It’s been said that you should always be willing to hear about your health and your finances; to ignore either is insanity. Homeowners insurance rests somewhere between your health and your finances because it safeguards the place where you live — the roof over your head, the walls that protect you.
It’s important to understand homeowners insurance so you know where you are protected and where you are vulnerable. Vulnerabilities that overlap with frequent perils of your region (whether you live in a break-in prone neighborhood or a hurricane evacuation zone) should be resolved with endorsements — additional points of coverage that aren’t included in standard policies.
As covered perils like severe weather and identity theft become increasingly common, holding a strong and personalized insurance policy on your home is more important than ever. Homeowners insurance can help guard against the damages caused by a whole host of issues.
Types of Coverage
Homeowners insurance policies can include the following coverage areas:
The essential structure of your home is protected through dwelling coverage — the floors, walls, windows, ceiling, and roof, as well as attached structures, like the garage. Built-in appliances are also considered part of the dwelling. These include machines that are physically attached to your home, like a bolted-in dishwasher versus a plugged-in microwave. The limit for dwelling coverage is the cost of rebuilding your entire home. This is likely less than the price of purchasing the home, as this total doesn’t factor in the real estate market.
Also called personal possessions coverage, contents coverage protects everything that makes your house a home: your furniture and decor, plus your clothing, devices, collectibles, and jewelry. These items are typically covered at their Actual Cash Value (ACV), but you can usually bump up the protection to Replacement Cost for a rate increase. ACV will reimburse you for the loss or damage of a given item, minus its depreciation. So an expensive, state-of-the-art TV purchased in 2010 would be worth substantially less today than what you paid for it a decade ago, and that reduced price is what you would receive. Replacement Cost is more generous; it doesn’t quibble with depreciation. It’s also a more expensive type of coverage.
This is the most flexible type of coverage in a homeowners insurance policy, as it responds to a variety of different perils: medical expenses for injuries sustained by guests on your property, your property damaging someone else’s property, and lawsuit. Personal liability is sometimes subdivided into “personal liability” and “medical payments to others.”
Types of Homeowners Insurance Policies
If you own your home…
The most basic form of homeowners insurance, HO-1 is a limited coverage policy no longer widely offered. Because it doesn’t typically offer liability or personal property coverage, most lenders don’t consider it sufficient protection. An HO-1 policy covers only the following 10 perils, making it a “named perils” policy:
- Fire and smoke
- Hail and windstorms
- Damage from vehicles
- Damage from aircraft
- Riots and civil commotion
- Volcanic eruption
This “broad policy” is a step up from HO-1 and is more common as a result. Still, it’s limited in that it’s a named perils policy — its coverage areas are narrowly defined, and if the peril isn’t explicitly stated in the policy, you aren’t protected against it. HO-2 beefs up the coverage items listed above by including the following perils:
- Falling objects
- Weight of ice, snow, or sleet
- Freezing of household systems (HVAC)
- Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems
- Accidental discharge or overflow of water or steam
- Sudden and accidental damage from artificially generated electrical current
The HO-3 or “special form” policy hits the sweet spot for price and coverage. The most common policy type held by homeowners today, HO-3 is what people talk about when they say “basic homeowners insurance.” It offers all the protection points of the HO-2 “broad policy” but ditches the “named perils” structure. Instead of only covering what is stated, this “open perils” policy covers everything except that which is explicitly excluded. It offers the six core coverages:
- Dwelling coverage
- Other structures
- Personal property
- Loss of use
- Personal liability
- Medical payments to others
This hybrid policy type combines an open perils policy for your home’s structure with a named perils policy for your home’s contents, just like the HO-3. The difference between the two boils down to water damage protection. HOB provides this point of coverage, while HO-3 does not.
The super-sized, spendier upgrade to the HO-3, HO-5 is a “comprehensive policy.” Another open perils policy, it includes everything that isn’t expressly excluded for dwelling coverage and personal possession coverage. While HO-3 policies typically offer Actual Cash Value for damage and loss (original value minus depreciation), HO-5 policies offer Replacement Cash Value. The payout will equal the full replacement cost. If you have a high volume of big-ticket personal possessions, an HO-5 policy offers greater protection.
Typical exclusions for HO-3 and HO-5:
- Earth movement (earthquake, landslide, mudslide)
- Water damage
- Damage from or infestation of birds, vermin, rodents, and insects
- Neglect, deterioration, and general wear-and-tear
- Settling, shrinking, bulging, or expanding of the foundation
- Pets and other animals
- Mold, fungus, and rot
- Intentional loss
- War, government action, and nuclear hazard
- Ordinance or law
- Smog, rust, and corrosion
An HO-7 is essentially the same policy as the HO-3, but adapted to mobile or manufactured homes. This policy protects all varieties of prefab homes, from single- and double-wides to fifth-wheelers. Unlike typical homeowners insurance, mobile home insurance doesn’t assume that you live in the dwelling full-time. You can customize coverage to your living arrangement, securing primary residence coverage, secondary or seasonal, or rental.
Again, this policy is essentially the same as the HO-3, but this time adapted for the particular concerns of older homes. This is the homeowners policy typically held by historic homes and registered landmarks.
If you rent…
This tenant’s policy type is more commonly called renters insurance. It covers everything inside your dwelling, but not the structure itself. The landlord is responsible for that.
If you own a condo…
Otherwise known as condo insurance, HO-6 includes personal property and liability coverage as well as protection for damage to the walls, floor, and ceiling of the unit. The remainder of the structure should be covered by the condominium’s HOA.
Property damage from floods rack up billions of dollars in damage during years of intense storms. Those storm-heavy years are hitting fast and frequent. While water damage from, say, busted pipes is covered by most homeowners insurance policies, water damage caused by heavy rain and hurricanes is not. If you live in a “special flood hazard area” as defined by FEMA, you are required by that agency (and your mortgage company) to secure special flood insurance through the National Flood Insurance Program. You can check the status of your property using FEMA’s flood map address search. But even if your property is deemed safe from flooding (for now), you should consider adding flood insurance protection. First of all, it’s pretty affordable outside of flood zones. Second, FEMA reports that more than 20% of flood claims come from areas that are outside of high-risk zones.
The worst seismic activity has historically been restricted to the West Coast, but earthquakes are becoming more common in the Midwest and South. These quakes derive not from the movement of fault lines, but from the waste water released through oil drilling.
Property damage caused by destructive earthquakes is not covered by a standard homeowners policy, though ensuing perils — like fire — may be covered. If you do live in that earthquake-plagued state of California, you can secure coverage through the nonprofit California Earthquake Authority. Elsewhere, earthquake coverage comes in the form of a special endorsement.
Compromised devices and websites make it easy for identity thieves to grab your banking and credit card information, with sometimes disastrous consequences. While insuring yourself against identity theft does nothing to prevent it, an identity theft endorsement can help you recoup some of the financial loss following such an event. Importantly, it won’t cover fraudulent charges (hopefully your bank or credit card will shoulder those), but it can provide direct assistance in recovering your identity, replacing government-issued identification, and covering legal fees and lost wages while you’re busy getting your life back on track.
Consider building out your homeowners coverage to protect yourself from identity theft, or, if it’s more cost effective, sign up for an identity theft protection service. These services go one step further by monitoring your credit report for suspicious changes, then assuming power of attorney in the event of identity theft so they can file all the necessary paperwork on your behalf.
Water backup of sewer
If a clog in your pipes prevents water and waste from flushing out into the municipal sewer lines, you could have one heck of a mess. You could also face a lot of damage to your home’s structure and contents, including the electrical system. Like flooding, water damage caused by backed-up sewer or sump pumps isn’t covered in a standard policy. It’s a fairly inexpensive endorsement, and one to consider if you have a lot of tree roots in your neighborhood (potentially wreaking havoc on the pipes buried beneath), if your pipes are old or have been over-taxed with cooking grease and paper products, or if you live in an older home with aging pipes and no backwater prevention valve.