Home Insurance: Back to the Basics

Home Insurance

Insuring your home and valuables is one of the most important things you can do to secure your financial well-being.  Unlike car insurance, home insurance is not mandatory, and there are multiple options for coverage.  Home policies are broken down into eight types, each of which provides protection against different sources of risk, called perils.  These perils are specifically enumerated:

  1. Fire and Lightning
  2. Wind and Hail
  3. Smoke
  4. Civil Unrest
  5. Vehicles and Aircraft
  6. Explosion
  7. Theft
  8. Vandalism
  9. Broken Windows
  10. Volcanic Eruption
  11. Personal Liability
  12. Weight of Snow or Sleet (primarily roof and support damages)
  13. Pipe Freezing
  14. Electrical Damage
  15. Water Heater
  16. Water Damage from plumbing or HVAC system

Each homeowner’s policy will cover these perils differently:

  • HO 0: Also called a Dwelling Fire policy, this policy is limited to perils 1 through 6 and only covers the building itself.  Personal property is not covered by this policy, making it a less expensive option, and any injuries sustained by someone on your property are not covered.  This is the most basic policy option.
  • HO 1: This form covers damages caused by the first 11 perils named above.  It adds personal property and medical liability to its list of coverages and is a much more complete package than the Dwelling Fire option.  While still limited, this Basic Form does serve as an inexpensive comprehensive protection plan.
  • HO 2: The Broad Form option is similar to the HO1 in that it is also considered a “named perils” policy.  The difference is that this form includes damages caused by all 16 of the perils listed above, making it a slightly more complete option.
  • HO 3: The Special Form is the most common policy type due to its coverage and pricing.  While more expensive than the aforementioned policies, it provides coverage on an “all risk” basis.  This means that any damage occurring to the house, its contents, or to people in the house is covered, no matter what the source of damage, unless specifically excluded in the policy.  This provides exceptional comprehensive coverage for homeowners.
  • HO 4: This can be thought of as the opposite of an HO 0 policy since it covers everything except the structure.  Medical liability and contents are covered, generally on an “all risk” basis, while the structure is excluded.  This Tenants Form is commonly known as Renter’s Insurance since it is almost exclusively used by apartments and rental homes where the building owner will insure the structure themselves.
  • HO 5: This is a very expensive policy type known as the Premier Form and can be thought of as an HO 3 policy on steroids.  This policy broadens coverage for the structure and contents to nearly every possible peril.  It is a policy that is seldom used due to its cost and the infrequency of damages that are caused by something excluded from the HO 3 form.
  • HO 6: The Condominium Unit Form is similar to the HO 4 and essentially covers your portion of the building.  Specifically, it covers contents and liability, like the HO4, but also covers the walls, floors, and ceiling of your unit.
  • HO 7: This is the form specifically made for mobile and manufactured homes. These policies cover the unit itself, any permanently attached structures, and have content coverages that can vary with the value of your personal belongings.
  • HO 8: The Older Home Form is specifically designed for, fittingly, old houses.  The reason that these are dealt with separately is that the cost of replacing the home in the event of a total loss does not match the depreciated market value.  Since the valuations do not match up, these houses must be underwritten individually to determine an appropriate coverage amount.

Now that you know the eight different types of home policies and what they cover, let’s look at the basic sections and layout of a home policy:

  • Section I:  This deals with the damages caused to the home itself and the things in it.

o   Coverage A:  This will cover the entire replacement cost of your home or dwelling and is not included in HO4 forms.  Agents will plug all of the materials and size of your home, along with any upgrades, into a program called a Replacement Cost Estimator which will give an estimate for the cost of rebuilding your home from scratch, including both materials and labor.  In general, this will be higher than the market value of your home due to the depreciation of real estate as it ages.

o   Coverage B:  This covers other structures on your property and is usually automatically added to a policy at a certain percentage of Coverage A.  It covers losses on things like detached garages, sheds, barns, and guest houses.  If these structures are worth more than what is automatically included in your policy, they will need to be added to the Additional Coverages section.

o   Coverage C:  This covers any and all possessions in the house and is proportional to your home value, so it may not cover your entire need.  If your house contains valuable art, instruments, furs, jewelry, or other high-value items, they should be added individually to your policy in the Additional Coverages section.

o   Coverage D:  Where would you live if your house is being repaired or replaced?  This section gives the limits for Loss of Use and can cover temporary hotel expenses.  It is important to note that this excludes loss of income if you run a business out of your home; that sort of loss would have to be covered by a business owner’s policy.

o   Additional Coverage:  This section is where all items with a value higher than the personal property limits are listed.  Some of these items may need an appraisal to determine appropriate value.

o   Exclusions:  Perils like earthquakes and flooding are listed here as named exclusions to the policy coverage.  This is primarily for “all risk” policies where every occurrence is covered except for those specifically listed in this section.  Flood and earthquake coverage is always excluded from home policies and both must be insured against through separate policies.

  • Section II:  This section covers you for liability claims and is excluded in some of the most basic home forms.

o   Coverage E:  This covers your responsibility to pay for damages to the property of others and bodily injury when losses occur on your property.  This can include lawsuits and medical payments from dog bites, pool injuries, slips and falls, and any other expense incurred due to an incident at your home.

Beyond these basic home policy types and guidelines there can be subtle or major differences in policies depending on the insurance company you use.  Let your agent know exactly what you need covered so they can find the policy that best fits your needs.

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