Policy Basics: What Does Your Homeowners Insurance Cover?

Imagine this: You come home after work and realize someone broke into your backyard shed. Initially, you’re just annoyed, but then you see your new lawn mower and gardening tools are gone, and the stress sinks in. You wonder if this is covered by your home insurance, if your policy will replace everything that’s missing, and if your premium is going to go up now.

Don’t worry. You’re not alone. In fact, nearly half of U.S. homeowners don’t know what their homeowners insurance policy actually covers. After all, many insurance policies can feel far too complicated to comprehend. Still, they are necessary to homeownership. They protect your home, your possessions, and your family in the case of an emergency or disaster. Plus, while they may be pretty confusing at points, they provide invaluable peace of mind.

So how do you know what you’re protected against? We’ve talked with experts with decades of experience in the industry to break down the ins and outs of homeowners insurance and what a standard policy covers. Here’s what homeowners need to know.

What is homeowners insurance?

Homeowners insurance is exactly as it sounds: a form of insurance that protects your home, your belongings, and helps shield you from personal liability in case of disaster. Simply put, it is a protection on your investment, and it provides financial peace of mind in the event of significant covered repairs. Plus, many banks and lenders actually require it to receive and maintain a mortgage loan. They want to ensure their own investment (i.e., your loan) is protected against accidents as well.

Even if your lender does not require it or if you paid cash for your property, experts strongly recommend getting homeowners insurance anyway, says Sam Mansour, a Washington state real estate agent with 18 years of experience. While exact coverage will vary from policy to policy, homeowners insurance is meant to financially cover you when an unpredictable catastrophe hits.

Plus, it’s an extremely valuable tool to use before your closing, Mansour says. You may be able to receive a “CLUE report,” an extensive look at the claims history on the property, when applying for insurance. This will give you an idea of past claims the previous owner submitted and what repairs were necessary.

“Let’s say there was a smoke claim or a fire claim in the house,” Mansour says. “Now, I want to know, was that repaired professionally, or was that repaired by a homeowner? And are there any remnants of it?”

What does homeowners insurance cover?

A standard policy protects four main areas, according to Loretta Worters of the Insurance Information Institute (III), an association focused on fact-based insurance information. Your coverage will typically cover the structure of your home, your belongings, liability lawsuits related to your property, and living expenses if you have to leave your home temporarily. Within those areas, a standard policy will cover up to 16 perils, which is just insurance lingo for dangers (i.e., fire, theft, etc.). Sound confusing? Let’s look in detail.

Dwelling protection

This is what most people think of when it comes to home insurance: the actual protection of your home and structure. So when something bad happens to the physical structure of your house, this section of your policy will kick in and help pay for repairs.

Most policies require you to insure at least 80% of the replacement cost for the home, meaning the total cost to rebuild your house (Note: this is different from the market price, which is the property value determined by the real estate market). However, Worters recommends covering 100% of the replacement cost of your house. This means in case of a disaster you will be compensated for the full cost of rebuilding your home as long as it’s under the coverage limit (the amount you insured the house for).

This part of your policy will most likely also cover secondary structures on the property, such as detached garages or sheds. Typically, you’re covered for these structures up to 10% of your coverage limit. So good news! In our example above, the broken shed would be covered under a standard home insurance package.  That said, policies can vary so it’s always a good idea to review your policy, coverage amounts, and possible exclusions in detail.

Personal property

Just like the structure of your home is protected, so too are your personal belongings that live inside. Similar to dwelling coverage, if one of the perils covered in your policy occurs and destroys your couch, you will receive compensation up to a certain amount.

Worters says you can expect personal property coverage to be around 50% to 70% of the insured amount. That means if you have your home insured for $300,000, you can expect the insurance company to cover about $150,000 to $210,000 of the personal property you lost.

An added plus: Your belongings are covered no matter where they are in the world. So if your tablet is stolen at the airport, your personal property policy will likely pay you the cost to replace it (provided it’s worth paying the deductible to have it replaced).

Personal liability

This is one of the more confusing parts of your policy. In fact, nearly 50% of homeowners don’t actually understand what this coverage means.

Liability protection covers you if you’re sued for any bodily injuries or property damage you or a family member (including the furry ones) caused. So let’s say your mailman slips on your porch, and they decide to sue you. Your policy will pay for your legal costs and any compensation you owe up to a specific amount. Coverage limits usually begin around $100,000, according to the III.

This part of your policy often will also protects you off your property. So if you’re at the dog park and your dog bites another owner there, your policy will cover any costs (again up to the coverage limit) connected to the incident. In simple terms, liability protection protects you or a family member if you’re legally responsible for damages or injury whether it’s off or on your property.

One last thing: Your policy will also pay for the medical expense of the individual hurt on your property (at least, up to a point). So, in the case of the mailman, your liability policy will pay for any necessary medical expenses, including hospital visits or ambulance costs. This can be paid out even if you aren’t deemed liable, meaning it’s “no-fault coverage.”

Coverage limits for medical coverage paid to others range from $1,000 to $5,000.

Loss of use

This part of your policy will pay for your living expenses if you need to move due to property damage temporarily, Worters says. For example, if a tree takes out part of your roof and you can’t live in your home while it’s being fixed, your policy will cover costs toward your temporary living quarters, your meals, and other similar expenses until you get back into your home.

Again, there is a limit. Typically, your loss of use coverage will be around 20% to 30% of your dwelling insurance amount. There may also be a time limitation, typically a year, on how long your insurance will reimburse you for living expenses, Worters says.

Named peril vs. open peril

What exact perils are you covered for in your policy? You may find either “named peril” or “open peril” coverage, depending on what type of policy you choose. Named peril means your policy covers the listed damages — typically 16 in a standard policy — in your package, but nothing outside of those. Those perils are:

• Windstorm or hail
• Fire or lightning
• Explosion
• Riot or civil commotion
• Damage caused by aircraft
• Damage caused by vehicle
• Smoke
• Vandalism or malicious mischief
• Theft
• Volcanic eruption
• Falling object
• Weight of ice, snow, or sleet
• Accident discharge or overflow of water or steam (from plumbing, heating, or a household appliance)
• Sudden and accidental tearing apart, burning, or bulging (of hot water system, air conditioning, or fire sprinkler system)
• Freezing (of plumbing, heating, air conditioning, or a household appliance)
• Sudden and accidental discharge from artificially generated electrical current

Open peril means your policy covers everything except what’s specifically listed as excluded in your policy. This is usually a broader level of coverage.

Some policies might include named perils for some coverage and open peril for others, to make matters more confusing. For example, in an HO-3 policy (we’ll explain this more below), you may have open peril coverage for your dwelling, but named peril coverage for your personal property.

What’s not covered by homeowners insurance?

It’s important to note that, while many homeowners insurance policies can provide sufficient coverage, you’re not guaranteed coverage for everything. Worters says one of the most common misconceptions is that homeowners insurance covers flooding and earthquake damages. In fact, it covers neither, and you’ll need an additional policy for both.

You’ll need to get flood insurance from the government-funded National Flood Insurance Program, and it actually might be required if you live in a high-risk flood zone. As for earthquake insurance, many insurers provide that coverage as an add-on to your policy.

Other damages not included in standard insurance packages include landslides, nuclear disasters, and damage caused by homeowner neglect.

How does my insurance pay me?

An insurance provider will pay you for repairs based on three different levels of coverage. Here’s a look:

Actual cash value

With actual cash value, you will be repaid based on the item’s value minus the depreciation due to age, wear, and tear, Worters says. So if a fire destroys your 10-year old couch, you will be paid the depreciated value of a 10-year old couch, even if it’s less than what it costs to buy a new couch.

Replacement cost

More likely, your policy will be based on replacement cost, Worters says. That means you’ll be paid based on the cost to replace your item exactly as it was or rebuild your house to the same quality you had before (as long as it’s within your coverage limits). So, in the case of the couch mentioned above, you would be paid the cost to buy a new couch.

“You want the cost to replace the property with something of the same quality and kind of the thing you lost,” Worters says. “So it really makes sense to have a replacement value on your personal property [and home].”

Guaranteed and extended replacement cost

These are both similar to replacement cost, except for the fact they offer even more coverage. With guaranteed replacement cost, your insurer will repay you the total cost of replacing your item or repairing your home, even if it’s over your coverage limits. Extended replacement cost allows your insurer to pay you a certain percentage over your limit if your policy turns out to be insufficient.

For example, let’s say you have extended protection that allows for 25% coverage over your limit and a wildfire hits your area. Since so many people are also dealing with repairs, contractor costs might go up, which pushes your repair costs over your limit. Your extended protection will now cover 25% past your initial coverage limit.

Types of homeowners insurance

If you’ve done research on homeowners insurance policies and been confused by the different “forms” available, that’s ok. A form is just a fancy term meaning a type of insurance policy.

There are eight standard forms, or types, of home insurance policies based on the coverage you want and the kind of property you have. Let’s take a closer look.

HO-1

This is the most basic type of policy. It will cover you for just 10 named perils, instead of the standard 16, and it usually only covers your dwelling, meaning no personal liability or property coverage. It’s so bare-boned that many providers might not even offer it in some states.

HO-2

An HO-2 policy, also known as a “broad form,” is a step above the HO-1 form. It is still very limited in what it covers, but it does protect against two more perils (for a total of 12) and includes personal property coverage.

HO-3

Sometimes called a “special form,” this is the most common type of home insurance, accounting for over 80% of home policies. So, if you have a single-family home, it will most likely be what your provider recommends.

An HO-3 policy will protect you in all four areas mentioned above: dwelling, personal property, liability, and loss of use. And, again, it typically provides open peril coverage for the dwelling and named peril coverage for personal property.

Worters believes it’s helpful to consider an endorsement, meaning an amendment to the original policy that adds more coverage or changes it in some way, alongside this standard policy. Some common endorsements might be a jewelry policy that provides better coverage for valuable personal belongings or a sewer backup endorsement that protects against damage from sudden sewer issues.

HO-4

Also known as renter’s insurance, this policy protects a renter’s personal property against all 16 perils. This doesn’t include damage to the structure itself, which the landlord’s insurance policy should cover.

HO-5

This is the broadest range of coverage, protecting against almost any peril, unless it’s specifically excluded. Both dwelling and personal property will have open peril coverage.

HO-6

This is a type of insurance for condo or co-op owners. It will provide “walls-in” coverage, meaning your actual unit — from the walls into the interior — is covered against all standard 16 perils. The rest of the structure, including all the common areas, roof, and detached structures on the property, should be covered by a master insurance policy your homeowners’ association or management company provides.

HO-7

A policy that protects your mobile home, including all personal property and damage to the physical structure.

HO-8

A special type of policy that includes modified coverage for homes that don’t fit into the other forms. While uncommon for many homes, it may be useful for older homes or historically significant ones. Many times the replacement costs on these homes are more than the homes are worth.

The cost of home insurance

On average, a U.S. household pays $1,631 annually for homeowners insurance, but it could be much lower or higher based on several personal or environmental factors. Here are some of the main contributing determinants.

Location

Undoubtedly, the location of your home plays a big part of the premium you pay. If you’re in an area with more extreme weather or you’re near a body of water, you will most likely pay a higher price. For example, Texas, which is prone to hurricanes, tornadoes, or other extreme conditions, has some of the highest premiums in the country at an average of $3,257 annually.

On a more local level, the safety of your neighborhood and even your proximity to a fire department can affect how much you pay, Worters says. Insurance companies like if you’re near a well-staffed fire station, meaning your home might have better protection in a case of fire.

Your home

The age of your home and the building materials in it will be another significant factor. Insurance companies like brick homes over wood-framed houses, according to Worters, because they’re more fire-resistant, and a newer roof likely means you pay less on your premium.

The older the home is, the more you’ll probably pay since it will most likely cost more to replace and repair. According to insurance.com, a house built in 1980, a 40-year old home, could increase your insurance premium by about 2%.

Your own history

Let’s say you’ve had several claims on your homeowners insurance in the past. That might mean you’ll pay a higher premium. Insurance companies give every buyer an insurance score, similar to a credit score, that determines how risky you are to insure. They consider your age, location, claims history, payment history, credit history, and even your debt. The higher your score is, the less risk you present, meaning you’ll pay a lower price.

It’s important to note, once you have your policy completed, a new claim won’t always increase your premium. Worters says frequency and severity of claims are two areas insurers look at when determining premium increases.

“If you have filed several claims in a year, or one really big claim, you may see your rates go up,” she says.

Discounts

You may be able to lower your premium with several discounts available from your provider. Many companies offer a lesser premium if you have a security system installed or update your home to make it more resistant to natural disasters. Your home may also be eligible for a “green discount” if it has Leadership in Energy and Environment Design (LEED) Certification.

If none of those apply, ask for a higher deductible, which means you’ll pay more out of pocket before your insurance kicks in, but your premium will be lower. Or bundle your auto and home insurance with the same company, which could save you on average over $700 a year.

Before you buy

Purchasing homeowners insurance can be daunting, especially for first-time buyers. You want to make sure you’re getting the right coverage but not overpaying for it. So before you complete any transactions, it’s wise to do your research.

Ask your top buyer agent about independent insurance agents, who can explain all of your options and answer any questions without pressuring you on a specific policy. They’ll most likely advise you to shop around to several companies, comparing not only their prices but what each policy covers.

“I ask [my clients] to shop apples to apples,” Mansour says.

“Because cheaper insurance does not mean better insurance.”

In addition, reviews will also be valuable in finding a reputable company. Your insurance provider should have your back in an emergency, so information on the company history and their claims response may save you trouble down the line.

Once you have your policy, it’s vital to protect your home before any losses occur, Worters says. Keep up with maintenance to help prevent any damage and make it defensible against extreme weather and other natural disasters. Lastly, it’s smart to review your policy once a year, ensuring your coverage is up to date.

Hopefully, that’ll be the only time you need to look at your policy, and you’ll never have to file a claim. But, either way, you can sleep soundly knowing your property, belongings, and family are covered.

Header Image Source: (Matthew Henry / Burst)