Homeowners Insurance Basics

Homeowners insurance provides financial protection against disasters. It is a package policy, which means that it covers both damage to property and liability, or legal responsibility, for any injuries and property damage policyholders or their families cause to other people.

This includes damage caused by household pets. Damage caused by most disasters is covered but there are exceptions. Standard homeowners policies do not cover flooding, earthquakes or poor maintenance.

Flood coverage, however, is available in the form of a separate policy both from the National Flood Insurance Program (NFIP) and from a few private insurers. Earthquake coverage is available either in the form of an endorsement or as a separate policy.

Most maintenance-related problems are the homeowners’ responsibility. A standard homeowners insurance policy includes four essential types of coverage. They include:

1. Coverage for the Structure of the Home

This part of a policy pays to repair or rebuild a home if it is damaged or destroyed by fire, hurricane, hail, lightning or other disaster listed in the policy. It will not pay for damage caused by a flood, earthquake or routine wear and tear.

Most standard policies also cover structures that are not attached to a house such as a garage, tool shed or gazebo. Generally, these structures are covered for about 10 percent of the total amount of insurance on the structure of the home.

2. Coverage for Personal Belongings

Furniture, clothes, sports equipment and other personal items are covered if they are stolen or destroyed by fire, hurricane or other insured disaster. Most companies provide coverage for 50 to 70 percent of the amount of insurance on the structure of a home.

This part of the policy includes off-premises coverage. This means that belongings are covered anywhere in the world, unless the policyholder has decided against off-premises coverage. Expensive items like jewelry, furs and silverware are covered, but there are usually dollar limits if they are stolen.

To insure these items to their full value, individuals can purchase a special personal property endorsement or floater and insure the item for its appraised value. Trees, plants and shrubs are also covered under standard homeowners insurance generally up to about $500 per item.

Perils covered are theft, fire, lightning, explosion, vandalism, riot and even falling aircraft. They are not covered for damage by wind or disease.

3. Liability Protection

Liability coverage protects against the cost of lawsuits for bodily injury or property damage that policyholders or family members cause to other people. It also pays for damage caused by pets. The liability portion of the policy pays for both the cost of defending the policyholder in court and any court awards up to the limit of the policy.

Coverage is not just in the home but extends to anywhere in the world. Liability limits generally start at about $100,000. However, experts recommend that homeowners purchase at least $300,000 worth of protection.

An umbrella or excess liability policy, which provides broader coverage, including claims for libel and slander, as well as higher liability limits, can be added to the policy. Generally, umbrella policies cost between $200 to $350 for $1 million of additional liability protection.

Homeowners policies also provide no-fault medical coverage. In the event that someone is injured in a policyholder’s home, the injured person can simply submit medical bills to the policyholder’s insurance company. In this way expenses are paid without a liability claim being filed. This coverage, however, does not pay the medical bills for the policyholder’s own family or pets.

4. Additional Living Expenses

This pays the additional costs of living away from home if a house is inhabitable due to damage from a fire, storm or other insured disaster. It covers hotel bills, restaurant meals and other extra living expenses incurred while the home is being rebuilt.

Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20 percent of the insurance on a house. The coverage can be increased for an additional premium.

Some companies sell a policy that provides an unlimited amount of loss-of-use coverage, but for a limited amount of time. Additional living expense coverage also reimburses homeowners who rent out part of their home for the rent that would have been collected from a tenant if the home had not been destroyed.

Types of Homeowners Insurance Policies

There are several types of homeowners insurance policies that differ in the amount of insurance coverage they provide. The different types are fairly standard throughout the country. However, individual states and companies may offer policies that are slightly different or go by other names such as “standard” or “deluxe.” People who rent the homes they live in have specific renters policies.

The various types of homeowners insurance policies are listed below.

HO-3: This is the most common policy and protects the home from all perils except those specifically excluded.
HO-1: Limited coverage policy This “bare bones” policy provides coverage against the first 10 disasters. It is no longer available in most states.
HO-2: Basic policy A basic policy provides protection against all 16 disasters. There is a version of HO-2 designed for mobile homes.
HO-8: Older home Designed for older homes, this policy usually reimburses for damage on an actual cash value basis, which means replacement cost less depreciation. Full replacement cost policies may not be available for some older homes.
HO4: Renter Created specifically for people who rent the home they live in, this policy protects personal possessions and any parts of the apartment that the policyholder owns, such as newly installed kitchen cabinets, against all 16 disasters.
H0-6: Condo/Co-op A policy for people who own a condo or co-op, it provides coverage for belongings and the structural parts of the building that they own. It protects against all 16 disasters.

What Type of Disasters Are Covered?

Most homeowners policies cover the 16 disasters listed below. Some “bare bones” policies only cover the first 10:

Fire or lightning
Windstorm or hail
Explosion
Riot or civil commotion
Damage caused by aircraft
Damage caused by vehicles
Smoke
Vandalism or malicious mischief
Theft
Volcanic eruption
Falling object
Weight of ice, snow or sleet
Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning, or automatic fire-protective sprinkler system, or from a household appliance
Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system, an air conditioning or automatic fireprotective system
Freezing of a plumbing, heating, air conditioning or automatic, fireprotective sprinkler system, or of a household appliance
Sudden and accidental damage from artificially generated electrical current (does not include loss to a tube, transistor or similar electronic component)

Standard Homeowners Policy Exclusions

Standard homeowners policies exclude coverage for flood, earthquake, war, nuclear accident, landslide, mudslide, sinkhole. Some of these exclusions are discussed below.

1. Floods

Flood damage is excluded under standard homeowners and renters insurance policies. Flood coverage, however, is available in the form of a separate policy both from the National Flood Insurance Program (NFIP) and from a few private insurers.

Additional information on flood insurance can be found on the FloodSmart.gov Web site or by calling 888-379-9531. For coverage over and above the $250,000 limit for property and $100,000 for contents provided by the NFIP, excess flood insurance is available from private insurance companies.

(See Topic on Flood Insurance on page 47 for further information.) Tsunamis cause flood damage and are therefore only covered by a flood policy.

2. Earthquakes

Earthquake coverage can be a separate policy or an endorsement to a homeowners or renters policy. It is available from most insurance companies. In California, it is also available from the California Earthquake Authority, a privately funded, publically managed organization. In earthquake prone states like California, the policy comes with a high deductible.

3. Damage Resulting from “Faulty, Defective or Inadequate” Maintenance, Workmanship, Construction or Materials

Defective products can include construction materials. An insurance policy will not cover damage due to lack of maintenance, mold, termite infestation and infestation from other pests. It is the policyholder’s responsibility to take reasonable precautions to protect the home from damage.

Levels of Coverage

There are three coverage options.

1. Actual Cash Value

This type of coverage pays to replace the home or possessions minus a deduction for depreciation.

2. Replacement Cost

This type of coverage pays the cost of rebuilding or repairing the home or replacing possessions without a deduction for depreciation.

3. Guaranteed/Extended Replacement Cost

An extended replacement cost policy pays a certain percentage, generally 20-25 percent, over the coverage limit to rebuild the home in the event that materials and labor costs are pushed up by a widespread disaster, for example.

For example, if homeowners take out a policy for $100,000, they can get up to an extra $20,000 or $25,000 of coverage. Some companies offer a guaranteed replacement cost policy, which pays whatever it costs to rebuild the home as it was before the fire or other disaster, even if it exceeds the policy limit.

This gives protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It generally does not cover the cost of upgrading the house to comply with current building codes.

However, an endorsement (or an addition to) the policy called Ordinance or Law can help pay for these additional costs. Guaranteed and extended replacement cost policies are more expensive; but can offer excellent financial protection against disasters. This type of coverage, however, may not be available in all states or from all companies.

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