Homeowners insurance basics

Homeowners insurance is usually a “package policy,” meaning it can combine property coverage and liability coverage in one policy. In general, it may help pay for damage to the home, damage or theft of personal belongings, certain additional living expenses, and legal responsibility if someone is injured or property is damaged because of the policyholder or covered household members.

What does a standard homeowners policy usually include?

Most standard homeowners policies include four major categories of protection:

• Dwelling coverage: Helps pay to repair or rebuild the home if it is damaged by covered events such as fire, lightning, hail, wind, or other covered perils listed in the policy.
• Personal property coverage: Helps cover belongings such as furniture, clothing, appliances, and electronics if they are damaged or stolen under covered circumstances.
• Liability protection: May help pay legal defense costs, settlements, or judgments if the policyholder is legally responsible for covered injuries or property damage to others.
• Additional living expenses: May help pay extra costs such as hotel stays, meals, or temporary housing if the home becomes uninhabitable because of a covered loss.

What is usually not covered?

A standard homeowners policy does not cover every type of loss. Common exclusions often include:

• Flood damage: Most homeowners policies do not cover flooding. Flood insurance is usually purchased separately through the National Flood Insurance Program or a private flood insurer.
• Earthquake damage: Earthquake coverage usually requires a separate policy or endorsement.
• Wear and tear: Routine maintenance, gradual deterioration, neglect, and normal aging of the home are generally not covered.
• Certain water backup losses: Sewer or drain backup may require a separate endorsement.

Common homeowners insurance policy types

Homeowners insurance forms can vary, but common examples include:

• HO-3: A common homeowners policy form for owner-occupied homes. It generally covers the dwelling on an open-perils basis, while personal property is often covered for named perils.
• HO-5: A broader form that may provide open-perils coverage for both the dwelling and personal property, depending on the insurer.
• HO-4: Renters insurance. It usually covers personal property and liability, not the building structure.
• HO-6: Condo insurance. It typically covers personal property, liability, and parts of the unit not covered by the condo association’s master policy.
• HO-8: Designed for some older homes where replacement cost may be higher than market value or where standard coverage is harder to obtain.

Actual cash value vs. replacement cost

Actual cash value: Pays based on the value of the damaged property at the time of loss, usually after subtracting depreciation. This may result in a lower payout than the cost to buy a new replacement.

Replacement cost: Helps pay the cost to repair or replace damaged property with similar new property, without subtracting depreciation, subject to policy limits and conditions.

Extended or guaranteed replacement cost: Some insurers offer endorsements that may provide extra protection if rebuilding costs exceed the dwelling limit. Availability, limits, and rules vary by insurer and location.

References

1. Insurance Information Institute, “What is covered by standard homeowners insurance?” https://www.iii.org/article/what-covered-standard-homeowners-policy
2. Insurance Information Institute, “Homeowners Insurance Basics.” https://www.iii.org/article/homeowners-insurance-basics
3. NAIC, “Homeowners Insurance.” https://content.naic.org/consumer/homeowners-insurance.htm
4. FEMA, “Flood Insurance.” https://www.fema.gov/flood-insurance
5. NAIC, “What’s the Difference Between Actual Cash Value Coverage and Replacement Cost Coverage?” https://content.naic.org/article/whats-difference-between-actual-cash-value-coverage-and-replacement-cost-coverage