What Is Homeowners Insurance And What Does It Cover?

What is homeowners insurance and what does it cover? Investing in your home is a big decision, so it’s important to make sure it’s properly insured. What are the coverages, forms, and exclusions of your policy?

What is homeowners insurance?

In the event of a covered loss, homeowners insurance will cover your home and your personal belongings. It can also cover you for liability if someone gets hurt at your home or if you cause property damage to your home.

Your mortgage company is not only required by law to provide homeowners insurance, in many cases, they are required to provide homeowners insurance as well. This means that your mortgage company will also be financially protected if your home suffers a covered loss.

Why homeowners insurance?

Owning a home is the biggest investment most people make. It’s often the biggest asset on your family’s “balance sheet.”

The contents of a home, such as furnishings, appliances, clothes, family keepsakes and other moving personal items, represent a significant additional investment.

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If your home and contents were to be stolen (or lost in a fire, storm, or other disaster), it could cost you tens of thousands of dollars.

Everyone is at risk of personal injury. For instance, a visitor might slip and fall in your home. In these cases, the injured party could be awarded large sums of money for medical bills and/or pain and suffering.

Homeowners insurance coverage

In the past, a homeowner’s policy was limited to the fire risk. Today’s homeowner’s policies cover many of the hazards of modern life in one “package” policy. A standard homeowners policy footnote can provide coverage for the following:

  • Home: Physical dwelling structure and associated structures.
  • Personal liability: Protects against bodily injury and property damage in the event of accidental injury or damage to a third party’s property.
  • Personal property: This includes the home’s furniture, appliances, or clothing. Some property footnotes have dollar limits.
  • Loss of use or additional living expense: Loss-of-use cover helps cover the cost of hotels, apartments or rental homes, meals, and other living costs if the home becomes uninhabitable as a result of a covered loss. Loss-of-use policy section may also cover a homeowner’s loss of income if a room is rented out in the home. This type of coverage is sometimes insured on a “sustained” basis.
  • Medical payments: These are also referred to as “guest-medical payments” and offer limited coverage in the event of a third party being hurt and requiring medical care.
  • Other structures: If you own a house, you might have a garage, a pool house, a guesthouse, a greenhouse, or a tool shed on your property.

Homeowners’ insurance policy forms

Several organizations create standardized homeowners policies in collaboration with insurance companies. While the specifics of a standard homeowners policy may differ, these standard policies or standard forms are very similar.

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  • Broad form policy (HO-02): A named-peril policy applies to the home, other buildings, and personal property. Only the listed perils are covered.
  • Special form policy (HO-03): Insurance for your home and other buildings is written on a risk basis – any damage caused by any hazard is covered unless it is specifically excluded. Personal property insurance is written on a named peril basis.
  • Comprehensive form (HO-05): This policy applies to the home, other buildings, and personal possessions on an all-risk basis – any damage caused by any danger is covered, except where specifically excluded. This is usually used for more costly homes.
  • Modified form coverage (HO-08): This policy form is typically used for homes where the costs associated with the reconstruction of the property exceed the market value. Protection is granted on a named-risk basis. Payment is usually restricted to the actual cash value.

What does homeowners insurance not cover?

There are a few perils that are specifically excluded from standard homeowner’s policies. These perils can usually be added to your policy through an endorsement and an additional premium. Common perils that are typically excluded from your policy include:

  • Ordinance or law: Many homeowner’s policies don’t cover losses or have restrictions because of the law or regulations of the community where you live. For instance, if your home is destroyed or damaged, changes in building regulations could cause additional hidden costs when you repair or rebuild your home. Some package policies include ordinances or law coverage, usually as a percentage of your dwelling coverage (10, 25, 50%, etc.). In some states, this coverage is required.
  • Earth movement: It does not include losses due to natural disasters such as earthquakes, volcanic eruptions, mudslides, or landslide
  • Water damage: Water damage refers to damage caused by backed-up water from sewers and drains, water that seeps through underground walls, or by wave action. Most water damage policies include dollar limits for damage caused by things like a broken pipe.
  • Flood damage: It refers to water damage caused by rising waters or surface water.
  • Mold exclusion: Most insurance companies do not cover mold damage.
  • Other exclusions: In addition, war, nuclear risk, negligence, and intentional loss are also excluded.

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Other homeowners insurance considerations

Reimbursement can be on a “replacement-cost” basis through an endorsement and an additional premium. Replacement cost simply means returning your home to where it was before the loss using similar quality materials and workmanship. In some policies (if available), this feature requires you to maintain coverage on your home at least 80%. If you didn’t maintain coverage at 80%, any loss would be covered at a lower amount or on a “real-cash-value” or “depreciated” basis.

Replacement cost condition: If your home is destroyed or damaged, your homeowner’s policy will typically reimburse you (within your policy limits) for the cost of rebuilding or repairing your home based on the “actual cash value” of your home. In plain English, the actual cash value of your home means the replacement cost minus a depreciation or wear-and-tear deduction. If you’re reimbursed on this basis, it could leave you with less than the total amount you need to rebuild your home.

Replacement cost: Personal Property (Contents): The coverage is usually based on the real value of the property. For an extra premium, you can usually be approved to cover covered personal property in the form of replacement cost (the cost of buying the item new now). Depreciation doesn’t count until you replace the item.

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Inflation guard rider: In most cases, the standard forms can be endorsed to allow you to automatically, and regularly increase your policy limits. The increases usually apply to both your home and its contents and help prevent you from being underinsured because of inflation. An endorsement also helps you meet the 80% replacement-cost requirement to qualify for the replacement cost on your home.

Understanding insurance policies

An insurance policy is a contract between an insured person and an insurance company. The coverage provided by an insurance policy usually makes up a significant portion of an insured person’s risk management program. Therefore, it is important for an insured person to read and understand the following key policy provisions:

What perils are covered in the policy? It depends on the type of policy you have. A basic policy might not give you as much coverage as you would like.

What perils are not covered? Perils or situations that are not covered by your policy can be added to your policy as an additional premium.

What are the limits of coverage? This is the maximum amount your insurance company will pay for a covered loss.

What are the deductible amounts? A deductible is the amount of money or a percentage of that amount that the insured has to pay before the insurer pays out their share of the claim.

What are the responsibilities of the insured in the case of a loss? A policy will typically outline the steps that the policyholder must take in the event.

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In addition to insurance agents and brokers, there are also insurance counselors and other qualified financial consultants who can answer detailed questions about a specific policy. They can help you choose the right policy and how much coverage you need.

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