Homeowner's Insurance FAQ
The Basics of Home Insurance Home insurance usually boils down to two crucial concerns — protection and price. Although regulated at the state level, home insurance is more of a national product than is auto insurance, meaning you will find fewer local variations.
The proper home insurance coverage consists of buying the right type of policy, having the proper levels of protection within that policy — including special provisions for jewelry, your computer stuff, and other particularly valuable possessions — and supplementing this coverage with special protection against natural disasters that are not covered in your basic policy.
Homeowners with mortgages are required by their lenders to have home insurance. Many people may think that the policy terms required by their lenders represent "OK" levels of insurance, but this may not be true. Lenders want to make sure their exposure is covered, but that can happen without you being fully protected. Thus, it's important that you calculate your needs as well and make sure they are reflected in your coverage.
In addition to regular insurance, there also is private mortgage insurance to consider. Visit insure.com for more information on PMI.
Seven Basic Policies
There are seven basic kinds of home insurance policies and they're pretty much the same regardless of where you live (except for Texas). They tend to be defined by the perils they cover:
HO-1. Basic homeowner stuff. Covers your dwelling and personal property against losses from 11 types of perils: fire or lightning; windstorm or hail; explosion; riot or civil commotion; aircraft; vehicles; smoke; vandalism or malicious mischief; theft; damage by glass or safety glazing material that is part of a building; and, volcanic eruption.
HO-2. Basic homeowner stuff plus some. Covers dwelling and personal property against 11 perils plus six more: falling objects; weight of ice, snow or sleet; three categories of water-related damage from home utilities or appliances; and electrical surge damage.
HO-3. Extended or special homeowner stuff. Covers 17 stated perils plus any other peril not specified in your policy, except for flood, earthquake, war, and nuclear accident.
HO-4. Renters’ coverage. Covers only personal property from 17 listed perils.
HO-5. All risk coverage for building and personal property. This policy form isn't sold very often anymore.
HO-6. Condominium owner coverage. Covers personal property from 17 listed perils along with certain building items in which the unit owner might have an insurance interest.
HO-7. Basic older-home stuff. Covers dwelling and personal property from 11 perils. Differs from HO-1 in that it covers repairs or actual cash values — not rebuilding costs. This is for homes where some historic or architectural aspects make the home's replacement cost significantly higher than its market value.
There are variations on these policies as well. For example, landlords can buy coverage that insures only their dwelling and not its personal property (which is what a tenant's renter's policy would cover). And you can get special policies to cover mobile homes (a.k.a. manufactured housing). Most homes are covered by HO-2 and HO-3 type policies.
Coverage Levels
There are many special coverage provisions offered by insurers, but here are some basic questions that you should answer as part of the home insurance process:
In the event of a serious loss — let's say it's a fire that destroys the house — how would I fare?
In most cases, you want to insure your dwelling and its contents for their replacement values, which will likely differ from the dwelling's market value and your personal property's depreciated cash value. You also should probably get a policy with automatic inflation adjustments so that the replacement cost keeps pace with the general level of price increases. (Homes insured under HO-8 policies are only covered for repair costs or actual cash values, since replacing them would be so costly. Owners of such homes could always get replacement insurance under another type of policy, but they'd probably pay astronomical annual premiums.)
Standard coverage normally insures your possessions at 50 percent of the value of your dwelling. Many people boost this coverage to 70 or 75 percent with additional protection. But there are still individual limits on certain types of personal property (see below).
Free - standing structures on your property (garages, gazebos, tool sheds) are also covered, with standard protection equal to 10 percent of your dwelling. Trees and shrubbery normally can be replaced up to a limit of 5 percent of your dwelling coverage. As is the case with your personal property, you should assess your needs to determine if you want to pay extra amounts to increase these levels of protection.
Also, pay attention to what might happen if you were to lose the use of your home for an extended period. Loss-of-use provisions are important elements of homeowners' policies, and coverage levels equal to 30 percent or more of your dwelling's insurance aren't unusual.
If someone who is not covered on my health insurance was to suffer a serious injury in my home, and I was found liable, how would I fare?
The standard level of liability protection in homeowners’ policies has been $100,000 but it's rising all the time. Today, $300,000 is not an uncommon amount, and even higher levels are recommended for affluent homeowners with lots of assets to protect. In this situation, "umbrella" policies have become popular. These policies provide liability coverage on both your homeowners and automobile policies, and are not that expensive (you normally need to carry both underlying policies with the same insurer).
Do I have certain possessions — computer equipment, cameras, jewelry — whose replacement values far surpass normal coverage limits in my policy?
Standard policies may not come near covering the replacement costs of even moderate amounts of home electronics hardware or expensive possessions. For relatively small amounts, you can purchase "floaters" that will add protection to certain types of personal property.
In addition, equipment related to a home-based business may not be satisfactorily covered unless you obtain additional protection.
Can I afford a high deductible, say $1,000, in order to save money on the policy?
The differences in annual premiums between policies with deductibles of $250 (you pay the first $250 of damage, the insurer pays the rest), $500 and $1,000 may easily be worth 20 to 30 percent of the annual premium. So, if you can afford the expenditure, and want to place a small bet that you won't face a home-related loss, consider a larger deductible.
What other protections does my policy provide?
Homeowners’ policies regularly provide other types of coverage, including off-premises theft protection and unauthorized use of your credit cards. Make sure you understand which provisions are included in the standard coverage you elect to purchase and which may require supplemental premiums.
Homeowner's Insurance FAQ
What is homeowners insurance, and who should buy it?
Homeowners’ is one of the most popular forms of personal insurance on the market. The typical homeowners’ policy has two main sections: Section I covers your property, and Section II provides personal liability coverage (to cover you in case of lawsuits arising from things that happen on your property). Almost anyone who owns or leases property should have this type of insurance. Often, homeowners insurance is required by lenders as a requirement to obtain a mortgage.
What is the difference between "actual cash value" and "replacement cost"?
Covered losses under a homeowners’ policy can be paid on either an actual cash value basis or on a replacement cost basis. When "actual cash value" is used, the policy owner is entitled to the depreciated value of the damaged property – so the older the item is, the less money you may receive for it. Under the "replacement cost" coverage, the policy owner is reimbursed the amount it costs to replace the property with something of a similar type and quality at current prices.
What are the limits in the standard homeowner’s policy?
[Note: this answer is based on the Insurance Services Office's HO-3 policy.] Coverage A and B cover your dwelling and other structures on the premises on an "all risks" basis up to the policy limits.
You set the limit for Coverage A when you buy the policy. The Coverage B limit is usually equal to 10% of the policy limit on Coverage A. Coverage C covers losses to your personal property on a "named perils" basis, which means you’re covered for all the perils specifically named on your policy. The policy limit on Coverage C is equal to 50% of the policy limit on Coverage A. Coverage D covers extra expenses you may incur when the residence can’t be used because of an insured loss. The policy limit for Coverage D is equal to 20% of the policy limit on Coverage A. You choose the Coverage E - personal liability - limit when you buy the policy. The limit on Coverage F - medical payments to others - is usually set at $1000 per injured person.
Where and when is my personal property covered?
Coverage C, the named perils coverage, applies to all your personal property (except property specifically excluded) anywhere in the world. For example, suppose that while traveling, you purchased a dresser and you wanted to ship it home. Your homeowners’ policy would provide coverage while the dresser is in transit - even though the dresser has never been in your home before.
Do I need earthquake coverage? How can I get it?
Direct damages due to earthquakes are not covered under standard homeowners’ insurance policies. And unless you live in an area prone to earthquakes, you probably don’t need it. If you do live in a part of the country with high earthquake activity you may want to consider adding an earthquake endorsement to your homeowners’ insurance policy. This will cover damages due to earthquakes, landslides, volcanic eruptions and other earth movements.
What should I consider when buying homeowners insurance?
First and foremost, buy the amount and type of insurance you need. Remember: if your policy limit is less than 80% of the replacement cost of your home, you will face a "coinsurance penalty," which means you’ll have out-of-pocket expenses to cover costs beyond your policy’s deductible. For example: Your home's estimated replacement value (RCV) is $100,000. The co-insurance clause requires you carry at least $80,000 (80% of your RCV), so you would be underinsured by half if you bought a $40,000 policy. In such a scenario, the company would pay half of a loss less the policy deductible - so if you had a $500 deductible and suffered a $10,000 covered loss, your policy would only pay $4,500.
Also, figure out how much personal property insurance and personal liability coverage you need. Personal property, like a home, should be insured for its replacement value. Personal liability is a bit more subjective, but limits should not be less than those on other liability insurance such as auto. Seek advice from a financial or legal professional if in doubt. Finally, think about the extras you could add to your policy. For example, do you want the personal property replacement cost endorsement or the earthquake endorsement? Finally, once you have decided on the coverage you want, you can decide which insurer you would like to purchase the insurance from. You should also decide whether you would like an insurance agent to help you make decisions or you want to buy the product directly from an insurer without an agent.
What is the difference between an "all risks" policy and a "named perils" policy?
A named perils policy covers losses that are due to only those perils listed in the policy. Those typically include fire, windstorm, hail, and other physical losses. An all risks policy covers losses that are due to any peril except those specifically excluded in the policy. An all risks policy provides broader protection than a named perils policy.
What can I do to lower the cost of my homeowners insurance?
The best thing to do is to shop around. You could find quotes on homeowners insurance that vary by hundreds of dollars for the same coverage on the same home. When you shop, make sure each insurer is offering the same coverage. Many insurers use the ISO policy forms, but this is not always the case. Another way to cut costs is to look for discounts that apply to you. For example, many insurers will offer a discount when you buy both your automobile and homeowners insurance from them. Some insurers offer discounts if you have deadbolt exterior locks on all your doors, or if your home has a security system. Ask your agent or company about discounts. Another easy way to save is to raise your deductible. Increasing your deductible from $250 to $500 will lower your premium, sometimes by as much as five or ten percent. However, you should be sure you have enough cash on hand to cover the larger deductible in case of emergency.
If I have an accident I think is covered under my homeowners policy, what should I do?
Insurance contracts are conditional contracts, which means policyowners have certain responsibilities to meet if a covered loss occurs. Not completing these can result in non-payment by the insurance company for losses that otherwise would have been covered. These include: (1) notifying the insurance company or the agent that a loss has occurred -- this should be done as soon as you discover the loss; (2) protecting the property from further damage and/or making any repairs necessary to prevent further damage; (3) preparing a detailed list of the personal items damaged that contains descriptions, the items’ actual cash value, or their replacement cost if you have added the replacement cost endorsement to your policy; (4) being prepared to show the company and/or the insurance agent the damaged items; (5) completing a statement for the insurance company that explains how the loss occurred -- for example, the time the damage occurred, the cause, etc.
Who pays for my legal defense costs if I am sued?
In the unfortunate event that you are sued, your homeowners’ policy will not only cover the cost of your legal defense, but your insurance company will also provide the legal counsel.
