How Insurance Covers Different Dwellings

Wed Nov 22 2017

Whether you rent or own, one of the eight dwelling-based home insurance policies can help protect you from disaster. Make sure you have the right policy, based on your lifestyle, possessions, and tolerance for risk.

Home Insurance Policy Forms

HO1 - Basic Form: It is, as the name suggests, basic. So basic, in fact, that it is slowly becoming obsolete. It covers so few risks that mortgage companies won't accept them as a guarantee that they'll recoup payment in the event of a total loss. They typically only cover named perils, which are exactly what it sounds like: fire, smoke, lightning, and other events that the insurance carrier is able to name in advance.

If you read our post on the different components of a home insurance policy, then you'll know that this omits some pretty common coverage. The most worrisome exclusion, from a homeowner's perspective, is personal liability. This means that if someone is injured on your property, you're on your own to cover damages.

A cousin of the HO1 is the HO2. This is called a Broad Form policy, and covers more named perils than the HO1, but still does not cover anything else. While this policy covers things like falling objects, weight of snow, ice, and sleet, or damage caused by faulty household systems and pipes, it does not include any coverage for personal liability.

An HO3 policy, or Special Form, is the most common type of home insurance in the country. This covers all of the named perils in an HO1 and HO2, but layers on many other types of coverage. These include:

  • Unnamed Perils - This includes things that aren't specifically written into your policy. For example, if your neighbor loses his glasses and accidentally drives into your garage door, that's covered.
  • Loss of Use Insurance - An HO1 or HO2 would pay for your home to be rebuilt if your home burns down, but where will you stay? That's the sort of thing that's covered by Loss of Use Insurance. Personal costs that arises as a result of being unable to use your home is covered by Loss of Use Insurance.
  • Personal Liability Insurance - This covers damages that result, on or off your property, as a result of your actions.
  • Medical Payments Insurance - This covers medical payments for third parties in the event of an injury on the insured location. If your cocker spaniel gets fussy and bites your daughter's friend, the trip to the emergency room would likely be covered by this.

The only policy in this list that doesn't cover homeowners, the HO4 is more commonly known as renters insurance. In industry terminology, it's the "tenant's form." This is similar to a home insurance policy, with the coverage for structures removed. Your personal property is covered, and typically there's some personal liability coverage as well.

An HO3 on steroids, the HO5 is known as the Comprehensive Form, and it's appropriate. This policy covers more perils, and typically at higher limits. As such, this is typically only offered on newer homes.

We should note that there are many perils that aren't covered by any of policies we've talked about so far. These include, but are not limited to: earthquakes, landslides, floods, acts of terrorism, and neglect. Each of those policies can typically be purchased separately, aside from neglect.

An HO6 is condo insurance, and is a combination of renter's insurance (HO4) and the immediate structure surrounding the domicile - the unit's floors, walls, and ceiling. The condo association needs a commercial policy that covers all common areas and external structures.

Mobile homes are covered by the HO7. The protection is similar to an HO3, but the nature of the risk is understandably different. Having a structure that's not attached to the ground is riskier, especially in areas prone to floods, hurricanes, or tornados. As a result, many carriers will not cover this risk. At this time, we're unable to cover mobile homes.

Finally, an HO8 policy covers older homes, or homes that are particularly difficult to replace. It's similar to an HO1 or HO2 in the sense that it only covers named perils, so make sure to be aware of what's covered and what's not in your policy.

For all of the above policies it's important to understand what's covered, and how you'll be paid back for your claim in the event of a loss. The former requires you to understand what perils and accidents you'll get compensated for, while the latter is about replacement cost and actual cash value. If your policy covers your structure and property to replacement cost, you'll get an amount equal to the cost of a new version of the lost item. If it's only actual cash value, you'll get the current value. This means that if you need to replace something that depreciates in value (like electronics), you'll be paying mostly out-of-pocket.

Check out our guide on types of homeowners insurance to learn more.