Homeowner’s insurance can provide coverage for the physical structure and liability protection for the owner and/or resident. You will learn in this article that the last statement barely scratches the surface of this topic. The good news is we will explain all this in plain English, not industry jargon.
There are different types of homeowner’s policies
Not all policies are created equal. Most of the time, when you get a homeowners policy, it will be comprehensive. But some policies are not as robust, so you need to know what’s important when determining what to purchase.
You may be building a new home and need a policy. Maybe you just inherited your grandmother’s home, and the roof is as old as you, and the insurance company won’t provide you with a robust policy. What if you own a condo inside of a building? What if you live in an apartment that you rent?
A homeowner’s policy will cover up to a four-family residence, provided the owner lives in one of the units. A home policy can also provide coverage for home sharing, like Airbnb, provided you occupy the home as your primary residence. If you are looking for information about a second home / camp / vacation home check out the article “Does Home Insurance Cover a Second Home?”
Each of these scenarios uses a different type of homeowners policy. We will list below some of the policies and links to articles for that specific type of policy. We will explain in more detail the most common form of policy; for an owner-occupied residence.
Types of policies
Dwelling policy – This type of policy will only cover certain events that are specifically listed. Those events are fire, explosion (think a furnace blowing up), and lightning. Most of the time you can obtain this coverage with a valuation method of replacement cost (this topic is described more shortly).
This type of policy is better than no coverage, but it’s not the most common policy used due to the limited amount of coverage. Liability coverage is not included, another reason it’s not often used.
Personal property is covered for the same limited number of events as the structure. You also have the ability, at an additional cost, to have the personal property valuation method be replacement cost (also described in more detail shortly).
Homeowners “broad form” – The structure and your belongings are covered by more events, such as the frozen water pipes and the weight of ice and snow. Typically, the valuation method is replacement cost for both structures and personal property.
Homeowner’s “special form” – This coverage is a big step up from the dwelling policy. For the structure, the policy will cover you for everything EXCEPT events listed explicitly as an exclusion.
Some examples of excluded events are wear and tear, mold, flood, and others. Read our article “What’s NOT covered by my homeowner’s policy?”. This type of exclusionary policy is also called “all-risk” coverage.
While this is undoubtedly more coverage, it only applies to the structure, and your belongings are still only covered by a named list of events, just like the dwelling policy. You can upgrade the “all-risk” feature to include your belongings for an increase in cost (also called a “rider”, which is further explained in the article “What Are the Best Riders to Add to Home Insurance?“).
We suggest including the “all-risk” for both structure and belongings because the cost difference is not worth the frustration you will experience if your belongings don’t get replaced in full. If you need to make a claim, the last thing you want to hear is that you cannot replace your belongings without paying more out of pocket.
This policy does include liability coverage and covers you (and potentially your assets) if someone gets hurt and you are found legally responsible. The same coverage applies if someone’s property is damaged and you are found legally responsible.
Homeowner’s “comprehensive form” – this policy has the broadest coverage for homeowners. Both structure and belongings will be covered for most events unless expressly excluded. This coverage is provided automatically, unlike the rider needed in the previous policy.
This policy also includes liability protection, the same as the previous policy described. We believe this policy provides the best coverage for most homeowners. Each insurance company may have some minor differences, but we can walk you through those if you have follow-up questions. You can also find more information by reading “What Does My Homeowner’s Insurance Cover“.
Condo policy – this policy is particular for condo owners because you are not required to cover the entire structure for damage. For example, you may be required to cover everything from the sheetrock on the walls in (meaning cabinets, carpets, appliances, etc.). The building owner would cover the structure in that case.
Insuring a condo is unique enough that a different type of policy is needed. You can have your belongings covered at replacement cost if you wish (we strongly suggest you do) and liability coverage is part of the policy.
Mobile home policy – this policy is designed for homes manufactured off-site and transported there by being towed. There is no foundation underneath the home. This can be a helpful policy for older mobile homes, as there is no requirement to upgrade older wiring or appliances.
The valuation method for this type of policy is actual cash value (ACV) for structure and belongings. There is a list of events that will be covered (just like the dwelling policy described above). This policy will include liability coverage automatically, unlike the dwelling policy where the homeowner needs to request and pay a higher cost to include liability coverage.
How are my home and personal property valued?
Two terms stated early in the article will be helpful to define as you read down through the sections. There are two ways insurance companies determine the value they will pay you for your home or your personal property. One is actual cash value (ACV) and the other is replacement value.
ACV is the value of something today, relative to its condition and age, not what it would cost to replace (that is replacement value). An ACV policy will only pay out what the structure or belongings are worth today in their current condition. For example, you bought a plasma TV ten years ago for $5,000. If the value of that TV is $500 and ruined in a fire, you will get $500, which is the actual cash value. That is not enough to go out and replace that same TV.
Replacement value is named well, because it means if something is damaged and your insurance policy covers that item, then you will get a new one. So, continuing the above example, you would get a new plasma TV. Keep in mind that since prices of TV’s have come down, the cost to replace may be less than the $5,000 you paid. But you get your TV replaced, which is the important part to remember.
What is not covered by these policies?
Now that you have some basic knowledge regarding what types of homeowners policies are available, some items are not covered regardless of the type of policy. None of the policy types reviewed above cover the items on this list.
To be clear, if something is not on this list, it does not mean a policy will cover it. Here is a list of certain events all companies exclude. Read the article “What’s not covered by my homeowner’s policy?” for a more detailed review.
Flood – Most of us think of a flood and imagine a river or lake rising over its banks and causing significant problems for a wide area. While that is a flood, the impact area does not need to be that large. The definition of a flood is:
“A general and temporary condition of partial or complete inundation of 2 or more acres of normally dry land area or two or more properties (at least 1 of which is the policyholder’s property)”. We suggest you read the article on the Federal Emergency Management Agency flood description website.
It is essential to point out “2 or more properties” in the previous section, and the property size is not part of the definition. If you live in a residential neighborhood of any kind, and a pool of water collects in your yard and your next-door neighbor’s yard, that is a flood.
Your homeowner’s policy will not cover any damage caused by this flood. You can purchase a flood policy separate from a homeowners policy. The same agent with whom you have homeowners insurance should also be able to provide that policy. Further information is available at the FEMA Flood Insurance website.
Earthquake – Most folks know earthquakes are caused by underground shifts that often cause shaking on the earth’s surface. Homeowner’s policies do not cover damage caused by earthquakes, but that can be available as a separate policy, much like flood insurance. Some insurance companies allow you to add a rider for earthquakes instead of getting a separate policy, and your agent will be able to help you with that option.
Many policies include other events in this section, specifically mudslides and earth movements. An example is a home built on the side of a hill, and after years of slow erosion, the hill shifts. If a crack is created by this earth movement, that will not be covered.
The same outcome for a mudslide impacting the house, any damage would also not be covered. In many areas of the country, this is not a serious concern. But if you live in an area that experiences frequent earthquakes, you need to factor this into your conversation with your insurance agent. Here in CNY, we are not concerned about earthquakes like in California.
Settling – This event tends to happen more in older homes, where some of the structure may sag over time. Or a foundation might settle in one corner. If a door or window is not opening smoothly anymore, that is a good indication of settling.
Your homeowner’s policy would not cover this because it would be considered normal wear and tear. Keeping an eye out for settling is an excellent first step in preventing a potentially minor issue from becoming a significant problem.
Sewer and water backup – This is when the line going out of the house gets plugged, and the drain backs up. Or perhaps your sump failed and stopped working. Your homeowner’s policy will not cover damage in this scenario.
However, this is an example of coverage that can quickly be added to your policy. You can decide how much coverage you want; the more you want, the higher the cost. Similar to earthquake coverage, sewer and water backup coverage can be added to a policy.
Understanding the coverage
We have covered different types of policies available and discussed some topics that are not included in the policy. Let’s now spend some time explaining what is included in most homeowner’s policies, and this will allow you to understand homeowners insurance far better.
Dwelling – This part of the policy covers the structure, from the roof to the front porch to the rear deck. This policy section refers to the main structure and anything physically attached to that structure. This section of the policy determines how much insurance you have in the event of a covered event.
We described “actual cash value” earlier in the article, but replacement cost coverage needs further explanation. The concept of replacement cost coverage is relatively straightforward, but different insurance companies have slight differences in calculating the cost.
For an insurance company to provide a quote for replacement cost, they need to know what your home has and how it is built. Is it one or two stories, made of wood or brick, etc.? They use this information to determine what they think it would cost to replace the home if it were gone. More on the topic of the needed information is included later in the article.
“Replacement cost” has different definitions by different insurance companies. Some companies will tell you the number is the “number.” Others will tell you that it’s that “number” plus a percentage. Others will have guaranteed replacement cost, which is that “number” plus whatever it costs to replace the structure regardless of cost.
Remember that “replacement cost” does not mean “opportunity to improve.” The insurance company will not upgrade your kitchen or bathroom if it needs to be replaced. You can pay for an upgrade if you like, but the insurance company is only on the hook for replacing what you had, not what you want.
To get replacement cost coverage, most insurance companies require you to insure the home for the “number.” If you insure for less than the “number, ” the policy becomes an actual cash value policy.
Other Structures – This part of the policy covers structures not attached to the home. Some examples are a detached garage or a fence not attached to the house. Perhaps you have an inground pool or a shed. Depending on the dwelling coverage, this coverage will be at replacement cost or ACV.
Most policies will include ten percent of the dwelling amount for this part of the policy. If a dwelling is insured for $200,000, the policy will provide for $20,000 for other structures. This amount is in addition to the dwelling coverage, which means you have $200,000 for the dwelling and an additional $20,000 for other structures.
Personal Property – This is your belongings, also thought of by many as your “stuff.” Think of it as everything not attached to your home, but you own it (and cannot drive it, so your car is not included in this category). It includes the furniture, the dishes in your cabinets, the clothes in your closet, etc.
Many folks do not know that this coverage follows you wherever you go. Was an iPad stolen while on vacation? Covered. Tent burns while on a camping trip and your clothes with it? Covered. If the personal property lost or damaged is covered when at home, it is covered anywhere in the world.
If you are involved in a car accident, and the suitcase in the trunk gets destroyed because the vehicle caught on fire, your car policy won’t pay for this; your homeowner’s policy will step up. Does this section of the policy cover all personal property? Almost everything. (The topic is insurance, so there are always exceptions).
Most insurance policies limit higher-value items or items with a history of theft. Examples of this are expensive pieces of art, jewelry, firearms, or other items worth quite a bit of money. For example, a piece of jewelry might have a limit of $2,500 of coverage.
What do you do if these articles are worth more than these limits? You can add these types of items as individually listed items. If you can provide an insurance company with a qualified third-party appraisal of the value, they will provide you a quote if you want to add it to the policy.
You do not have to add it, but you can if the premium is acceptable to you. You can learn more by reading “How Should I Insure My Most Valuable Things?”
What is the loss of use portion of my policy? – If your home is damaged by a covered event, like a fire, and you cannot live there while the damage gets repaired, you will probably experience some expenses that you usually would not during a typical week.
This portion of your policy would cover costs like living in a hotel. If your food costs are higher because you have to eat out more often, that would also be covered. If your commute is longer resulting in higher fuel costs, that would be covered.
This portion of the policy provides coverage for the extra costs, not all costs. For example, if you usually spend $200 per month on fuel and suddenly experience $300 per month in costs, your reimbursement will be $100. If you typically spend $200 per week on groceries and now spend $350 per week while living in a hotel, the $150 would be covered.
The entire cost of the hotel is extra and therefore covered. So what is not covered by the loss of use portion of the policy? You still need to pay the mortgage if you have one. You still need to pay for the insurance, utility, and water bills. But you owed those anyway.
This section will not improve your cash flow; it covers what is above and beyond your regular costs in the event you lose the use of your home.
How much liability coverage is included in a homeowner’s policy? – The section at the beginning of this article explained that not all policies include liability. You can check with your agent or look at the first pages of your policy to determine if your policy includes liability protection.
The coverage typically starts at $100,000 per occurrence if you have a liability policy. You can then purchase additional coverage at an increase in the cost. Insurance companies offer different maximums, but often the most you can purchase is $1,000,000. You can obtain more by adding an umbrella liability policy but please know that is a separate policy described in another article.
Knowing how much coverage you can have is helpful, but when do you need this coverage? If someone gets injured on your property and you are legally responsible, this will provide coverage. If you are legally responsible for damaging someone’s else property, even if away from home, this portion of your policy can provide coverage.
If you get sued by someone else, then this portion of the policy can cover the legal expenses involved, depending on the circumstances. An example of this portion of your coverage not providing coverage is if the insured intentionally harmed someone else. If you intentionally hit someone, that is not likely to be included.
If someone accidentally trips on your steps and is injured, that will probably be covered by your policy. This type of coverage is typically inexpensive compared to the policy’s total cost, so adding more is something we suggest for most clients.
Once you know you have liability coverage with your policy, who does this cover? To learn more about that read “Does Home Insurance Cover Everyone Who Lives With Me?”
Medical Payments – Sometimes, someone can experience a minor injury while on your property, and medical payments cover non-residents of the property. It does not matter who is at fault. The coverage limit is relatively low at $1,000 to $5,000, depending on the insurance company.
The medical payments portion of your policy is more of a convenience for your guests than anything. No one needs to sue you for the coverage, so there is no hassle factor. It is not the most used portion of a policy, but it is nice to include.
Do I need homeowner’s insurance?
You often do not have the option even to consider this question. If you borrowed money to purchase the home, you must have coverage. If you live in a community with a homeowners association, there is a good chance you will be required to have coverage.
But what if you have paid off your mortgage? Is it still essential to have coverage? Full disclosure we firmly believe you should, and we will explain why. Before that explanation, let’s review your option of not having coverage.
This situation is called “self-insuring.” Here is the only question you need to ask yourself: “Can I afford to pay cash to replace the entire home with all my belongings if a fire destroys my home?”. For most people, that answer is easy: “no.”
You have accumulated some wealth if you answer “yes” to this question. For a different reason, you will want to keep homeowner’s insurance. You want the liability coverage that comes with the policy because if you have wealth, you have assets to protect. Liability coverage is very inexpensive for the benefits provided.
For most people, the question is not if they should have homeowner’s insurance but which type of policy is best for them. Our consultative approach can help guide you through this process, as we have for thousands of others.
What information is needed to obtain homeowners insurance?
Whether you are getting your first policy or shopping for better value, the insurance company will need certain information (described further in this section) to decide if they want to insure the property. If they decide they want to provide insurance, the next step is to provide a quote to tell you how much they will charge you for the policy.
If you accept the cost, then you can purchase the policy. If you do not, you are not obligated to buy. You can look at many different carriers, and there is more on that topic below in the section explaining different types of insurance agents.
We have an entire article dedicated to what information about the property you need to know when seeking an insurance quote. Here we will give you a broad overview, and we promise it will be enough to make you dangerous.
Insurance is nothing more than the transfer of risk to another party. In this case, from you to the insurance company. To know the level of risk they may take, they will need to know some information about the property. Some basic questions will be how big is the house? How old is the wiring? Do you have a pool? If you have a pool, is it in-ground or above ground?
Other questions may be less obvious but are equally as important. How old is your roof? Do you have any decks or porches, and if so, how big are those? Do you have a wood stove or fireplace? How is that vented?
The larger the home and the more expensive the contents, the higher the cost for insurance. A brand new roof is less likely to leak. An updated electrical system in a home (even if in an older home) is less likely to experience an issue. Is your garage part of the home or detached and separate?
All of these factors impact the cost the insurance company asks you to pay for coverage. Read the full article mentioned above for full details but prepare yourself when you begin looking for a new or different policy that you will get asked these questions. The more prepared you are for this, the faster your research will be complete.
Are there any discounts available for homeowners insurance?
There are discounts you can get on your policy that you should know about. Some are within your control, some are outside your control. For example, a newer home built five or less years ago can often earn a discount, but you cannot change the age of your home.
Another discount is often available if you combine your home and car insurance with the same insurance company. That is something you have in your control. Here is a list of other discounts that you can ask your agent about when getting homeowner’s insurance:
- Brand new construction
- Recently upgraded systems in your home (electrical, heating and plumbing are examples)
- New roof
- Proximity to a fire hydrant
- Central alarm to the fire department
- Electronic communication rather than paper mail
Each insurance company will have their own list of available discounts, and each will have different amounts you can earn with each discount. We have more information in our article Can I get discounts on my homeowners policy?, but we wanted to let you know that this is a topic you should have with your agent in the hopes of saving you some money.
Can I be denied a policy?
Now that you have given the insurance company all the information, they need to present you with a quote. They are not required to insure your property. Insurance companies may have specific criteria that may cause them not to want to insure someone or some property. Another company may not be bothered by the same criteria, so you should consider reviewing your policy every few years.
Take a read through “Can you be denied homeowners insurance?” for more details about things that could make it challenging to get a policy, but we will provide some examples in this section of the article. Some insurance companies do not like a pool with a diving board, and another may not like trampolines in the yard.
Some insurance companies may require your property to be located within a certain distance of a fire hydrant. Another may not like that you have trees overhanging your roof. Another may not like it if someone has a home-based business.
One item that most companies want to know is “Have you had prior insurance claims”? If people have a habit of slipping and falling on your property, they may not be interested in being your insurance company. You may not receive a quote if you have had several claims for water damage due to not replacing your old roof.
Sometimes you will be allowed to correct what the company thinks is a problem, and then they are willing to provide a policy. For example, cutting back some tree limbs over the house may be all it takes. Get rid of the trampoline, and magically a quote is available.
If you do not want to cut back the limbs on that tree, or you just adamantly want to keep the trampoline, you may be able to get a quote but with less coverage. Earlier in this article, we reviewed different types of policies you may have available.
An example in this situation is a dwelling policy that might provide minimal coverage for the structure and the belongings but not include any liability coverage. This may be enough coverage temporarily while you get the trees cut or remove the diving board, then get a more robust policy once completed.
What will the insurance company need to know about me?
The insurance company will want to know about the owners and who lives on the property. Here is a list of information, followed by some explanations:
- Names of all owners
- Date of birth of all owners
- Social security numbers of all owners
- Number of people living on the property
- Number and type of pets
- Loss history
The first three data points are all about confirming who is requesting the insurance. To have a homeowner’s policy, you must prove you are the homeowner. Knowing the number of people living on the property is essential because the policy covers some people living on the property but not everyone. For more information, read our article “who is covered by my homeowner’s policy?”
Suppose you have a pet with large ears, a long trunk, a greyish appearance, and a reputation for having a phenomenal memory. In that case, the insurance company may not be interested in providing a quote. Do you have three goldfish in a five-gallon tank? No worries. An elephant in the backyard of your half-acre parcel? Not so much.
If your house has been struck by lightning fourteen times in the last ten years and a fire started each time, that will not be looked at favorably by the insurance companies. A lightning rod may solve the issue, allowing you to obtain a policy. Or perhaps you must remove your lifelong habit of collecting aluminum foil in the attic to prevent your home from being a target.
Did you know there are three sources for getting insurance for your home?
Everyone has three paths to getting insurance, each with potential benefits. Like many things in life, your preference matters, so follow your instincts. These descriptions will allow you to decide what type of insurance agent is best for you.
- Captive agent
- A captive insurance agent can only represent one insurance company. Sometimes that company may have relationships with subsidiaries, but the primary company determines those relationships. Some examples of companies with captive agents are Allstate, State Farm, and Liberty Mutual.
- Direct writer
- There are similarities between captive agents and direct writers of insurance companies in that they only represent one company. The difference is that a captive agent is not an insurance company employee. If you call GEICO, for example, you are dealing with an employee of the company instead of an agent.
- Independent insurance agent
- How independent agents operate is different than the first two. These agents represent multiple insurance companies and are also not insurance company employees. They can search for policies from several companies to find the best fit for the needed coverage.
If you are the type who likes doing the research yourself, then dealing direct may be best for you. If, however, you prefer to be educated by an expert and prefer a guided tour, working with an agent may be your preference. Whichever path you try (and it’s ok if you try more than one), check online for reviews of both the insurance company and the insurance agent.
Remember, don’t just look for the rating; look for a good rating with some volume. A national insurance company will have more ratings than a local agent, be aware of making the comparison relevant. Suppose one agent has a five-star rating, but only three people participated. In that case, that’s probably less valuable data than an agent who perhaps only rated a 4.7 but had fifty reviews. The latter is far more impactful and meaningful to you as a consumer.
Is the next step to get in touch with us?
You have now learned a lot about homeowner’s insurance, probably more than the average homeowner would ever dream of knowing. If you are satisfied with that information and would like to receive a home insurance quote, we would love to hear from you. You can send us your request by tapping the Get Started button below. One of our insurance pros will reach out ASAP.
If you have any unanswered questions or would like clarification on any of the topics we have covered, please complete the Get in Touch section below and we will be sure to find an answer for you.