A home is the single largest and most important purchase that most consumers make in their lifetime. For many, becoming a homeowner is the epitome of fulfilling the American Dream; however, most consumers never discuss the risks, liabilities, and potential downfalls of homeownership. Homeowners insurance protects consumers against financial loss if their home is damaged or destroyed. It also covers liability or legal responsibility for accidents, injuries, deaths, and property damage you or a member of your family causes someone else. Not all types of damage are covered, so it is important to understand the different policies and coverage to get the best possible protection, as well as the cheapest insurance quotes.
Types of Insurance Policies
There are basically two types of homeowners insurance: “Named Perils Insurance” and “Against All Risks” or “All Perils” policies. A named perils policy covers damages to the home caused by risks, perils, events or hazards specifically named, such as fire, wind, hail, flooding, earthquake, hurricane, and theft. An all risk policy, which is the opposite of named perils, covers damages from any cause not excluded in the policy. Common exclusions include flood, earthquake, acts of war, civil riot, falling space debris such as satellite parts, nuclear accident, power failure and owner neglect.
Damage caused by most natural disasters is covered; however, two notable exceptions are flood and earthquake coverage. You must buy two separate policies if you want protection against these exceptions. There is no standard option for home insurance so coverage can vary between different insurance companies and consumers can customize it to their specific needs.
What Is Covered By A Policy?
In most cases, the home, contents and any other structures on the property are covered by the homeowners insurance. A standard insurance option includes the following four items:
- Structure of your home
- This portion of your home policy pays out on a claim to help you repair, rebuild, or replace your house in the case of fire, hurricane, or another listed disaster in your contract; however, it does not cover earthquakes, floods, or wear and tear (like your roof).
- Personal belongings – furniture, clothes, electronics, jewelry, etc
- Most insurance companies only provide coverage for your personal belongings up to 50% to 70% of the total amount of insurance you buy.
- Liability, litigation, or legal protection
- Liability or legal coverage protects you against lawsuits for bodily injury, property damage, or death, caused by you, a family member, or a pet. It pays for lawyers, fees, other costs of defending you in court, as well as settlements and court awards, up to the limit of your policy. Limits normally start at around $100,000, but we recommend around $300,000.
- Temporary living expenses in case you can not inhabit your home due to fire, water damage, or another disaster you are covered by.
Other covered structures include detached garages, workshops or sheds used for storage, but are only covered for 10% of your total insurance policy. Vehicles, even vehicles that are not operational and are used for storage, are not covered by home insurance. The coverage for jewelry, cash and art objects in the home is limited, usually between $500 and $1000. Equipment used for a business in a home is excluded.
What Is Not Covered?
Damage due to any risk excluded by the policy is not covered. While wind and rain damage from a hurricane are covered, storm surge is considered flooding and damage from flooding is normally excluded. Damage that is intentionally caused by the insured person or family member living in the home is not covered and damage due to deferred maintenance may be excluded. An example would be damage to the home or its contents from a roof that leaked over a period of time because the homeowner failed to make repairs.
Replacement Cost vs. Actual Cash Value
Homes and their contents depreciate in value over the years and an actual cash value (ACV) insurance policy pays damage claims at a depreciated rate. For example, a metal roof has a 100 year life expectancy and it is damaged after 25 years. The insurer would pay 75% of the cost of repairs since the roof has depreciated in value by 25%. Replacement cost insurance pays the full cost for repairs or replacement of the same metal roof without deducting for depreciation.
Supplemental Government Coverage
Flood damage is not covered by homeowners insurance, but the U.S. Government offers special flood insurance at reasonable rates. In states where earthquakes or volcanoes present a risk, state governments may also have special, single risk, supplemental insurance to pay for damages caused by these natural disasters. Some states, including Pennsylvania and Illinois, offer special insurance for damage caused when houses built on top of old coal mines are damaged by sinking or shifting earth.
Scheduling Valuable Items
Although the amount of contents coverage on homeowners insurance for certain items, like jewelry, is limited, consumers can schedule the items and pay an additional premium. Scheduled items must be appraised and coverage is based on the appraised value. Scheduled items are covered both in and outside the home. For example, if jewelry is stolen during a robbery at work, home insurance will still pay for replacement of the jewelry. Damage to contents being moved to another location is also included.
Liability and Medical Payments
If a guest in your home is injured on your property, medical payments coverage will pay their medical bills up to the policy limit. Liability insurance pays for claims for damages caused by the insured person’s negligence. If a homeowner fails to remove a dead tree from his property and a branch falls and damages a neighbor’s fence, the damage is covered by liability insurance. The insurer will provide a defense for lawsuits arising from accidents on the property. Damages or injuries arising from business use of the property are excluded under homeowners liability insurance.
Actual Cash Value Insurance
The amount of coverage on an actual cash value policy is based on an appraisal of the home. The coverage for the home’s contents is usually based on a percentage of the face value. If a homeowner makes substantial improvements to the home which raise its value, they must have the home reappraised and increase the insurance coverage. The insurance company will not pay more than the face value of the policy if the home has increased in value due to market conditions or improvements.
Replacement cost coverage is based on the square footage of the home and the cost to rebuild the house in its current location. The home insurance company determines the amount of the policy. While depreciation does not apply to the replacement cost option, improvements like custom kitchens or baths should be reported to the insurer since this can raise the expense of rebuilding the house if it was destroyed. Consumers should review their insurance at least every five years to make sure they have the right amount of protection.
All property insurance, whether it is on a car, a commercial building or a home, has a deductible. This is the amount of damage that the property owner must pay before the insurance company covers a claim. Most homeowner’s insurance policies have a deductible of either $500 or $1,000. If a storm causes $1,025 in damage to a home’s roof, on a policy with a $1000 deductible the insurance company would pay $25. If damages from a covered risk are less than your deductible, there is no need to file a claim.
Loss of Use Coverage
Home policies pay for living expenses when damage from a covered risk renders the home uninhabitable. This coverage will pay for lodging, food and some other expenses that the insured person would not have to pay if they were living in the home. There are usually limits on the amount paid for lodging and restaurant meals and if a house is destroyed, the time for which expenses are paid may be limited. Those claiming loss of use must keep accurate records and proof of their expenses.
Standard insurance policies cover removal of debris as part of a claim for a covered loss. If a wind storm knocks down a 100 year old oak tree and it hits the home, insurance will pay for clean up and removal of the tree and repairs to the house. If the tree falls in the yard and does not cause damage to the home or another covered structure, homeowners insurance does not pay for removal of the debris. Damage to landscaping, trees and land surrounding a house are not covered.
Choosing The Right Insurance For A Home
For most homeowners, a replacement cost policy is the best option since it pays the full amount, less the deductible, for repairs to the home. The actual cash value policy is less expensive to buy, but will cost more if the house is seriously damaged since the insurer pays for repairs at a depreciated rate. New home buyers can opt for purchase price home insurance which is usually the least expensive type, but if the home was purchased for less than market value, damage to the home may not be fully covered by the policy limit.
The easiest way to compare the rates of different policies is to visit an insurance website that offers homeowners insurance quotes from multiple carriers so consumers can make side by side comparisons. It is also possible to compare the cost of actual cash value vs. replacement cost policies and to compare the rates of named perils home insurance to all risk insurance. Since coverage options differ between companies, it is also smart to compare the provisions of when comparing rates.
To get the best insurance quotes, a consumer will have to fill out a short questionnaire with basic information. Questions will include whether the home is a one or two story structure, if there is an attached garage, the number of bedrooms and bathrooms and whether the house has smoke alarms or a security system. Some forms may ask for the square footage of the structure and the size of the lot. It is also necessary to know the market value or purchase price of the house.
A homeowners insurance quote can help consumers find the best insurance for their home at the most affordable price. The cost of repairing or replacing a home that is damaged or destroyed can be staggering and a good insurance policy is the best way for homeowners to protect themselves from financial loss.