Home insurance is a contract between a homeowner and an insurance company. In exchange for an annual fee – called a premium – an insurance company agrees to compensate you for certain financial losses you might face as a homeowner. These losses are often the result of damage to your property but can also stem from liability claims.
The 6 coverage parts in home insurance
Every homeowners insurance policy is different, but the most common one, called an HO-3 policy, includes six coverage parts. Each part protects a certain aspect of homeownership, such as damage to your primary residence or guest injuries.
Dwelling coverage
Dwelling coverage (Coverage A) is probably what most people think of when they think about home insurance. This is the coverage part that protects the structure of your primary residence, including your walls, windows, roof, and foundation.
In an HO-3, the dwelling coverage is written on an open perils basis. That means it’s triggered by damage to your primary residence caused by any peril not excluded by the policy language.
Perils that are typically excluded from and therefore don’t trigger your dwelling coverage include:
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Earthquakes or earth movement.
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Floods.
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General wear and tear.
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Lack of regular and proper maintenance.
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Infestations.
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War and/or nuclear hazards.
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Intentional loss.
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Smog, rust, corrosion, and rot.
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Settling, expansion, shrinking, or bulging.
Other structures coverage
Many homeowners have additional structures on their property, so most home insurance comes with other structures coverage (Coverage B). It typically covers structures on your property that aren’t attached to your primary, such as sheds, detached garages, and additional dwelling units, as well as sidewalks, fences, and permanently installed boat docks.
Other structures insurance in an HO-3 policy is usually written on an open perils basis and includes similar exclusions as dwelling coverage.
Personal property coverage
Personal property coverage (Coverage C) protects the items that aren’t a part of the structure of your dwelling. Essentially, it covers the stuff inside your home, which is why you might also hear it referred to as contents insurance.
Most home insurance policies also cover your personal property when it’s not in your home. For instance, let’s say you’re at a coffee shop and leave your laptop unattended for a moment. If someone walks off with it, your personal property insurance most likely covers your loss.
This coverage is usually written on a named perils basis, which simply means it only covers property damage when it’s caused by an event listed in the policy. In an HO-3 policy, your personal property coverage usually helps pay for damage caused by:
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Fire or lightning.
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Flood.
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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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Theft.
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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 certain household systems.
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Freezing of household systems.
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Sudden and accidental damage from artificially generated electrical current.
Loss of use coverage
Loss of use coverage (Coverage D) helps cover additional living expenses beyond your normal costs if you’re unable to stay in your dwelling due to property damage from a covered peril. Basically, if a peril is included in the dwelling coverage, then your loss of use coverage kicks in if the peril makes your house uninhabitable.
Loss of use coverage can also help with lost rent if you rent your house to others and have landlord insurance. That portion of the coverage is called fair rental value coverage.
Personal liability coverage
If someone gets hurt on your property or experiences property damage as a result of your negligence, personal liability coverage (Coverage E or L) protects against the potential financial losses that can result, such as:
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The injured person’s medical bills.
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The repair bills for the person’s damaged property.
Personal liability coverage can also help if the situation turns into a lawsuit. Oftentimes, your insurer will help in your defense by assigning an attorney to your case.
Another good thing to know about your liability coverage? It usually extends to your family members living in your home, too.
Medical payments coverage
Medical payments coverage (Coverage F or M) is there to minimize the chance of a small injury turning into a major lawsuit. It does this by paying some of the medical expenses a guest incurs after being injured on your property, such as doctor’s bills. Unlike liability insurance, medical payments coverage reimburses the injured person’s medical bills even if you are not at-fault for the injuries.
What home insurance doesn’t cover
While standard homeowners policies guard against many of the problems homeowners face, they can’t cover everything. For examples, your insurance company doesn’t pay for:
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Regular maintenance. If something in your home breaks down simply because it's old, home insurance doesn’t pay for its repair.
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Mechanical failures. Similarly, your insurer doesn’t cover your furnace, HVAC, or other systems that break down.
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Normal wear and tear. For example, home insurance doesn’t pay for a new roof or siding when these things wear out.
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Your home’s market value. Declining home prices in your area aren’t a covered loss.
Common home insurance endorsements
In addition to the coverage provided in a standard homeowners policy, you can get additional coverage by purchasing specific endorsements. Some examples of these include:
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Personal property replacement cost coverage.
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Increased dwelling coverage.
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Limited fungi, mold, wet or dry rot, or bacteria coverage.
Sometimes getting an endorsement adds coverage that wasn’t in your policy in the first place. In others, an endorsement increases your coverage amount.
How homeowners insurance works
As we mentioned, how home insurance works is pretty simple. You pay a premium and the insurer promises to cover certain financial losses. Part of covering losses, however, is determining the value of the thing being covered. Generally, insurance companies insure your property in one of two ways:
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Actual cash value, or what it costs to replace the property taking into account depreciation.
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Replacement cost value, or what it costs to replace the property using materials of a similar quality.
Insuring your home and personal property for their actual cash value can be less expensive than insuring them for their replacement value. However, it also means you see a smaller claim payout. The opposite is true for replacement value. You may pay more, but you’re more likely to be able to rebuild your home after a total loss.
Some insurance companies offer endorsements that can provide additional coverage in the event that your actual replacement costs are more than the insured value, or estimated replacement cost, of your home. These are endorsements are typically called:
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Extended replacement cost, which pays a certain percentage above your estimated replacement cost after a covered loss.
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Guaranteed replacement cost, which covers the entire cost of rebuilding your home after a covered loss.
One reason these endorsements are so beneficial is because the replacement cost of your home can change over time. You and your insurance agent may have based your home insurance on a really good replacement cost estimate, and rebuilding expenses could still be way more than you anticipated due to inflation, rising construction costs, and more.
Homeowners insurance deductible
A home insurance deductible is the amount you’re responsible for if you need to file a claim. Deductibles are often expressed as a dollar amount – often $1,000, $2,500, or $5,000. However, they can also be a percentage of your primary dwelling coverage.
Your home insurance policy can have more than one deductible. This is more common in catastrophe-prone areas where certain perils make it more difficult to insure homes. For example, homeowners along the Gulf coast often have a hurricane deductible in addition to their all other perils deductible. Places with lots of hailstorms may also have a wind/hail deductible.
Types of home insurance
Sometimes home insurance is written on standardized forms, and each one creates a different type of home insurance. Each type can be significantly different from the others, so you want to be sure you're choosing the correct one for your situation.
HO-3 policy
This is the most common type of home insurance policy, and it’s appropriate for a single-family dwelling. It can include coverage for your home, other structures on your property, your personal belongings, and your personal liability as well medical payments for injured guests and your additional living expenses if a covered event makes your home unlivable.
HO-5 policy
An HO-5 policy is sometimes called a comprehensive policy because it covers the same things as an HO-3 policy, but it protects them against almost any peril. An HO-3 usually only provides open perils coverage for your primary residence and other structures.
HO-1 and HO-2 policy
HO-1 and HO-2 policies are lesser known types of home insurance. Both offer named peril coverage, so they only insure your home against a set of events listed in the policy. For the HO-2, that list includes 16 perils, but the HO-1 only covers 10. In fact, the HO-1 policy is so limited that it’s seldom offered by insurers.
