the basement is excluded from the homeowners policy, and a sump pump failure with no flood is excluded from the flood policy. The two answers meet only at the cause of the water, so the claim starts with how the water got in.

Keeping the Program Current

The program fits the household as it stands today. These events change it, and the producer should ask about each at renewal.

• A renovation or an addition raises replacement cost, and the dwelling limit must rise with it.
• A new driver, a new boat or a new off-road vehicle changes both the underlying policies and the umbrella requirements.
• A growing home business may outgrow an endorsement and need a business policy.
• A rise in net worth or income moves the umbrella limit.
• Every scheduled item needs a fresh appraisal from time to time, because the policy pays no more than the amount of insurance.

Lesson summary

• A program assigns every likely loss to one policy. The homeowners policy answers fire, theft and household liability, and leaves flood, owned boats, off-road vehicles, business activity and scheduled valuables to other coverage.
• The homeowners dwelling limit should be set at 100% of replacement cost, with replacement cost on contents and endorsements for water backup, ordinance or law and any home business.
• A flood policy has a building limit that can fall short of replacement cost, and its basement coverage is limited to listed items.
• Michigan’s default auto liability limits are $250,000 per person, $500,000 per accident and $10,000 for property damage.
• An umbrella sits over scheduled underlying policies, and it responds to a loss only where the underlying policy and its required limit are in place.
• The review is finished when each of a set of realistic losses has a policy, a limit and a stated deductible, and each gap is either closed or accepted by the client.