Homeowners insurance is complicated. Luckily, it’s not something you’ll have to navigate alone. When you’re ready to purchase a policy, you’ll work with an insurance agent who understands the ins-and-outs of homeowners insurance and can help you choose the right coverage for your home.
That said, it’s still a good idea to come to the table prepared. Homeowners insurance is a big investment — and there’s a lot of money on the line if you end up needing it. Being familiar with the types of coverage offered will help you ask the right questions and have an informed discussion with your agent. That way, you can be sure you’re getting the coverage you need and that you’ll understand how it works if you ever need to file a claim.
What does homeowners insurance cover?
The majority of homeowners purchase what’s known as an “HO-3” policy. The HO-3 is best for its broad protection; instead of covering certain “named perils” like other policy types do, an HO-3 policy protects your home against everything except for a few causes that are specifically excluded. These exclusions generally include:
- Earth movement – earthquakes, landslides, or sinkholes
- Water damage – flooding, sewer backup, or groundwater seepage
- Poor maintenance – neglect, sub-par construction, or faulty building materials
- Social causes – war, nuclear hazard, government ordinance, or new building codes
- Intentional loss – damaging the home on purpose to get an insurance payout
Under an HO-3 policy, if your home is damaged or destroyed by any cause that’s not excluded, your insurance company will have to pay for repairs or replacement up to the maximum coverage limits listed on your insurance.
Homeowners insurance covers six core areas
The exclusions listed above dictate when your homeowners insurance will pay out. Within that framework, there are a variety of coverage types that determine what the insurance company will pay for.
- Home or “dwelling” coverage pays to repair or replace your main house if it’s damaged by a covered cause
- Coverage for “other structures” pays to repair or replace other structures, like detached garages, sheds, fences, and guest houses
- Personal property coverage replaces the things inside your home. Note: personal property is the only thing covered on a named perils basis under an HO-3 policy
- Loss of use coverage helps pay for living expenses, like alternate lodging, if you’re displaced from your home while it’s being repaired
- Personal liability insurance covers losses and legal fees if someone outside your family is injured or has belongings damaged while on your property
- Medical payment insurance helps cover medical bills for anyone injured on your property or by your pets
Each type of coverage comes with its own limit, which is the maximum amount your insurer will pay out in that area on a given claim. Your dwelling limit is the highest, since it must be enough to completely rebuild your home in a worst-case scenario. Limits for the other five categories are set as a percentage of the overall dwelling coverage — so the higher your dwelling limit, the better your coverage will be in each subsequent area.
Optional coverages add extra protection
An HO-3 policy covers all the basics. But depending on your location, your home type, and your assets, you may find that you need additional coverage in certain areas. Homeowners insurance companies offer add-ons or “endorsements” to address those places where a standard policy might be lacking. There are a huge number of endorsements available on the market, but some of the most common options include:
This optional coverage pays for damages caused by earthquakes, mudslides, sinkholes, etc., which are all specifically excluded under an HO-3 policy. If you live along a fault line or other earthquake-prone area, look for an insurance company that offers earthquake coverage as an add-on for HO-3 policies.
Water damage is generally covered under an HO-3 if it originates within the home (e.g. burst pipes or overflowing appliances). However, water damage is not covered if it’s from a source outside the home, like backed-up or overflowing sewage systems. Experts recommend adding a sewer or sump pump backup endorsement to protect against this specific (and nasty) type of water damage.
“Scheduled personal property protection” means specific items in your home are listed and insured for their replacement value. This endorsement is a good idea if you own high-value or collectors items that would exceed the standard amount of property protection included in an HO-3 policy. Consider adding it if you own things like fine art, furs, expensive jewelry, or valuable antiques.
This optional coverage boosts your policy limits in keeping with inflation. That way, if the price of materials and labor goes up over time, your insurance will still cover the amount needed to fully repair or replace the home.
Sometimes when an older home is damaged, the owner is required to upgrade outdated systems during repairs so that the house meets current building and safety codes. Updates may be required for electrical, HVAC, or plumbing systems. If your home is older and would require expensive upgrades should you file a claim, consider adding ordinance or law coverage to help pay for those added costs.
If you’ve made eco-friendly upgrades to your home, odds are they’ll cost more to repair or replace than traditional components. Green home coverage ups your limits to cover the cost of eco-friendly building materials and additions should you need to replace them. Not all companies offer this endorsement, so if you need green home coverage, be sure to check for it before choosing an insurer.
Umbrella liability insurance is a catch-all endorsement that protects you against large liability claims. It can apply to homeowners, auto, or watercraft insurance in the event that your liability limit in one of those areas isn’t large enough to cover damages or legal fees. You may consider umbrella liability if you have extensive assets that could be at risk if an injured party should sue for damages.
This endorsement extends coverage to sport, water, or utility vehicles parked on the property, should they be damaged by a covered peril.
If you run a business out of your home, consider adding business coverage to your homeowners insurance policy. This endorsement adds work-specific liability coverage and may protect some of your business equipment.
Identity theft insurance is an optional coverage that can help cover expenses like financial counseling, attorney fees, lost wages, and phone bills if your identity is stolen and needs to be recovered.
Flood insurance is sold separately
Homeowners insurance does not cover flooding or flood-related damages. And, unlike earthquake insurance, flood insurance is not sold as an endorsement to the basic HO-3. It must be purchased separately, either from a private insurer (though only a handful of companies carry it) or from the National Flood Insurance Program.
Whether or not you’ll need to purchase flood insurance depends on your location. Anyone living in a flood plain or storm-prone area should consider protecting themselves, as flooding can cause extensive and costly damages. Be sure to talk with your insurance agent about flood risk and the availability of flood insurance where you live.
A note on “named peril” policies
Some homeowners insurance policies operate on a “named perils” basis, meaning they only pay out if your home is damaged by a cause specifically listed on the policy. Although HO-3 policies don’t work this way when it comes to your home — instead using exclusion-based coverage — they do use a named perils system when it comes to personal property. Named peril coverage typically protects your personal property against the following 16 events:
- Fire or lightning
- Windstorm or hail
- Riot or civil commotion
- Damage caused by aircraft
- Damage caused by vehicles
- Vandalism or malicious mischief
- Volcanic eruption
- Falling object
- Weight of ice, snow, or sleet
- Discharge or overflow of water or steam from plumbing, heating, air conditioning, fire-protective sprinkler system, or household appliance
- Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system, air conditioning, or fire-protective system
- Freezing of a plumbing, heating, air conditioning, or fire-protective system, or household appliance
- Sudden and accidental damage from an artificially generated electrical current
*Source: The Insurance Information Institute
To learn more about how homeowners insurance works — and what to look for in your policy — check out our homeowners insurance buyer’s guide. Ready for the next steps? You can start comparing companies and quotes with our in-depth homeowners insurance reviews:
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