What Does Homeowners Insurance Cover?
Homeowners insurance (or Home Insurance) is the standard type of insurance used to protect your home and personal property from storm damage.
- What does home insurance typically cover?
- What types of storms or damage are not covered?
- What questions should I ask when I purchase home insurance?
This article will answer these questions and provide links to additional information and resources.
Typical Categories of Coverage
Most homeowners insurance policies cover both property damage and liability for injury to others on your property due to an accident or your negligence. While we may touch on liability coverage (Coverage E) from time to time, this website and this article are focused on using insurance to protect and repair property damage from severe storms.
Most policies provide property damage coverage in the following categories.
The property coverage included in your Homewoners insurance protects you from damage to your home, your personal property contained within your home, loss of the use of your home after a storm (living expenses), as well as other structures on your land and additional personal possessions.
For more details, read What Does Homeowners Insurance Cover? or review common insurance terms and definitions.
Coverage D – Loss of Use/Additional Living Expenses
Many people do not realize they have Coverage D. Coverage D protects you from additional living expenses incurred if you are not able to live in your home while its being repaired. More information about Coverage D.
Coverage E – Personal Liability and Medical Expenses
Coverage E protects you from lawsuits filed against you by visitors injured on your property. More information about Personal Liability Coverage E.
With an All Risk or Special Form Policy, the policy will state specific perils that are not covered. See the next section for more information on common exclusions.
Named Perils vs. All Risk Policies: Common Coverage and Exclusions
HO1 and HO2 home insurance policies are named peril forms. Named perils means that the types of damage the insurance covers are expressly stated in the policy.
Named peril policies include coverage for common occurrences such as fire, wind damage, hail, vandalism, smoke, falling objects, explosions and more. Typically, HO1 policies list 11 perils and HO2 policies list 17 perils. If you have one of these types of home insurance policies and a peril is not expressly listed, it’s not covered.
HO3 insurance policies work the other way around. HO3 policies are often called “special form” or “all risk” insurance meaning that everything is covered unless expressly excluded.
HO3 polices are the most common form used today. The following list shows the typical exclusions.
- Water damage from floods, sewer back-ups, or water that seeps through the foundation. Read more about how to purchase flood insurance and protect your property from the most common form of storm related damage.
- Earthquakes or land movement from shockwaves, sinkholes, landslides and mudflows
- Ordinance or law, such as demolition or construction required to bring your house up to code
- Power failure
- Neglect or failure to take reasonable measures to mitigate damage after a storm
- War, including undeclared war and civil war
- Nuclear explosions
- Any intentional act by you with the purpose of causing damage or loss
- Governmental action, such as the destruction, confiscation or seizure of covered property by any governmental or public authority
- Damage to or loss of property from faulty zoning, poor repair or workmanship, faulty construction materials, or inadequate maintenance
If you want to be covered for anything listed below, you would have to purchase an additional, named peril policy for the specific type of coverage you want (flood insurance is the most common example).
What Type of Coverage do You Need: Replacement Cost vs. Actual Cash Value
Beyond knowing what perils and damage you need covered, it’s important that you understand how an insurance company determines what to pay you after a storm damages your home or personal property.
Unless you make a specific request, most standard home insurance policies cover damages to your structure on a replacement cost basis while your personal property and the contents of your home are covered on an actual cash value basis. It’s important that you know the difference.
Replacement cost is the amount it would take to replace or rebuild your home or repair damages with materials of a similar kind and quality, without deducting for depreciation. Depreciation means the decrease in home or property value since the time it was built or purchased because of age or wear and tear.
Actual cash value means the amount it would take to repair or replace damage or loss after accounting for depreciation. For example, if you have a flat screen TV destroyed by storm damage that cost you $2500 two years ago, the insurance company will only pay you the amount that TV is worth at the time it was destroyed. Actual cash value calculations could leave you with a substantial gap between what it would cost to buy a new TV of similar quality.
Many insurers offer the option to insure the contents of your home on a replacement cost basis. The premiums for this type of additional coverage will be higher, but if you have a significant amount of older items that would be costly to replace, upgrading your policy might make sense for you.
Also, you may want to consider additional insurance such as guaranteed replacement cost coverage and an inflation guard endorsement.
What Dollar Amount of Coverage Do You Need for the Structure?
Most insurance companies require that you insure at least 80% of the replacement cost of your home.
With typical replacement cost coverage, if it would cost $200,000 to replace and your home was insured for $160,000 (80% of $200,000) and a hail storm damaged your roof causing $20,000 worth of damage, the insurance company would pay you the full $20,000 minus deductible to replace your roof.
If your home is insured for less than 80 percent of its value, the insurance company will only pay part of the loss. You are entitled to insure 100% of the replacement value if you so choose. This will ensure you have no gap to make up in the event of a total loss. Also, because home values fluctuate year to year, it is important that you review coverage at least every two years to make sure you are properly covered.
The main questions you need to ask when purchasing insurance are as follows.
- What kind of policy is it? Named perils or all-risk?
- What perils are excluded? Do I need additional coverage for any of the exclusions?
- What percentage of my home’s value is insured?
- How will damages be valued for the structure? What about for the contents of my home?
- Do I need to make any special inclusions or upgrades for valuable items like a diamond ring?