Homeowners insurance is a contract between you and a home insurance company. In exchange for a regular premium payment, the insurer offers financial protection for your home and personal belongings if they are damaged by an unexpected incident, or peril, covered by your policy. It also contains liability coverage if you or a covered member of your household is found responsible for someone else’s bodily injury or property damage.
What Does Homeowners Insurance Cover?
Standard homeowners insurance policies contain six types of coverage, each with a limit, or the maximum amount your insurer will pay for a specific type of claim. Several coverages also have deductibles, or the amount an insurer will deduct from a claim payout, representing your minimum out-of-pocket expenses.
Dwelling coverage
Dwelling coverage helps pay for repairing or rebuilding your house and most attached structures, up to your policy limit, if a covered peril, like a fire, damages them. It covers the structure of your home and built-in fixtures, but it does not cover your belongings inside the house.
Standard home insurance insures your home on an open-peril basis. That means it’s protected from most causes of damage, unless it is listed as a policy exclusion. However, some types of insurance, like HO-1 and HO-2 policies, offer named peril coverage, meaning your insurer will only cover damage caused by perils specifically named in your policy documents.
You should have enough dwelling coverage to rebuild your house to its prior condition using similar building and construction materials.
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Suggested limit. You should carry enough dwelling coverage to rebuild your home based on the current cost of materials and labor.
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Deductible. Dwelling coverage claims are subject to a deductible. Deductibles can be flat rates, such as $500, $1,000, or as high as $10,000. They can also be percentage-based, such as 2% or 5% of your total dwelling coverage.
Other structures coverage
Other structures coverage helps pay to repair or rebuild structures not attached to your home, such as a detached garage, fence, or pool house. Like dwelling coverage, other structures coverage only covers the physical structure of the property, not the belongings inside.
A standard homeowners insurance policy offers open-peril coverage, though other forms, like the HO-1 policy, can provide named-peril coverage.
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Suggested limit. Generally, at least 10% of your dwelling cost. For instance, if you have a $300,000 limit for dwelling coverage, the limit for your other structures coverage would be $30,000. You can typically adjust coverage amounts to meet your needs.
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Deductible. Claims are subject to your policy deductible.
Personal property
If your belongings are stolen or damaged by a covered peril in your policy, personal property coverage can help pay to replace them. Most policies also offer limited off-premise coverage that can help you pay for replacing items that are damaged or stolen outside of your home, such as a laptop in a car.
Standard home insurance policies insure personal property on a named-peril basis, meaning the belongings in your house are only covered against perils specifically named in your policy.
Personal property insurance generally offers actual cash value coverage, so your claim payout will reflect the depreciated value of the affected item(s), not the current market value or how much you paid for it upon purchase.
This type of coverage typically includes separate sublimits for specific items, such as jewelry or collectibles. In those cases, a policy will only pay up to the specified sublimit, regardless of the item's value. However, you can often enhance coverage with a policy endorsement.
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Suggested limit. Personal property coverage limits are usually between 50% and 70% of your dwelling coverage limit. It’s wise to take a home inventory to determine if you need more (or less) coverage.
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Deductible. Claims are subject to your policy deductible.
Personal liability protection
Personal liability insurance can provide financial protection if you or a covered household member is found liable for injuries or property damage sustained by a third party.
For instance, liability coverage can help pay for the third party’s medical bills, including an ambulance ride, emergency visit, surgeries, and physical therapy if someone is injured on your property. Similarly, if you or a covered household member damages a neighbor's fence, your liability insurance can help cover the cost of repairs or replacements.
If you’re sued after a covered incident, liability coverage will also help pay for your legal defence and any resulting judgments or settlements.
Note: Liability coverage only pays for other people’s injuries or damaged property, never the homeowners.
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Suggested limit. You should generally carry a minimum of $300,000 in liability coverage, though you may need more based on your unique property risks and net worth.
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Deductible. Liability coverage does not typically have a deductible.
Medical payments to others
The medical payments portion of your policy offers limited coverage for third-party injuries, regardless of who is at fault. For instance, if a guest trips up the stairs, falls, injures their ankle, and needs an X-ray, this part of your policy can cover some related expenses.
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Suggested limit. Medical payments to others coverage generally has low limits, such as $1,000 or $1,500.
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Deductible. This type of coverage generally does not have a deductible.
Loss of use coverage
Also known as additional living expenses (ALE) insurance, loss of use coverage pays for any extra costs you incur if a covered peril makes your home uninhabitable. Coverage can include hotel stays, restaurant meals, laundromat bills, pet boarding, and other essential services.
Loss of use coverage is generally limited to a specific period, such as 12, 18, or 24 months, though the period can vary by insurer and policy.
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Suggested limit. Generally, the loss of use coverage limit is 20% of the policy’s dwelling coverage limit.
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Deductible. Loss of use coverage does not have a separate deductible, though you’ll still need to pay the deductible related to your dwelling claim.
What perils are covered by home insurance
Though every policy and insurer is different, a standard homeowners insurance policy, or an HO-3, generally covers the following 16 perils:
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Fire or lightning
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Hail or windstorms
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Explosions
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Riots or civil commotion
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Damage from aircrafts
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Damage from vehicles
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Smoke
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Malicious mischief or vandalism
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Volcanic eruptions
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Falling objects
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Weight of ice, snow, or sleet
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Accidental discharge of water or steam
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Sudden and accidental tearing apart, cracking, burning, or bulging of specific household systems
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Freezing of household systems
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Sudden and accidental damage from artificially generated electrical current
Remember that the perils above are generally covered in an “open peril” policy. Other types of home insurance, like HO-1s, HO-2s, and HO-8s, typically offer named peril coverage.
Learn more: Types of homeowners insurance
What isn’t covered by homeowners insurance?
Standard home insurance typically doesn’t cover damage caused by the following incidents:
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Flooding and storm surges
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Earthquakes and sinkholes
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Pest infestations
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Intentional damage
Types of homeowners insurance policies
The most popular type of home insurance is an HO-3 policy. However, several other types of coverage are available based on your specific needs or the type of property you are insuring.
HO-1
The most basic form of coverage. This type of policy offers limited dwelling and other structures coverage for select, named perils. Availability is limited, as fewer insurers offer this type of coverage.
HO-2
This type of policy offers personal property coverage, liability insurance, loss of use coverage, and third-party medical payments coverage in addition to dwelling and other structures insurance. However, coverage is limited to only perils named in the policy.
HO-3
The most common type of home insurance, HO-3 policies, are designed for primary residences. They contain six types of coverage: dwelling, other structures, personal property, liability, loss of use, and third-party medical payments coverage.
The dwelling and other structures coverage is open peril, so the property is insured against all perils except those specifically excluded. Personal property is covered on a named-peril basis.
HO-4
Also known as renters insurance, this type of policy is designed for tenants who lease a home or apartment. It covers your belongings against common risks, like fire, theft, and vandalism. HO-4 policies also typically include liability coverage.
While an HO-4 policy doesn’t cover the building itself, it can help pay for temporary living expenses if your rental becomes uninhabitable due to a covered event.
HO-5
HO-5 insurance is a comprehensive homeowners policy that offers broader protections than a standard HO-3. It provides open peril coverage for your home as well as your personal belongings, meaning you’re protected against all risks except those specifically excluded from coverage.
HO-6
Also known as condo insurance, an HO-6 covers the condo unit’s interior structures, such as walls, flooring, and fixtures. It also includes personal property coverage and liability insurance. An HO-6 policy is often purchased in addition to the condo association’s master policy, which covers the building housing the unit and other features, such as pools or recreational areas.
HO-7
This type of policy is designed for mobile or manufactured homes. It contains the same type of coverage as an HO-3 policy. Your mobile home is insured on an open-peril basis, but your belongings are insured on a named-peril basis.
HO-8
Typically used for older or historic homes, HO-8 policies insure your dwelling at its actual cash value, meaning depreciation is factored in. HO-8 policies are named-peril for both dwelling and personal property coverage.
HD-3
Also called house and property insurance, this type of policy provides flexibility to individual who may use their property as both a residence and a rental property.
While standard home insurance policies don’t often cover rental properties, an HD-3 policy can be customized so that you don’t need to get a new policy if, say, you decide to rent your home out during the summer but plan to return to it the rest of the year.
Replacement cost vs actual cash value
In property insurance, replacement cost value means your insurer will issue a claim payout based on the current cost to repair or rebuild your home is a covered peril damages or destroys it. With actual cash value, your insurer will factor in depreciation when determining the claim payout.
A standard home insurance policy (HO-3 policy) usually insures your dwelling at its replacement cost and your personal belongings at their actual cash value.
Learn more: Average cost of homeowners insurance.
3 steps to choose the right home insurance policy
To find the best home insurance company and policy for you, you’ll need to consider several factors.
1. Understand your coverage needs
First, determine how much coverage you need. You should have
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Enough dwelling insurance to cover the cost of fully rebuilding your home to its prior condition.
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Personal property coverage with a limit high enough to cover your personal property if a covered peril destroys your home and its contents.
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Enough liability insurance to cover your assets (including funds in checking, savings, etc.) in the event of an expensive lawsuit.
Another coverage consideration is endorsements, or add-on coverage. For example, if you live in an area that experiences heavy rains and hurricanes, consider adding a flood endorsement or purchasing a standalone flood insurance policy.
Likewise, if you have high-value belongings, like jewelry or collectibles, consider scheduling personal property coverage for those items to insure them at their full value.
2. Get and compare quotes
Get and compare quotes from at least three different home insurance companies. Make sure your coverage limits, deductibles, and endorsement selections are the same for each quote. It’s also helpful to ensure your quote accurately reflects any discounts for which you are eligible. This ensures that you’re getting an apples-to-apples comparison.
Tip: Deductible options can vary by insurer. If you can’t get quotes for the same deductible, keep that in mind when comparing quotes and selecting an insurer.
3. Review insurers
Once you get your quotes, review and compare the insurance companies. Check third-party credit rating agencies, like Demotech, to determine the provider’s financial strength. You can also check online review sites, like TrustPilot, or ask friends, family, or colleagues about their experiences with a specific insurer.
