Home. It is a powerful word. While a house (or other dwelling) is often the largest single item of value that a person or family will own, it isn’t just a physical structure for most people. It protects us from the elements, shelters our children and hosts our celebrations; the home is almost like a member of the family. Both the financial significance and the emotional connection is why it is critical to purchase adequate homeowner’s insurance.
Homeowner’s insurance is also known as hazard or home insurance (often abbreviated as “HOI”) and is used to provide this vital level of protection. In addition to the building, homeowner’s insurance also covers personal possessions that may be inside or on the property as well as personal injury liabilities resulting from accidents on the property. The coverage may also extend coverage over a larger area for the policyholder in certain circumstances. Homeowner’s insurance offers you the peace of mind that you will be made whole should something occur to your home.
While homeowners insurance is a relatively straightforward concept, variations between policies exist and you will need to understand these differences in order to make an informed decision.
While insurance has existed for thousands of years, homeowner’s insurance that protects against many threats is a relatively new invention, only coming into existence in the 1950s. Prior to the 1950’s individual threats, such as floods and fire, were insured separately and a person had to buy multiple policies to achieve security against potential disasters. A number of laws were enacted that reformed the insurance industry to better meet homeowners’ needs, which allowed for a multiple-line policy, which means that the insurance covers both property and liability through the same policy. While the legislative reforms resulted in the ability to offer a multiple-line policy, policies varied greatly until the 1970’s at which time a private company (the Insurance Services Office) established a standardized policy that was widely adopted and largely remains in use today.
The standardization that resulted from the emergence of the Insurance Services Office has resulted in eight standard policies. If you are not offered one of these standard policies read the fine print of the contract to see how it deviates from the normal policy (be sure to read the fine print on any policy for that matter).
The most popular policy is HO1, also known as the Basic Form Homeowner Policy. The coverage for this insurance is limited to 11 line items (each of which is explicitly stated in the policy), including fire or lightning, vandalism, broken glass, hail or windstorms, riots, volcanic eruption, smoke damage, theft, and personal liability. The only two major natural disasters that are not covered by the HO1 policy are earthquakes and floods. A more complete policy that includes earthquakes and floods (and several other loss events) is the Broad Form Homeowner Policy, also called the HO2 policy.
While the HO1 and HO2 policies are more standard, many insurance companies also commonly offer the HO3 variation. The difference between the HO3, or Special Form Homeowner Policy, and the HO1 and HO2 policies is that it offers a line by line list of the perils that are excluded from coverage. Flood and earthquake protection are explicitly listed as not covered by a HO3 policy. Choosing a policy that allows you to define events that you don’t want to protect against allows you to lower the cost of the policy.
Similar to the HO3, the HO5 and HO7 policies will provide a line item list of threats that are not covered by the policy. Anything not listed on the policy is covered. However, the HO5 and HO7 policies extend coverage significantly (there are much fewer items listed for exclusion). Pets, pools, trampolines, etc. may all be covered by the Premier Homeowner Policy types (HO5 and HO7). Despite the standardization, there are subtle, but significant variances between the policies offered by different insurance providers. It is important to compare the insurance quotes closely to understand the differences and to understand how those differences affect the premium.
The remaining three types of homeowner insurance are used in specific situations. The H04 policy is called Renters’ Insurance and does not protect the residence, but rather the possessions that a tenant chooses to keep in the property. Most H04 policies require that a tenant list all of the items of value at the time of signing. In the case of damage to the possessions, this list will stand as a reference to what is covered by the policy. The H06, or condominium, policy is one that is designed specifically for owners of condominium properties. For older houses that would cost more to replace than the market value of the property, the HO8 form is used to give a modified coverage.
To reiterate, while standardization has greatly improved access to quality homeowner’s insurance, and has made comparing insurance quotes much more straightforward, there are still significant differences among policies. It is very important to understand exactly what is being offered to you and to request several quotes to make sure you are only buying insurance that would benefit you. There’s no sense purchasing liability coverage related to a pool if you don’t have one.
Classes of Homeowners Insurance
For each policy, there are typically 5 to 6 classifications of coverage. These are based on standard Insurance Services Office or American Association of Insurance Services forms. The first three coverages, A, B, C and D relate to property insurance. The last two coverages (E and F) are for liability insurance.
- Coverage A – Dwelling: This insures the value of the dwelling itself, though it does not insure the land the dwelling is on. In order to guard against inflation and fluctuation in the cost of replacing the dwelling, a coinsurance clause is generally inserted that provides for full replacement (up to policy limits) as long as insurance has been purchased for up to 80% of the cost of the dwelling.
- Coverage B – Other Structures: This insurance covers damage to other structures on the property as long as they are not related to business. The default insurance policy limits for other structures are normally limited to a percentage of the main dwelling (between ten and twenty percent). However, additional coverage can be purchased using a rider (otherwise known as an endorsement).
- Coverage C – Personal Property: Insurance for personal possessions that are located on the property (coverage may extend off the property in certain situations). The coverage is against theft of damage, but there are loss limits on certain types of personal property, such as cash or jewelry. Specific riders can be purchased to expand coverage in these areas. Many insurance companies tie the liability associated with Coverage C to that of Coverage A. Depending on your situation (the relative value of your dwelling to your personal property), this may be more or less coverage than desired.
- Coverage D – Loss of Use: Additional Living Expenses: Reimburses the policyholder for living expenses that are associated with a loss event that prohibits the policyholder from living in the dwelling. In other words, if you are unable to live in your home, Coverage D reimburses you for the cost of alternate accommodations. This insurance may also cover loss of income from a rental property.
- Coverage E – Personal Liability: This insurance covers homeowners from loss in the event that you are found to be legally responsible for an injury to others. This coverage generally extends to accidental injuries and does not apply to intentional actions. The coverage may include legal defense fees and damages, but will vary by policy.
- Coverage F – Medical Payments to Others: As with personal injury insurance, this covers you against medical liabilities resulting from accidental injury where you are found legally responsible. However, this insurance does not apply to the policyholder or residents (those events fall into the category of health insurance). Accidental injury related to business activities are generally not covered by this insurance either.
Additional Coverage: There are numerous other insurance features that can be purchases as part of a homeowner’s insurance policy, including damage to landscaping, removal of debris from storms, identity theft, loss assessments, etc. It is generally a good idea to settle on a level of A through C Coverage levels, compare insurance quotes to find the most affordable policy with a provider you trust and then price out the additional features.
Exclusions: Any items that are specifically excluded from an open perils policy will be listed in the Exclusions section of the policy. Any event can be excluded, but the most common include events such as wars, nuclear hazards, intentional damage or destruction and earth movements.