In addition to updating your umbrella policy in a bull market, your homeowners insurance policy likely needs to be increased as well. Given real estate values have surged higher, your house may be underinsured.
I like to keep my real estate values static in my net worth calculations to keep me motivated. It encourages me to work harder and find new ways to build wealth.
However, I've recently seen some eye-popping comparable home sales that undeniably show a significant rise in San Francisco single-family home prices this year. Therefore, my motivational trick is no longer as effective.
There were three sales of three-bedroom, two-bathroom homes under 2,000 square feet that sold for between $2,300,000 – $2,450,000 million. This is significant because I have a similar property recorded in my net worth tracker for $1,900,000. Therefore, my property could be underinsured by around $500,000.
If you've owned a home for longer than a year, you may have to increase your homeowners insurance policy coverage as well. Some heartland cities have seen over a 30% rise in home prices since the beginning of 2020!
The last thing you want to do is have your house burn down and not have enough insurance to rebuild a similar home.
This post will cover:
- What homeowners insurance covers
- How much homeowners insurance to get
- How a homeowners insurance policy made one man $600,000 richer
- Homeowners insurance lessons learned after the same man's house burned down
Home Insurance As An Ongoing Expense
We generally don't think too much about homeowners insurance because it can be seen as a drag on returns. As real estate investors, our goal is to keep our expenses as low as possible in order to generate higher returns.
Further, I had an unpleasant run-in with my homeowners insurance provider. One year, they unilaterally jacked up my homeowners insurance premiums. They basically said they were doing it for my own good since construction costs had risen considerably.
This may have been true, but to get blindsided by a rise in homeowners insurance premiums didn't feel good. Therefore, I fought it and elected to get the lowest recommended coverage possible.
As someone who is bullish on the housing market and on rental properties, homeowners insurance is an ongoing expense just like property taxes. Therefore, you must bake in this insurance expense when buying a property. At least the expense can be written off rental income.
Eventually, the gap between your home's value and homeowners insurance coverage may be too wide for comfort. That's likely what's happening now for many long-time homeowners.
Below is an example of a recent home sale that has pushed single-family home prices in my neighborhood to new highs. As a result, I should increase my homeowners insurance coverage.
What Does Homeowners Insurance Cover?
A standard homeowners insurance policy provides coverage to repair or replace your home and its contents in the event of damage. Damage can result from a fire, theft, or weather events such as lightning, wind, or hail. Flooding and earthquake are almost always separate insurance policies.
Homeowners insurance also covers damage to your heating and cooling systems, along with kitchen appliances, furniture, clothing, and other possessions. Make sure you record a list of all your valuable possessions in a spreadsheet somewhere with the date of acquisition, purchase price, and current value.
Homeowners insurance will also cover structures and items outside of your house, but on your property. For example, you might have a writer's den in your backyard where you get away from the kids. Or you might have painstakingly built a nice playground structure for your kids during the pandemic.
Finally, your homeowners insurance policy will typically cover living expenses if you need to move out of your home while it's being repaired or rebuilt. Liability coverage is typically included as well. That means you’ll be reimbursed for medical expenses and legal fees if people that are not living in your home are injured on your property.
Below is a chart I got from US News & World Report that shows what homeowners insurance usually covers, sometimes covers, and rarely or never covers.
How To Determine How Much Homeowners Insurance To Get
Below are some considerations that will help you determine how much homeowners insurance to get. Homeowners insurance isn't expensive. But it is necessary to protect one of your most precious assets.
1) Calculate the market value of your property.
Get homeowners insurance coverage as close to market value plus a couple percent buffer just to be safe. You can find comparables by checking out the latest sales online. Once you punch in your address you'll see home estimates, previous sales prices, and comparable listings to make sure the appraised value given by your insurer is in the ballpark.
I wouldn't really trust online real estate price estimates by Zillow and Redfin. They are often wrong. Instead, track actual home sales of comparable properties.
2) Differentiate between building and land value.
The main focus for home insurance is the replacement cost of a similar quality home. This means similar square footage, build quality, and amenities.
For example, let's say a comparable house sells for $1,000,000 down the street. The house is 2,000 square feet and sits on 10,000 square feet of land. It costs an estimated $300 a square foot to rebuild the house, equating to $600,000. The land value is therefore around $400,000.
The homeowners insurance coverage should mainly be based on building $600,000 worth of the home. Insuring for $1,000,000 for the total value of the property may be an overkill since you don't need to rebuild the land. That said, if you have extensive landscaping that costs a lot of money, you should get that insured.
3) Consider various deductible options.
Insurance companies will offer various deductible levels in case a claim is made. For example, you can have a deductible as a percentage of the rebuild cost of your home. Or, you can have fixed deductibles such as $1,000, $2,000, $5,000 and so forth.
The higher your deductible, the lower your homeowners insurance premium.
4) Consider disaster insurance.
Disaster insurance is an extra layer of insurance for those properties in hazard zones such as earthquake, fire, flooding, and landslides.
If you are in a high risk zone, please read this post I wrote on how to decide whether you should or should not get disaster insurance for your property. Given San Francisco is near a fault line, I think about this topic every time I call my insurance company to check up on the latest.
Usually, the high deductible doesn't make sense, so I pass. What homeowners can do is reinforce their homes, clear loose brush, and reinforce their land to better protect themselves from natural disasters.
5) You can always change your deductible.
Let's say six months down the road you feel you are paying too high a monthly home insurance premium. Don't let that feeling fester. Call up your insurance agent and raise the deductible to lower your monthly premium.
If you go with a reputable insurance company like the ones that compete for your business on PolicyGenius, you shouldn't have any problems. Don't be afraid of being locked in.
In fact, PolicyGenius recommends homeowners shop around for homeowners insurance every 1-2 years. There's a lot of opaqueness in pricing policies. There is always going to be one reputable home insurance company that will compete for your business.
6) Understand what the condo association will and will not cover.
If you are a condo owner, the master association insurance policy generally covers all damage to the building other than to your property. Your homeowners insurance coverage is generally referred to as “walls-in” or “studs-in” coverage.
In other words, you shouldn't be liable for any damage outside your walls. And your association isn't going to pay for anything that happens inside your walls.
Sometimes there are disagreements between you and the HOA. For example, what if a main pipe that is between your wall and an outside hallway wall bursts and ruins the structure? It's important to simply ask your HOA board members and the respective insurance companies what is and is not covered.
Provide examples at your next HOA meeting to help clarify potential future situations.
7) Loss of rent and tenant liability coverage.
A comprehensive rental insurance policy should have loss of rent coverage for a certain amount of months, as well as tenant liability coverage. It may take six months to fix your place and find a suitable tenant again. Your agreed-upon policy will keep the cash flow coming in.
You also never know what your tenants are up to. If they accidentally set your place on fire, which ends up damaging the upstairs unit, you need to have enough insurance to cover such freak incidences.
How A Homeowners Insurance Policy Made One Man Richer
Now that we've gone through some basic considerations to help you determine how much homeowners insurance policy to get, let's go through a real-life disaster example. Natural disasters are occurring every year, so be prepared.
Back in 2017, the Tubb's Fire burned down a lot of homes in Northern California. One of those homes was owned by a Financial Samurai reader named EJ. Thankfully, everybody was OK.
Let's have EJ recap his harrowing story in his own words and share what he learned from his homeowners insurance saga. Below is a picture of his home before the Tubb's Fire.
We lost our home, but by being well-insured we were covered for not only our possessions and rebuilding, but also for our rental.
After the fires, both home prices (for sale) and rental prices actually skyrocketed. Classic market supply and demand with a steroid boost of large amounts of insurance money. So not really classic market supply and demand.
That is why Loss of Use Coverage is so important and the first thing we talk about today.
Coverage D: Loss of use and rental
Renters Get Squeezed
In the land of fire and mass chaos, owning is way better than renting (seems counterintuitive, but true). I talked to many people who are renters who have been evicted since the fire. The landlords asked their tenants to leave so that either the landlord or one of their family/friends who lost a home could move in.
This puts the tenants in a bad position because now they are stuck in a town with a housing shortage and now a high price point. They have no choice, either pay more for a similar rental in town or move further out of town.
Plus, unlike those who are insured and lost their home, tenants being evicted have no insurance to help them through this. It's a lose-lose situation.
Many Owners With Homeowners Insurance Came Out Fine
For owners it is better, but it is only as good as the insurance purchased. I was well insured. My insurance paid for my rental for up to two years because the Tubb’s Fire was a Federally declared disaster.
If it was just a run of the mill house fire, I would still be covered for one year. There is no monetary limit to my rental. Insurance covers an equivalent rental to my home.
So I was able to get a nice rental and not worry about the monthly rent. I lived in a paid-for rental for two years. I had a friend who had his insurance company pay $34,000 a month for his rental when the fire destroyed his home.
On the other end is one of my friends, who has a maximum cap of $14,000 for her rental. That means her insurance will only pay a total of $14,000 for the entire two years.
First lesson of insurance – make sure you are well insured for not only dwelling and personal property, but also loss of use. This will make your housing situation much better after the loss of your home. Clarify how much coverage you have.
Related: What Is A Home Warranty And Do You Need One?
What Type Of Homeowners Insurance To Get?
We have determined that being an owner versus a renter at the time of a disaster likely puts you in a better financial situation with insurance. But what type of insurance should homeowners (and renters to some extent) obtain?
I was insured by a large, reputable insurance company who “is always on your side.” They went by the books and were quite helpful.
In fact, by the end of the process I owned my land outright, had no mortgage, and increased my net worth by about $600,000. Granted, I have to replace all of my possessions but that can be done deliberately and slowly.
Oh, but the negative is that I don’t own a home anymore.
That said, a massive increase in net worth is quite the silver lining from this tragedy. Plus all the stress from owning a massive house with a massive mortgage is now gone.
Basics Of The Homeowners Insurance Policy
Insurance coverage is broken down into various coverages.
- Dwelling: Coverage A: Dwelling
- Other structures: Coverage B
- Personal property: Coverage C
- Loss of use: Coverage D
- Personal liability: Coverage E
- Medical pay each person: Coverage F
The limits for these items are visible on the insurance policy declaration page.
These are each important, but Coverage A is the most important.
Coverage A: Dwelling
This is the most important part of insurance coverage. Coverage A dictates how much the insurance company pays for rebuilding a home. This needs to be enough to rebuild an equivalent home and it is up to you to make sure it is adequate. Generally, increasing the limit leads to only a small increase in the overall annual policy premium. By law, if I rebuild they have to give me at least my Dwelling maximum to rebuild.
Another important part of Coverage A is to be insured for “Replacement Cost.” Some insurance companies offer “Actual Cash Value.” Actual cash value only pays the depreciated cost of the home, meaning the insurance company will only pay for a 20-year-old roof and not the cost of a new roof. The difference in reconstruction costs will be covered by out of the owner’s pocket. Not so good if you ask me.
With a “replacement cost” policy, the insurance company may depreciate the home for the initial payout, but will pay that actual replacement cost once the item is built or purchased. This can lead to thousands of dollars when rebuilding.
Extensions
There are also extensions to this coverage. For instance, I had a 125% coverage extension. This means they will pay an additional 25% of my maximum if I rebuild. This is an additional $200k for me to rebuild. I even realized after the fact that I could have purchased a “guaranteed replacement cost extension”.
If I had purchased a guaranteed replacement cost extension, then there would be no question about rebuilding as insurance would cover it all.
There are 3 companies I know of that have guaranteed replacement cost: Chubb’s, Nationwide, and AIG. If insured with one of these insurers, it may be worth switching to guaranteed replacement cost.
Coverage B: Other Structures
Another reason the price point of Coverage A is important is because all of the other Coverage limits are set by the Coverage A limit.
For instance, I am covered for Other Structures via Coverage B. This includes patios, external fireplaces, fences, and the outdoor kitchen. The maximum insurance will pay me for Other Structures is 10% of my Coverage A.
So if I have a $1,000,000 Coverage A limit, I get $100,000 for Other Structures. If my Coverage A limit is $500,000, then I only get $50,000 for Coverage B.
Coverage C: Personal Property
Coverage C or Personal Property coverage is the amount given for all of the items lost.
In other words, if you took your home and turned it upside down, anything that falls out is paid for by Coverage C.
Getting your insurance company to pay Coverage C can be a bit painful. You have to itemize everything to receive full payment. This can take dozens and dozens of hours.
Please take pictures and itemize all your belongings in a spreadsheet before you need to.
The insurance company will take the list and depreciate it based on age and condition. They will pay out the depreciated cost. Again make sure you are insured for “Replacement Cost” and not “Actual Cash Value”.
If you have “Replacement cost” coverage you can submit receipts as you buy items for the insurance company to pay the difference.
The Homeowners Insurance Payment
I thought that insurance will pay out all 100% right off the bat, but unfortunately that is not the case. The insurance company will come up with their own build estimate and from that depreciate the cost of things such as paint, roofs, flooring, etc.
It is not as bad as it sounds. For instance, in my case they depreciated about 1.5% of the home. Once I rebuild, they will pay the full amount.
Also, remember that this initial payout is a starting/negotiation point. I initially received one big check. But got another check after going back to the insurance company with my builder's estimates which are higher than what the insurance company estimated.
Always negotiate!
Other Home Coverages To Consider
There are also other coverages that come with good insurance. We had coverage for Debris Removal (10% of Coverage A), Landscaping (5% of Coverage A), and Building Code Upgrade (20% of Coverage A).
There is also coverage for Personal Liability (Coverage E) and Medical Pay for Each Person (Coverage F), and these limits can be adjusted as needed.
When in doubt, ask your homeowners insurance provider to explain all the additional insurance add ons and their costs.
Deductible Cost
I was surprised as to how cheap good insurance is. My insurance cost approximately $1,300 annually with a $1,500 deductible.
After this experience I would happily pay $2,000 annually for a higher coverage amount. Nothing is worse than being underinsured after losing a home. Insurance has by far been the best return on investment I have ever made.
Here are some detailed quote comparisons from PolicyGenius that are useful. You can click the chart to learn more.
Check Specifically About Fire Insurance Coverage
Finally it is worth noting that I did not have additional insurance. I had my regular old home insurance and it covered all of the loss. This is not like an earthquake or flood that needs an additionally purchased insurance policy.
My policy covered the fire whether it was a natural disaster or a house fire. Some of the additional protections I received were due to this being a Federally declared disaster and living in a consumer protection state like California. But no, I did not need fire insurance.
This is good because I would never have thought to ask separately for it. In fact, when I went to bed at 1 AM I saw a red glow over the hill and did not even realize it was a fire.
If there is going to be a fire though, in many ways it is best to have a complete loss like we did. Total destruction so that the insurance company can not argue about what is salvageable.
My neighbor was not so lucky.
His home stood between two burnt homes. He had a lot of smoke damage and it couldn't be inhabited. He had to fight tooth and nail with the insurance company about his coverage.
The insurance company argued he could simply clean everything in his house. But he had two young kids and argued his home needed to be stripped to the studs. I was able to move forward while he spent months arguing.
Below is a picture of our home after the Tubb's fire. We decided not to rebuild. We collected the insurance money and bought a smaller, cheaper home not in a fire zone.
Home Insurance Is A Life Saver
It pays to be well insured. I didn't know much about homeowners insurance when I bought my home. In fact, my insurance broker set this policy up for me. He worked throughout the claims process.
I never even read the entire policy before this. I was by no means an expert, but now have a lot of first hand experience.
This is what I recommend before getting a homeowners insurance policy:
- Call the insurance company and ask for a copy of the full policy. This document should be 50 to 70 pages long.
- Make sure to have an adequate Coverage A (Dwelling) limit. This is the coverage that will dictate all of the other coverages. It should be high enough to cover rebuilding a equivalent home.
- Purchase “Replacement Cost” insurance and not “Actual Cash Value” for both Coverage A (Dwelling) and Coverage C (Personal Property).
- Consider an extension for the Coverage A limit. My extension was for 125%, but other’s have 150%, 175%, or even guaranteed replacement cost. It is worth the small increase in annual cost if ever needed.
- Jump through the hoops that the insurance company lays out. I am impressed by my insurance company thus far. As long as I am doing what they ask, they have been quick and reasonable with payments.
There you have it. One man’s experience with insurance after a major fire.
The bull market in real estate likely means your home is underinsured for Coverage A at the very least. While your home is still undamaged, use this opportunity to upgrade your coverage and see if you need any additional coverage.
Check out PolicyGenius, the one-stop marketplace for home insurance and other insurance needs. Instead of applying to individual insurance carriers one-by-one, apply for a home insurance policy on PolicyGenius and get multiple insurance offers. Then choose the best one that's right for you.
I've met the founders at PolicyGenius multiple times. They have the best insurance marketplace platform today.
Readers, have you ever had to use your homeowners insurance policy? Do you live in a high-risk area for fires or floods where getting homeowners insurance is expensive or difficult? Why do we continue to rebuild homes in high-risk areas?
Great article but I have to admit, I only skimmed it. Still too traumatic for me. I’m close to but not finished with my fire project.
In January 2020, I had a small garage fire in a 2200 sq ft rental house. Only the garage and an inexpensive adjoining sunroom were damaged but the smoke got everywhere. It was a complete gut down to the studs and frame. I was a little underinsured maybe by 10%. I don’t regret it.
This is my 4th rental fire. Most losses are not total losses (such as this incident). I pay insurance for likely scenarios, and usually the fire damage is limited, for example 1 unit out of 6 is destroyed. If the entire structure is destroyed, I will have to make up the difference, an acceptable risk. The trauma, for me, stems from the potential injuries (thankfully none) and the nightmare of dealing with contractors, the city, and COVID delays.
Like your friend, I’ll actually be making money on this fire. Although I need to kick in money to complete the renovations, it will be a modern, new house upon completion instead of one with 20 to 30 year old systems and finishes. I basically got a free upgraded house which is worth 20% more than before the fire.
Thank you, that’s interesting.
Just read the article about the flooded house.
A few years ago, we had a burst pipe that filled our crawl space with water while we were on vacation. A lot of drying out but no long term damage. Since we have heard a lot of horror stories over the years, my husband researched and fitted a water shutoff valve that has saved us since. Well worth the money and effort.
Since that time, we have relined our sewer pipe, which, unbeknown to us, was breaking apart.
And we are visiting our insurance agent to deal with the dramatic house price increase that has occurred in our So Cal neighborhood.
Thank you so much, Sam and Sydney, for constantly drawing our attention to the ordinary, but expensive details of life.
Smart on an accessible shutoff valve. Why does it seem like things always happen on vacation?!
Glad things worked out.
I feel like I wrote this story out in a similar post a few years back, but either way here goes…
In 2007 my parents house which had literally just completed a massive renovation the weekend before, suffered a major flooding episode. A pipe burst behind the wall in the upstairs bathroom, and proceeded to leak out full force over night and flooded the entire top floor of the house, and then down the walls to the next 3 levels. In total 17 rooms were destroyed. All of the wall had to be striped to the studs. In some cases the studs had to be replaced. The wood floors on each level were removed and replaced. Windows, doors, basically all but the concrete and piping were swapped out.
Thankfully, my parents had replacement insurance as well as almost all of the additional coverage you are referencing above. The insurance paid for the house to be replaced completely. The coverage included an additional $450k in upgrades to the base build back to make it better than new. In addition the insurance covered the entire duration of hotel stay as well. My parents moved into a 2 level hotel suite for the duration of the rebuild I think they ended up staying there between 9-12 months. I recall an overlap period where the house was done, but they still had the hotel for some reason and it was still covered.
I recall my dad telling me a story how he got the coverage to begin with. He said with the insurance agent who he knew for 20+ years at this point, and asked him what the options were. The guys explained all the ins and outs and what to choose from. Then my dad said, if money wasn’t an concern what services would YOU get? So, the guy explained the best options. Then my dad said, since money is concern, what services do you have. The guy explained that even though the money was more he had the exact plan he outlined before, as he felt there is no reason to not have all the protection you need – life changes in a second.
So my dad, agreed and signed up for the plan. Years later, it paid off.
Amazing good fortune! Any idea how the pipe burst? Was it an old pipe that wasn’t replaced? Frozen pipe?
Water is for sure the most common culprit for housing damage.
It was the city water line running to the bathroom sink actually, but broke in the wall. Not sure why it broke in the end, but the water was supposedly pouring out through the vanity in the bathroom, as well as right back down the walls. My dad was actually working remote when it occurred. My mom woke up in the morning to the dogs barking and she went to step out of her bed and put her feet in a pool of water. Never a good thing to wake up in a pool of water in your house.
Anyway, the insurance was the way to go.
As a side note, based on this writing and the umbrella post – I have updated my house and auto, and working on the umbrella policy this week. The uninsured motorists example from the Lawyer in the other thread was the final straw for me. We had a friend just last week get rear-ended and it killed his dog and hurt him badly. He’s in the process now, and the other party has only the limited $50k. As did he. So between the two stories – I’ve pushed to the max. only a nominal increase in the rate total too.
Also, double bonus – because I was checking my policies, I notice that I was still carrying a home owners on a property I sold last year. Apparently it was never closed in the system so when I called today they said their notes said it should have been closed but wasn’t – likely due to Covid staffing. So, they are sending me a full refund for the year policy – ~$1k. Winner Winner!
Yet again, a bonus from reading your blog – keep up the good tips!
Dang. So it was the main water main. I had that happen to me where it burst b/c the tree root warped the pipe under the sidewalk. We had to dig up the sidewalk and fix it ASAP. I love trees. I plan them all the time. But beware of the roots over time!
Peace of mind is priceless. Yet, it’s so nice we get to buy peace of mind for a relatively cheap price.
Glad to have saved you $1,000! Beers on you next time? If not, I’d appreciate support for the book I’m going to release in 2022 with Penguin Random House. Just finished a 1-hour call with my editor. Phew. SO MUCH WORK writing a traditional book.
Might need another sabbatical! This one isn’t going according to plan.
My 2000 Sq ft 4 bedroom 3 bath middle class rental house suffered a garage fire in January 2020. Very little fire damage but smoke damage throughout. Basically a complete gut of the house and new garage construction.
With debris removal, asbestos/lead abatement, code upgrades and repairs, it’s $600,000. 18 months later still under repair. My insurance only covered 1 year of lost rent. I was slightly underinsured but it would have cost more had the whole thing burnt to the ground.
Oh wow. Good reminder to check on lost rent coverage. Perhaps two years is more appropriate with the time it takes to get a permit and remodel nowadays.
It took me 1 year to get a permit!
How did the fire happen? Is there a way it could have been prevented?
Great article. I haven’t updated our policy since spending a significant amount on renovations. It will be interesting to see how much the policy rate changes.
My last policy was $1200 a year on my other house and that was with declining sewer back up coverage, otherwise it would have been $1800. Funny thing was our new neighbours actually had sewer back up problems ruin their basement a week after they moved in. Guess we were lucky in that instance, as that could have been our house. I’ve never had to use my home insurance policy in the past, but these fires have been a consistent threat for the last 5 years. Agree that it’s worth being properly insured.
I understand most insurers utilize the “80% rule” that allows them to indemnify at less than the total loss if the homeowner insures the property for less than 80% of the replacement cost. That’s another good reason to ensure your coverage amount is adequate.
Great point. Thanks for bringing this up!
Thank you Sam for another extremely useful article. I reviewed my policy and found that “Buildings covered under Coverage A or B at replacement cost without deduction for
depreciation” .. so it looks like i have “Replacement Cost” Coverage. My total limit for Coverage A is about ~7% lower than the Zillow estimate of my house, but right in line with what comparable are actually going for in my area. So I *think* I am OK for now, but I’ll keep an eye on it. I should note I am in Pittsburgh where we have seen substantial price increases the last few years.
I also dug into “Coverage D”, Loss of Use and it looks like I am covered up to $70K, without a time limit.
Appreciate the info and reminders on this one. I think I’ll put a notification into my phone to prompt me to review my policy at least yearly.
Gosh I can’t even imagine the trauma of going through having your home literally burn down to the ground. My heart goes out to anyone who has gone through that. I have an emergency backpack with bare essentials but really should make a “go-bag.” And yes this really highlights the importance of homeowners insurance. And the importance of really understanding what you policy does and does not cover. Very thorough article – thank you!
Yes, fire season is definitely a concern. I was up in Sonoma recently and people were building houses at the exact spots that houses burned down.
But it LOOKED like there was more cement and less wooden or flammable material. Guess we all hope lightning doesn’t strike twice.
I would have taken the homeowners insurance money and left, like EJ did in this post as well, especially if it made me wealthier.
I’m so glad you said the part about making sure you’re getting a policy that covers the cost of rebuilding, not purchasing a whole new home with land included. Most of the spike in home prices lately has been attributable to land. Construction costs have increased some, for sure, especially if you haven’t updated the coverage on your home in a decade or so, but the balance of the purchase price is land, as you said.
Just one other thing: you said that mold damage is “sometimes” covered, but I think that one should actually be in the “rarely or never covered” box. Nearly every policy that I’ve seen has a mold exclusion, or a very, very low limit for mold coverage. As a practical matter, nearly every insurance claim involving mold is denied, because mold usually means there’s been a slow leak/water intrusion issue, and insurance only covers for “sudden” events.
For example, if your water heater has a pinhole leak that is spraying onto the drywall in the water heater closet, and mold starts growing and the drywall gets soggy over a multi-week period, the insurance company will generally not cover any of it. You might have to replace drywall and do mold remediation on your own dime (and maybe flooring and baseboards, too, depending on how far it spread). If the water heater blew up suddenly, however, it would typically be covered. The reason is because insurance companies don’t want to insure for “failure to maintain” issues. Gradual issues are usually deemed a failure to maintain. “Sudden events” are generally not a result of failed maintenance, at least in the insurance company’s eyes.
Sometimes you can get special riders that will cover things like mold, but you have to be cautious about the gradual damage versus sudden accident issue.
Interesting datapoint on mold exclusion. Thanks for the heads up! Worth asking about this specific incident with your insurance carrier.