Homeowners Insurance Coverage: A Complete Guide To The Homeowners Insurance
This article provides an overview of the homeowners insurance policy and guides you understand the different types and levels of homeowners insurance coverage.
In today’s world, having homeowners insurance has become a necessity. Although it is not required by the law or state, there are several reasons to protect your property and belongings. For instance, the insurance not only protects your possession and belongings but is also a requirement of mortgage companies/lenders to have homeowners insurance coverage for the fair market value of a property. In this article, we have provided a detailed description of the basics of a home insurance policy and the homeowners insurance coverage types and levels.
What is homeowners insurance?
Homeowners insurance is a package policy that provides financial security for your property and belongings against damage or destruction. Homeowners insurance coverage policy usually covers the residence’s interior or exterior damage, loss or damage of personal belongings, and personal liability.
Usually, the damage caused by most of the disasters are covered in this policy however, there are some exceptions. For instance, the policy does not cover the damage caused by earthquakes, flooding, and poor maintenance. It is because, for the earthquake and flooding, the coverage is provided by the government and maintenance problems are the responsibility of the homeowner.
Is homeowners insurance a requirement?
Homeowners insurance is a brainy purchase to secure your finances from the costly repair or rebuilding expenses. However, it is not necessary to have homeowners insurance coverage as it is not required by the law or the state.
Even though homeowners insurance coverage is not legally required, you might still be interested in purchasing it. This is because homeowners insurance provides a variety of benefits including coverage for different losses or damages that may occur on your property.
Moreover, homeowners insurance is needed for mortgage purposes. For instance, when you ask for a loan, the bank or lender has a financial interest in your property. With the homeowners’ insurance in place, the bank or lender has ensured a payout in case of some unexpected destruction.
Types of homeowners insurance policy
Usually, the different types of homeowners insurance policies are fairly standard throughout a country; however, individual organizations or states may offer slightly different types of policies or extend the coverage limit in the given policy.
Homeowners insurance policies is a complex subject because not all homeowners insurance policies are designed equally. Therefore, if you are planning to purchase homeowners insurance, it is best to carefully read the policies to find the best policy that will fulfil your coverage needs and is best suited for the type of home you have.
Each homeowners insurance policy falls into one of the following categories: named-peril policy and open peril policy. The word “peril” refers to the cause or any event that causes damage to your property. A named-peril policy implies that you will only be covered for the listed events. On the other hand, open peril policy provides full coverage for the damage that occurred by unexpected events.
Given below are the different policies for homeowners insurance, you can choose as per your needs:
Insurance policy for single homes
If you are planning to purchase homeowners insurance for your new home or looking to switch the type of homeowners insurance policy, a variety of homeowners insurance coverages for single homes are available:
Special home insurance policy (HO-3)
One of the most common types of homeowners insurance policies for single homes is special home insurance also known as HO-3. It provides the dwelling, belongings and liability coverage. It implies that the insurance company will provide you with financial help when it comes to rpairing or rebuilding your home’s structure, your personal belongings or other injuries that occur at your property.
This policy follows the open peril policy for dwelling protection and follows the named-peril policy for the protection of your personal belongings. The special home insurance for personal belongings does not cover disastrous events such as floods, earthquakes, mudslides etc.
Basic homeowners insurance policy (HO-1)
Basic homeowners insurance policy only covers the dwelling protection and does not provide any protection for personal belongings and liability.
This policy comes under the category of the named-peril policy thus, implies that the coverage will only be given in limited situations or events such as hail, storm, lightning, damage that occurred due to vehicle or aircraft, explosion, fire, riots, civil commotion, theft, smoke, and volcanic activity.
Broad form homeowners insurance policy (HO-2)
Broad form homeowners insurance policy extends the coverage of basic insurance policy (HO-1) to include personal belongings and additional perils.
The additional perils include artificial electrical current, pipeline damage, falling objects, freezing water or steam overflow and ice or snow’s weight. This policy is usually not recommended by lenders as it does not offer liability protection.
Comprehensive homeowners insurance policy (HO-5)
A comprehensive homeowners insurance coverage policy is only applicable for brand new homes. This open policy provides more coverage than the special home insurance policy (HO-3) but excludes some of the events.
The events or situations excluded in this policy include flood, earthquake, nuclear damage, animal damage, mould, land-sliding, foundation damage, government seizures, rust, fungus, smog, sinkhole, mudslide and ordinance upkeep.
Renters insurance policy (HO-4)
Renters insurance policy, as the name itself indicates was created for the renters. This policy provides the same coverage as basic and broad form policy.
This policy also comes under the category of the named-peril policy. The perils included in this policy are water leakage, water heater damage, artificial current damage, any damage from an aircraft or vehicle, explosion, fire, freezing, theft, smoke, vandalism, riots, windstorm and weight of ice and snow.
Condo insurance policy (HO-6)
The condo insurance policy covers the condo’s structure, the items inside it and the owner’s liability. This is a named peril policy and covers the events such as damage from an aircraft or vehicle, explosion, fire, lightning, riots or civil commotion, hail, theft, smoke, vandalism and windstorm.
Mobile homes insurance policy (HO-7)
This type of homeowners insurance policy provides the same coverage as the special home insurance (HO-3). It provides coverage including property, loss of use, and premises and personal liability.
This policy includes an open peril policy for the structure of RVs, mobile homes and trailers. However, while providing the coverage for the personal belongings, this policy runs on a named peril policy. The included perils are theft, explosion, fire, smoke, lightening, damage from an aircraft or vehicle, windstorm and vandalism.
Old or significant home policy (HO-8)
Old or significant home policy offers full coverage for the old or historically significant homes that may require a more costly replacement and repair.
This policy provides dwelling, belongings and liability coverage under the named-peril policy. The policy covers explosion, fire, hail, storm, vandalism, windstorm, smoke, theft, riots or civil commotion, lightning and damage from aircraft or vehicles.
Additional insurance policy options
If you failed to fit in any of the above policies/situations, then there are some other unique insurance policies that might fulfil your coverage needs. Some of them are given below:
This policy is quite similar to the special form policy (HO-3) however, is customized to landlords who are renting their houses to the renters.
Personal umbrella policy
This policy provides additional liability insurance along with your homeowner insurance.
Scheduled Personal Property
It extends the existing policy limit for high-risk or costly items in the situation of damage, theft or loss.
Short-term home insurance
The short-term home insurance covers vacation homes/property during peak seasons.
Vacant insurance protects vacant/empty homes that are more likely to be harmed by major damages from events like fire and theft.
Homeowners insurance coverage explained
Even though the homeowners insurance coverage is customizable, there are certain elements that every standard insurance policy has. Given below are the types of coverages that almost every standard insurance policy covers.
Homeowners insurance coverage types
There are four main areas of financial protection in a standard home insurance policy:
One of the basic homeowners insurance coverage types is dwelling coverage. It provides financial protection for the structural damage to your property and covers the repair or rebuilding cost for your home from peril damage.
It provides coverage against disasters such as fire, wind or lightning. However, it does not provide coverage for natural disasters such as floods and earthquakes. For such tragic events, you might have to look into additional coverage.
Personal liability coverage
This type of homeowners insurance coverage offers financial and legal protection in case someone gets injured in your home or harms the home itself. Liability coverage includes the coverage of medical bills, lost wages, legal fees and even death benefits.
Moreover, liability coverage is a part of your car insurance policy and helps you pay for the other driver’s expenses if you have caused a car accident.
Personal belongings coverage
Personal belongings coverage is also known as personal property protection and provides financial security to the items inside your home. Thus, if your furniture, appliances or jewellery gets lost or stolen, you can file a claim for remuneration for the cost of them.
However, there is a claim limit for these types of items, so you might need to purchase the additional coverages for such unique items or expensive belongings.
Additional living expenses
It includes the expenses of living away from home, in case the home is inhabitable due to fire, storm or other disastrous events. Additional living expenses cover the hotel bills, restaurant bills and other expenses while the home is being rebuilt. However, the additional coverages differ from company to company.
Homeowners insurance coverage levels
Homeowners insurance coverage levels refer to the amount of money that insurance companies will give you in times of any damage or destruction. There are three levels of homeowners insurance coverage:
Actual cash value coverage
Actual cash value coverage refers to the cost of the house and the cost of the belongings that insurance companies will give you after depreciation. The amount that the insurance company pays is according to the current worth of the items, not how much you paid for them.
Replacement cost covers the actual cash value coverage however, there is no depreciation. So you can repair or rebuild your home up to the original value.
Extended or guaranteed replacement cost
This level of coverage offers the highest level of protection. Guaranteed or extended replacement cost implies that the insurance company will give you the full cost to repair or rebuild the damage that occurred due to any reason, even if the cost exceeds the policy limit. This policy can be very beneficial in case of damage occurred due to any natural disasters such as floods or earthquakes.
Homeowners insurance coverage limits
While purchasing homeowners insurance, remember one thing that each homeowner’s insurance coverage has a limit. This limit refers to the total amount of money that the insurance company will give you to cover loss or damage. You can adjust your coverage limits according to your coverage needs and the type of home you have. For instance, you can evaluate the value of your belongings and home to get an idea of the cost required to repair or rebuild them, if they are damaged by any incident. Thus, look for a coverage limit that is best suited for your needs.
Knowing the coverage limit is important. Because typically, you have to pay the deductible before your insurance benefit sets in to recover the damage. That is why it is better to thoroughly read your homeowners’ insurance policy or contact your agent to review your deductible or coverage limit and then proceed accordingly to adjust your coverage limits.
Extend your homeowners insurance coverage
The traditional homeowners’ insurance policy has limits. For instance, you will not get coverage in case of destruction caused by a flood or earthquake. However, you can extend your coverage by purchasing certain additional policies. Given below are some of the available add-ons that you can purchase to extend your protection:
Coverage for additional structure
Average structure insurance provides the protection or the coverage cost to repair or rebuild the structures surrounding the home. However, such a structure has to be on your property. These structures include guest homes, servant quarters, detached garages or fences, sheds and storage containers etc.
Protection from flood
According to the research by FEMA, only one inch of the flood water can cause tremendous damage to your property. Usually, traditional homeowners insurance coverage policies do not cover the damage caused by floods. Therefore, if you live in a low-lying area, you better purchase this add-on to protect or cover your home and belongings from flood damage. Flood protection provides fair aid to repair or rebuild the flood damage to your property. Insurance coverage rates for floods are usually set by the government.
Coverage for earthquake
Although many natural disasters are included in the perils covered by traditional homeowners insurance policy, earthquakes are not the ones. This policy of earthquake coverage provides financial support in the event of damage or injury to your home or belongings due to the earthquake.
Coverage for service lines
There are a variety of service lines underneath your home, such as water line, gas line, electricity etc. Service line insurance provides you coverage for any damage that happens to the service lines due to growing tree roots, natural causes etc.
If you are running a home-based business, you may want to expand liability coverage for your equipment. This policy offers comprehensive protection for your home-based business and a large amount of tech that you utilize.
Scheduled personal property
Usually, expensive items such as jewellery, art and antiques are not covered in the homeowners’ insurance policy. This additional policy extends your coverage limits for higher-risk items in case of theft and damage or loss.
Coverage for sewer and street drains
Sewer or street lines problems can cause serious damage to your property. This additional policy provides the aid to repair or maintain the sewer or drain pipes at your property thus, protecting your belongings and home from serious water damage.
Umbrella liability coverage
This insurance policy extends the coverage limit for damages to your home, yourself or others when they are at your property. It provides the financial protection needed for repair, medical fees and other legal fees after the incident.
Coverage for watercraft
The traditional homeowner insurance policies do not cover the boats or any other watercraft that the policyholder owns. This coverage extends your existing homeowners’ insurance policy to any boats or watercraft kept at or off your property.
Coverage for high wind
Usually, the homeowner’s insurance policies do offer wind coverage. This additional policy extends the coverage for the damage caused due to hail, high wind or tropical storm damage.
What does homeowners insurance not cover?
Although homeowners insurance covers most of the scenarios where a loss or damage occurs, there are few events that are normally excluded from the policies. For example, in the case of natural disasters such as floods and earthquakes or the situation of wars, insurance companies do not offer any financial protection.
Apart from the traditional homeowners insurance coverage policy, there are some home insurance add-ons that you can purchase to extend your protection. For instance, if you live in a low-lying area with standing water or in an area with a history of earthquakes or floods, then you can purchase earthquake coverage or flooding protection.
Which one is the best insurance type for me?
In order to determine the right type of insurance for you, it is important to know your coverage needs and the deductible limit that you can afford. Acquiring a suitable coverage policy for your home can make or break the convenience to recover from setbacks such as robbery, fire or any other damage. Moreover, it is important to consider the vulnerability of your home, so that you can also purchase certain additional policies to extend the coverage.
Is homeowners insurance worth it?
Keeping in mind the market rates, customer service, coverage amount and costs, you can make the best decisions for your needs. No doubt that this process of shopping around and considering a lot of factors seems to be frustrating and overwhelming at first glance, but eventually the effort is worth it. Homeowners insurance coverage provides long-term protection to your property and belongings and can help prevent a major dip in your savings if the major repair arises. However, keep in mind that the homeowner insurance coverage policies are not the same, you have to choose the best one for you to get the maximum benefit out of it.