Understanding what’s included in your homeowners insurance policy and how you’re protected.
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byFabio Faschi, PLCS, SBCS, CLCS
Fabio Faschi, PLCS, SBCS, CLCS
Operations Lead, Property & Casualty
Updated September 23, 2020|6 min read
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Homeowners insurance provides financial protection for your home and other important assets against disasters, theft, and accidents for which you’re liable. Home insurance is also required by most lenders before they'll let you take out a mortgage on a house.
Homeowners insurance covers your home, personal property, and combined assets when your home is damaged, burglarized, or you're held liable for an accident
Homeowners insurance covers you against the hazards, or perils listed in your policy
Each of your coverages are insured up to the limit on your policy declarations page
A basic homeowners insurance policy includes six coverage provisions that cover the structure of your home, your personal property, additional living expenses, and legal and medical expenses.
|Coverage type||What does it cover?||How much are you covered for?|
|Dwelling coverage||Covers the structure of your home and built-in appliances||Coverage limit should be equal to your home's estimated replacement cost|
|Other structures coverage||Covers detached structures on your property||Usually 10% of your dwelling limit|
|Personal property coverage||Covers your personal belongings both inside and outside the home||Usually 50% of your dwelling limit|
|Loss of use coverage||Pays for additional living expenses while your home is being repaired||Usually 20% of your dwelling limit|
|Personal liability coverage||Pays for legal and medical bills if you're held liable for injury or personal property damage to someone else||Usually between $100,000 and $500,000|
|Medical payments coverage||If a guest is injured in your home, it pays for their medical bills, regardless of who is at fault||Usually between $1,000 and $5,000|
Dwelling coverage is the part of your policy that covers the cost of repairing or rebuilding your home if it’s damaged or destroyed by a fire, hurricane, or another disaster listed in your policy. With dwelling coverage, your home’s foundation, roofing, walls, deck, floors, cabinetry, plumbing, water heaters — basically anything that is built into the home is covered up to the limit in your policy.
Other structures protection pays to repair or rebuild structures separate from your home, such as a detached garage, guest house, shed, or fence.
Homeowners insurance also includes coverage for your personal belongings in your home and anywhere in the world. If someone breaks into your home and steals your valuables, the cost of replacing them is covered; if someone breaks into your hotel room or storage unit and takes your luggage, that is also covered. If a guest is staying in your home, personal property coverage may also cover their belongings if they’re damaged or stolen.
Jewelry, watches, furs, firearms, and other types of expensive valuables have special limits of liability, or sublimits, meaning the insurance company will only pay up to a limited amount — typically $1,500–2,500 depending on the category or class of items. Most insurers give you the option of increasing coverage limits on expensive valuables by opting into a more comprehensive coverage tier or “scheduling” items with a scheduled personal property coverage add-on.
Also referred to as loss of use coverage, this policy provision covers any increase in living expenses if your house is damaged in a disaster and you need to live somewhere else while it’s being repaired or rebuilt. Loss of use coverage may cover the cost of rent at your temporary residence, gasoline expenses if you had to flee the region, and the rental value of the property if you were renting it out as a source of income.
According to a standard policy, your additional living expenses are covered for the shortest time required to repair or rebuild your home. If your home is destroyed and you decide to permanently relocate, payments will continue until you’re settled in your new home.
Homeowners insurance also includes personal liability coverage to pay for medical bills, lost wages, and other costs for people that you’re legally responsible for injuring. Events you could be liable for include your dog biting someone or a guest slipping and falling and injuring themselves on your property.
If you’re sued and taken to court because of an accident, liability protection will also cover your legal fees. If you’re responsible for damaging or destroying someone’s property — maybe you accidentally torched your neighbor’s house in a gender reveal party gone wrong — this coverage may cover the rebuild.
You can choose anywhere from $100,000 to $500,000 in personal liability coverage. If you have assets in excess of $500,000 and you’d like more financial security, you can add personal umbrella insurance to your policy. It provides broader liability protection and higher coverage limits than standard homeowners insurance.
Your policy also includes no-fault medical payments coverage which pays out if a guest sustains a minor injury in your home, regardless of who is at fault or liable for the accident. You typically can choose between $1,000 to $5,000 in medical payments coverage.
Most insurance companies also offer supplemental protection that can modify or enhance your policy coverage, including water backup protection, service line coverage, and equipment breakdown coverage.
Read more about homeowners insurance endorsements here
Although homeowners insurance covers many types of disasters and loss, including fire, windstorm damage, and theft, there are multiple hazards and scenarios that aren’t covered by a basic homeowners insurance policy.
Most homeowners insurance policies don’t cover water damage from flooding or sewer backups, and earthquake damage isn’t covered either. Additionally, damage caused by wear and tear, neglect, pests, and anything considered a maintenance problem is also not covered by homeowners insurance.
Just about every type of homeowners insurance policy (HO-1 through HO-8) has the same aforementioned coverage components, but the amount you’re paid out or reimbursed for a loss will vary depending on the quality of your policy. Homeowners insurance generally has two types of loss settlement options: actual cash value and replacement cost.
Actual cash value - After a loss, actual cash value will pay to repair or replace your home or personal property minus the cost of depreciation. The depreciated value of property is how much it’s worth today in its current condition, not the amount you paid at the time.
Replacement cost - When your property is insured at its replacement cost, depreciation is not factored into your claim reimbursement. That means if your personal belongings are damaged or stolen, the insurance company will pay out the value of new items; if your home is damaged or destroyed, the insurance company will repair or rebuild your house with materials of similar type and quality.
Around 80% of owner-occupied homes are insured with a standard HO-3 policy, an insurance type that covers your home and other structures at their replacement cost, but may only cover your personal property at its actual cash value by default. Your insurance company will likely give you the option to upgrade your personal property coverage loss settlement terms to replacement cost for a small additional premium.
Most insurance companies also offer extended or guaranteed replacement cost claim reimbursements that provide you with a coverage cushion in the event rebuild costs end up being higher than your policy limit. Guaranteed replacement cost means the insurer will pay out whatever the rebuild amount is, while extended replacement cost pays a certain percentage more than your policy limit — usually 25% or 50% — in the event construction and labor costs are inflated after a disaster.
A deductible is the amount you pay out of pocket before your insurance company reimburses you for the remainder of a loss. If your insurance company agrees to a claim settlement of $20,000 because of storm damage to your roof and your deductible is $1,000, you’d first pay that amount and your insurance company would send you a check for the remaining $19,000.
Policy deductibles generally range from $500–$2,000, but are offered in amounts as high as $25,000 with certain companies. High deductible policies can be significantly cheaper than low deductible policies, but could prove to be unaffordable if you ever need to file a claim.
Each standard home insurance policy includes dwelling coverage, other structures coverage, personal property coverage, loss-of-use coverage, personal liability coverage, and medical payments coverage. Basic coverage includes protection against common perils like fire, lightning, explosions, smoke, theft, vandalism, weight of snow or ice, and frozen and burst pipes.
Home insurance won't cover damage from earth movement like earthquakes and landslides, flooding, neglect, war, nuclear hazard, or rodents or insects, among others. You should check your individual policy to find out exactly what is named and what isn't in terms of coverage.
Homeowners insurance will cover some types of water damage, depending on the source. Water damage from rain or snow, vandalism, or some instances of burst pipes are covered. Protection from flood damage requires a separate flood insurance policy; damage from sewage, gradual leaks, and neglect are similarly not covered.
There are eight different types of homeowners insurance policies for various home types and coverage needs.
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