Anyone who owns a house or a residential property must have come across the term ‘homeowner’s insurance’ while purchasing or taking mortgage for the house from banks or financial institutions.
When a calamity or accident strikes a house, the loss or damages can be paid by the insurance companies, in case the house is properly insured against such perils.
What is a Homeowner’s insurance?
Homeowner’s insurance is also known as home insurance. In the US, Homeowner’s insurance is better known in the real estate business, by its abbreviated form HOI.
Homeowners insurance provides financial protection in the event of a disaster or accident involving an insured home. It is a type of property insurance that covers the following:
- Losses and damages to an individual’s house
- Losses and damages to assets in the home
- Liability coverage against accidents in the home or on the property
Thus, as can be seen from above; homeowner’s insurance policies are generally “package policies”. This means that with a single set of premium, it covers not only the damages to the property and assets inside the house; but also the liability that arises out of any injuries and property damage to others caused by the members of the family including household pets.
For example, a homeowner’s policy will cover damage to the house caused by an uncontrolled vehicle ramming into the house. It will also cover the losses, in case a TV or a washing machine is stolen from the house. To give one more example, if you have homeowner’s insurance and your pet dog bites a visitor or a guest, the medical and legal expenses will also be covered by the homeowner’s insurance.
More about Home Insurance Policies
The home insurance policy is a legal contract between the insurance company and the insured. It is a contract of indemnity and makes good the loss that the insured may face. The cost of homeowner’s insurance often depends on what the replacement cost and which additional endorsements or riders are attached to the policy.
A homeowner’s insurance policy can cover damage caused by such perils as fire, windstorms, hail, lightning and vandalism. Typically, damage caused by floods, earthquakes, or war are excluded from coverage; but additional optional coverage and policies are available to cover damage due to such perils. Insurance payment is adjusted by applying an inflation factor or a cost index to correctly reflect the cost of replacement.
In the U.S. standardized policy forms are used that divide the coverage into several categories. Within these categories, coverage is provided as a percentage of the primary coverage, which is the coverage for the main residence.
What is Covered in a Home Insurance Policy?
There are several aspects of Homeowner’s Insurance policy, which a homeowner must be very well acquainted with. A standard homeowner’s insurance policy includes the following coverage:
(a) Dwelling Coverage
Dwelling coverage forms the basis of all homeowner’s insurance policies. It is concerned with the bare structure of the dwelling unit. The coverage for the structure includes the walls, floors, built-in appliances and ceilings, as well as any attached structures such as a garage, balcony etc. It also covers a variety of perils such as fire, theft, vandalism, hail, earthquake etc. the perils list can be enhanced depending on the requirements. The compensation in case of total loss, depending on the policy limit, can be sufficient to rebuild the home.
(b) Contents Coverage
Contents coverage is needed to protect household items including household appliances and equipments, furniture and clothing in the home. In case these are damaged due to perils which are covered under the insurance policies, then amount that equals the value of these items is given by the insurer.
(c) Personal Liability Coverage
Personal liability pays for damages that occur from certain accidents. Personal liability coverage consists of damage coverage caused by bodily injury. This coverage kicks in when a guest sustains an injury in the insured home.
(d) Optional additional Home Insurance Coverage:
A standard policy may not cover everything which a homeowner seeks to be protected against. Therefore, it is sometimes wise to customize your policy by having additional coverage to suit the specific situation and to cover more contingencies. These optional, add-on coverage cover those perils that are not covered by standard home insurance policies. A few of these are given below:
Flood insurance: It protects the house and belongings from flood-related damages. This coverage is very useful in case the house is in a flood-prone area. It is a separate policy with its own deductible.
Earthquake insurance: It covers the house in case of damages caused by earthquake, and is particularly useful in case of houses in a seismic or earthquake-prone zone. It is a also a separate policy with its own deductible.
Replacement cost plus insurance coverage: Often, in case of old houses, the insurance cover is reduced to the extent of depreciated value of the house. Thus it is difficult to rebuild the home with insurance money in case of total loss. This insurance fills in the gap caused by depreciation; and pays for the full replacement cost.
Other structures insurance: This insurance covers the unattached structures which are not attached to the main building, such as garages and gazebos.
Personal umbrella liability insurance: It provides additional coverage for physical injuries, or property damage to others, beyond the policy limits of the main homeowners policy.
Medical payments coverage: It provides for medical expense resulting from an accident on the insured property. This coverage is for the immediate medical treatment of guests and visitors on the insured premises, irrespective of whose fault it may be.
Ordinance or law insurance: It is very useful in case of older homes, where it is required to rebuild the house to comply with current building codes after a covered loss.
Perils Covered by Homeowner’s Insurance
Home insurance policies normally cover the property against the perils listed below.
Basic-form Covered Perils: These are the following;
- Windstorm or hail
- Aircraft or vehicle collision
- Riot or civil commotion
Broad-form Covered Perils: These broad-form perils expand the basic form by adding 6 more covered perils. These are ‘named perils’ which must be specifically listed to receive coverage.
- Burglary, break-in damage
- Falling objects
- Weight of ice and snow
- Freezing of plumbing
- Accidental water damage
- Artificially generated electricity
Special-form Excluded Perils: Special ‘all risk’ coverage is the most inclusive of the three options. The specialty of difference special form policies is that they provide comprehensive coverage to all losses unless specifically excluded. Therefore, all unlisted perils are covered perils. But in case of calamities caused by something on the on the exclusions list, no coverage is applicable.
Special-form excluded perils are:
- Ordinance of law
- Power failure
- Nuclear hazard
Types of Homeowners Insurance Policies
Homeowner’s insurance policies came into existence in the 1950s. The Insurance Services Office (ISO) and the American Association of Insurance Services (AAIS) developed the standard forms. These are now used in homeowner’s insurance policies. The following eight standard policy types are offered by insurance companies:
- Basic Form, HO-1
It is the basic limited policy form. It provides coverage on a home against 11 listed perils as compared to the 16 perils covered by standard policies. The exceptions include floods, earthquakes etc.
This policy also does not cover is the personal liability for those injured on your property, and your belongings. Many mortgage companies find HO-1 policies inadequate. This is the reason that HO-1 policies are not widely used. In fact, most states no longer offer this type of coverage
- Broad Form, HO-2
It is a more advanced form of HO-1 that provides coverage on a home against all 16 listed perils, which includes all 11 on the HO1.
However, it is a basic policy that requires lower premiums and also provides lower coverage. The HO-2 is a ‘named peril’ policy, which lists the events that would be covered. This also means that damages caused by events other than those listed on the policy, will not be covered.
- Special Form, HO-3
This is the most popular type of homeowners insurance. This is the most comprehensive form used for single-family homes. The policy provides ‘all risk’ coverage on the home with some perils excluded, such as earthquake, flood, landslide or mudslide, nuclear accident and sinkholes. Therefore, this insurance covers all disasters except those that are specifically excluded. This means that the home is protected against all perils other than those specifically mentioned in the exclusions.
The HO-3 also insures attached structures, such as a garage, and also the belongings. It also includes personal liability coverage if some is accidentally injure or their property is damaged.
- Contents Broad Form, HO-4
It is a renters’ insurance policy and covers the belongings against all 16 perils. It only covers personal belongings and not the building, as it is the responsibility of the landlord.
HO-4 policies also provide liability insurance in case someone is injured in the rented your home. It also provides living expenses in case the tenant needs to stay elsewhere temporarily while the rental property is being repaired or renovated.
- Comprehensive Form, HO-5
This is similar to a HO-3 policy, but it is more comprehensive, and provides better protection for personal belongings. An HO-5 insures belongings against all causes of loss that are not specifically excluded. In HO-3 insurance, only those causes are covered which are named on a specified list, whereas HO-5 form financially protects against all perils unless the policy specifically excludes them in writing.
HO-5 policy is generally available to those who own a new, well maintained home within close distance to fire protection services.
- Unit Owners’ Form, HO-6
It is a condominium insurance policy similar to HO-3 for condominium owners. It covers the personal property, walls, floors and ceiling of condo owners against all 16 perils. It also includes liability insurance. The building structure and the rest of the condo is covered by a separate policy purchased by the condominium association.
- Mobile Homes Form, HO-7
It is similar to HO-3. It is especially applicable to mobile homes or manufactured homes.
- Modified Coverage Form, HO-8
This is an insurance policy especially designed for the owner-occupied older home whose replacement cost far exceeds the property’s market value. It is similar to HO-3, but it has better provisions to suit older homes. It is especially used for historic homes and registered landmark dwellings. As the older homes are not eligible for full replacement cost insurance, so the reimbursement for damages is based on the replacement cost minus depreciation.
In case the home is not eligible to be covered under any one of the homeowners insurance policy forms detailed above, it can still be insured. This is called a DF-1 or fire and extended coverage policy. It offers very limited coverage. The DF-1 policy form usually covers such perils as, fire and lightning; windstorm and hail; explosion; riot or civil commotion; aircraft; vehicles; and smoke.
A home is one’s castle. It is a safe haven for the homeowner where he can find peace, comfort and safety. It is an institution in itself. Here people raise their families and spend a lifetime. A home is the most cherished possession for anyone.
Every homeowner should be aware about how home insurance can help protect their paradise from external and unseen calamities. It is difficult to rebuild a house again in case of serious mishaps. This is where home insurance becomes a vital life-saver. Every homeowner must educate himself about the benefits and deductible associated with home insurance. It is also important to choose the right coverage. Hope you found this article useful, as a homeowner. In case you wish to add or share your experience and piece of wisdom, you are encouraged to write in the ‘Comments’ page.