What is homeowners insurance?
Homeowners insurance is a policy covering your home (the structure) and its contents (personal belongings). It can save you from severe financial loss if your home is damaged or destroyed. It covers your family’s possessions and can provide you with compensation for liability claims, medical expenses, and other amounts that result from property damage and personal injury suffered by others. Most lenders require homeowners insurance in order to obtain a mortgage.
For example, a homeowners insurance policy can protect you against the following scenarios:
- A tornado or storm shattering your home’s windows or scattering your roofing shingles across the neighborhood
- A burglar breaking into your home and stealing that figurine you inherited from your grandmother
- Your dog biting a neighbor or delivery person
- Physical therapy costs for a guest injured by a fall in your home
- A successful personal injury lawsuit brought by a neighbor the last time you practiced your chip shot in the backyard
- Damage from a vehicle crashing into your house
Homeowners insurance is also a way for condominium and cooperative unit owners, mobile home owners, and renters to protect their possessions from damage or theft, and to obtain liability coverage for property damage and personal injury suffered by others.
Who is covered?
Homeowners insurance protects more than just the owner of the house, condominium, or other property. Depending on your living situation, the following individuals are covered under your homeowners policy:
- Named insured
The insurance policy identifies the “Named Insured” (meaning the individual who is primarily insured under the policy), who is usually the same person named on a deed or lease as the owner or tenant, respectively. You, as the named insured, receive the most extensive coverage under your homeowners policy, for you are covered by property insurance on your dwelling and other structures, in addition to personal property and liability insurance. Named insured condominium owners and renters do not receive such extensive coverage because they do not, on an individual basis, own their dwelling or other structures.
If your spouse resides in your dwelling, then he or she is covered by personal property and liability insurance, even if he/she isn’t identified on the Declarations Page as a named insured.
Individuals who reside in your dwelling are covered by personal property and liability insurance if they are your relatives (e.g., your children) or if they are under 21 years of age and in the care of any member of your family.
Housekeepers, au pairs, or gardeners, for example, are covered by personal property insurance.
- Guests and other visitors
Your guests and other invited visitors can typically be covered by personal property insurance so long as you contact the insurance company or your agent to request coverage.
What is covered?
The property insurance section of your homeowners policy protects more than just your actual home or dwelling. In most cases, your insurance company will reimburse you for damage or theft affecting:
- Your dwelling, any structures attached to the dwelling, and building materials and supplies that are stored near the dwelling and are used to construct, alter, or repair the dwelling or other structures on your property
- Structures on your premises that are not attached to the dwelling, such as a tool shed or detached garage
- Personal property such as the contents of your house like furniture, clothing, and stereo equipment, as well as outdoor items like sporting equipment and gardening tools
Generally, the coverage limit for other structures and personal property coverage is a set percentage of the dwelling coverage amount. If you wish, you can increase a policy’s preset coverage amount by endorsement (see below).
Condominium or cooperative unit coverage
If you own a condominium or cooperative unit, your homeowners insurance does not cover you for your entire dwelling space because you do not individually own the structure you live in. Instead, you are covered for your personal property and any portion of the unit you own under the terms of the condominium or cooperative documents. Renters are covered for personal property only because renters do not own any portion of the property.
In most cases, whether you own or rent a home, the homeowners insurance company will reimburse you for costs, expenses, and other amounts related to:
- Loss of use
If your dwelling is not fit to live in because of damage covered by the policy, you should receive reimbursement for your family’s or household’s living expenses while you wait to permanently relocate or wait for the dwelling to be repaired. A set coverage limit is always applied to a policy’s standard loss-of-use coverage, but it can be increased by endorsement.
If you or another insured are found responsible for personal injury or property damage suffered by another person, your insurance company will offer a settlement amount owed to that person. This is only true if carelessness or negligence, rather than intentional misconduct, caused the injury or damage. If an injured or damaged person brings a lawsuit, your insurance company should pay to defend you or any other insured named in the lawsuit. For example, you may be found negligent if a meter reader was injured by falling off your tricky cellar stairs because the railing was broken (and you knew about the situation but failed to repair it). You may be found liable for intentional misconduct if you cut down a tree on your neighbor’s property to improve your view.
- Medical payments to others
If a nonresident requires medical assistance as a result of an injury suffered on or near your premises, your insurance company should pay his or her medical expenses. Injuries that take place away from your premises are also covered, as long as you, another insured, a household employee or your pet caused the injury.
Open perils vs named perils
Your policy can also cover either open perils or named perils. A named-perils policy specifies which perils are covered as well as which perils are not. Rather than covering a number of listed or named perils, an open perils policy covers you broadly against the risk of direct loss to your dwelling and other structures and also includes an extensive list of perils that are not covered.
What is not covered?
There is a wide variety of damages, conditions, and costs that are not covered by homeowners insurance. Your insurance policy describes a number of situations that are specifically excepted or excluded from coverage (called exclusions). Some policies contain more exclusions than others. Your policy also describes certain conditions you must meet, and duties you must perform, in order for you to be covered. Terms and limitations that were originally included in your policy can be changed by a document called an “endorsement.” For these reasons, you should carefully read your homeowners policy to learn the limitations and exclusions that apply to your specific situation. Here are just a few examples of situations when you may not be covered by a standard homeowners insurance policy:
Although the structures and possessions that lie upon a parcel of land are usually covered by a homeowners policy, the land itself is not. This means, for example, you’re not covered by your policy if your neighbor’s pool overflows and contaminates your untilled garden.
- Coverage Limitations
The Declarations Page of your policy recites maximum coverage amounts that limit what the insurance company must pay. Separate limits are set for the dwelling, other structures, personal property, loss of use, personal liability, and medical payments to others. This means that even if you suffer a loss to your personal property in the amount of, let’s say, $50,000, the insurance company will pay you no more than the policy’s stated limitation recited on the Declarations Page. If this figure within your policy is $100,000 then you’re covered for all of it. On the other hand, if it’s only $30,000 then you’ll have a $20,000 deficit.
Your homeowners policy will not cover you for damage that results from floods, waves, sewer overflows, or water seeping into your basement.
If you’re involved in business activity, your homeowners policy will not cover you for liability or medical payments due to other persons, even if the damage or injury occurred in your home. Other structures located on your premises that are used for business purposes are also not covered by the policy. This means your standard homeowners policy will not reimburse you for medical care required by a client who slips and falls in your home office as he’s putting his coat on the rack.
- Your tenants
Your standard homeowner’s policy will not cover you for damages or injuries suffered by the tenants who rent any part of your home.
- Other insurance
If an injury or damage is covered by other insurance in addition to your homeowner’s policy, your homeowner’s insurance company will only pay its proportionate share of the amount due.
- Theft by another insured
Your homeowner’s insurance will not cover you for a loss caused by a theft committed by another insured person under the policy. This means your policy will not cover you if your nephew (who lives with you) steals a valuable baseball card from the family room.
- One or two-family dwellings
Structures that have more than two-family dwelling units cannot be covered by homeowners insurance
Registered motor vehicles are specifically excluded from personal property coverage. Only vehicles like motorized wheelchairs and lawnmowers, which are not usually registered with the state, are covered by personal property insurance. Your car is also not covered under the “Personal Liability and Medical Payments to Others” sections of your homeowner’s policy because insurance companies prefer you to insure vehicles with an automobile insurance policy.
How much coverage is needed?
Your home can be insured for either:
- Replacement Cost– pays you the cost of replacing damaged property, with no deduction for depreciation, but with a maximum dollar amount.
- Actual Cash Value– pays you an amount equal to the replacement value of the damaged property minus a depreciation allowance.
Unless a policy specifically states that property is covered for its replacement value, coverage is for actual cash value.
It is important that your policy should cover 100% of the replacement cost of your home. That way, the insurance company will pay you the full replacement cost for any damage up to the coverage limit. If you fear inflation will decrease the value of your policy, an inflation guard endorsement, which is built-in to many homeowners’ policies these days, ensures that your coverage amount increases a bit every year to keep up with inflation. What this means, for example, is if your house increases in value next year by 5% your policy’s replacement limit will also increase, according to some predetermined index of local home values.
Additions to your home
If you add improvements to your home, you should increase your coverage. Don’t wait until the addition is completed to increase your coverage, contact your insurance agent or representative shortly before or after construction begins. Otherwise, if the new addition is damaged or destroyed before you have increased your coverage, you may be responsible for the cost of repairing or rebuilding the addition.
Also, make sure that contractors and subcontractors working on your addition have workers’ compensation by requesting copies of their insurance certificates. If the coverage is insufficient you may need to extend the liability limits portion of your homeowners policy, or simply find a company whose insurance meets your requirements. The reason for this is relatively simple to understand… Workers injured while working on your addition could sue you if the contractor doesn’t have the proper insurance coverage.
What is Condominium/Co-op Insurance?
Insuring a condo or co-op is a little different than insuring a typical home because you don’t own the entire building. There are typically two policies involved: the master policy provided by the condo association or co-op board, and your individual policy, which is typically written on a standard form HO-6. If you know what is covered by the master policy, and purchase individual coverage for the rest, then you should have the protection you need.
The master policy
The common areas you share with other tenants should be covered by a master policy owned by the property. These areas include the roof, stairways, elevators, and basements. The master policy should protect the policyholder(s) from liability and physical damage. The master policy may also cover individual units as they were originally built, and may or may not cover fixtures. It is important for you to know exactly what the master policy covers so that you can purchase appropriate individual coverage for your unit and its contents. For instance, the master policy may cover original fixtures, but not improvements. If you or a former tenant has made improvements, you will want to be sure they are covered under your individual policy. The condo association or co-op board should be able to supply you with the information you need or provide you with the appropriate documents that explain the coverage.
Your personal policy
Typically, your personal condo or co-op coverage will be written on Form HO-6. While the liability coverage on Form HO-6 is similar to that found in other homeowner’s policies, the property coverage is different. Form HO-6 covers your personal property, and other property such as improvements, additions, private balconies, private entranceways, private garages, and other property that is your insurance responsibility under the condo or co-op documents. However, the policy only covers physical damage to property if it is caused by a “named peril” identified in the policy. Those include fire, lightning, storm, explosion, riot, aircraft, smoke, vandalism, theft, broken glass, and volcanic eruption to name a few. Review the perils covered by your policy and remember, you always have the option to purchase coverage to protect you against additional perils.
Things not covered on the typical policy
If your policy is written on Form HO-6, your possessions are not covered for property damage resulting from perils listed in the “exclusions” section of your policy. These can typically include damage due to enforcement of building codes, earthquakes, flooding, power failures, neglect, war, nuclear hazard, or intentional acts.
If your personal policy is written on Form HO-6, pay particular attention to the paragraph entitled “Loss Assessment.” This paragraph entitles you to collect up to $1,000 for loss assessments charged to you by the condo or co-op association. Loss assessments typically result from losses suffered by the condominium or co-op as a whole, such as damage to a roof. These damages are then passed through to all unit owners.
Your policy will also specify what amounts you can recover in the event of a loss. In the case of property such as fixtures, balconies, improvements, and certain other such items, you are entitled to receive the actual repair or replacement cost if the damage is repaired or replaced within a reasonable time. If the damage is not repaired or replaced, you may only receive the actual cash value of the property. As for your own personal property, you are entitled to receive the actual cash value of any damaged property, but no greater than the repair or replacement cost of the property. Loss settlement is always subject to the coverage limits described in your policy.
In order to qualify for payment from your insurance company, you must meet the conditions that are spelled out in your homeowner’s policy. Some conditions dictate your responsibilities before a loss occurs, and some dictate the actions you must take after the loss to remain eligible for coverage. Reading your policy carefully to familiarize yourself with your responsibilities under the policy is always advisable and can speed things along should a loss occur.
Where loss is covered under the master policy and personal policy
Form HO-6 has a unique feature. When a loss is covered by both the condominium’s or co-op’s master insurance policy and your individual policy, your homeowner’s insurance will pay only for the balance of the loss that remains after the master insurance policy pays 100 percent of its limit.
What is Renters Insurance?
If you rent a house or an apartment, you might think you don’t need insurance because you don’t own the building. Your landlord has coverage, right? Probably. But your landlord’s insurance only covers the building, not your belongings. Without insurance of your own, you could be left with nothing in the event of a fire or burglary. And what if a friend slips on your bathroom floor and hits his head on the bathtub? Your landlord’s insurance won’t pay for his medical expenses, either.
What is it?
Renters insurance (HO-4) is a special kind of homeowners insurance. It provides no coverage for the building itself. Instead, it covers your personal possessions if you rent a house or apartment and offers a level of liability protection.
What is covered?
Standard renter’s insurance policies only cover losses that result from any of the “Named Perils” itemized in the policy. If your property is lost or damaged as a result of one of these perils, your insurance company will compensate you for your loss. Some of the typical “Named Perils” are:
- Fire or lightning
- Vandalism or malicious mischief
- Broken glass
- Volcanic eruption
- Falling objects
- Weight of ice, snow, or sleet
- Accidental discharge or overflow of water
- Sudden and accidental tearing apart
- Artificially generated electrical charge
What is not covered?
It should go without saying that losses caused by any other event are not covered. However, most renter’s insurance policies go a step further, listing specific events which the policy does not cover. Typical exclusions include:
- Enforcement of building codes and similar laws
- Power failure
- Nuclear hazard
- Intentional acts
If you live in an area prone to earthquakes or flooding, you should consider purchasing a separate flood insurance policy to insure your possessions against damage caused by these hazards.
Replacement cost vs. Actual cash value
These may sound like highly technical terms, but they are actually very important in determining how much money you will get if you ever have to file a claim. When you get a quote you should always make sure you know which type of coverage is being described.
Actual cash value coverage reimburses you for only the amount your property was worth when it was stolen, damaged, or destroyed. This means that if all your clothes suffer smoke damage in a fire, your insurance company probably won’t pay much more than you could’ve made at a garage sale – not the $4,000 you spent over the last six years to create the perfect wardrobe.
Replacement cost coverage, on the other hand, reimburses you for the amount it will cost to replace your property. If you bought a $400 television two years ago, you’ll receive enough money to go out and buy another television just like the old one. Replacement cost coverage typically pays significantly more than actual cash value coverage.
Like any type of insurance, your renter’s insurance policy places a limit on the amount it will payout. Coverage levels can typically start somewhere around $15,000 and go up from there. As you increase your level of coverage, your premiums will increase as well.
In addition, insurance companies have per-category limits for certain items such as jewelry, antiques, computer equipment. If the value of your property exceeds these limits, you will want to get an appraisal proving its worth. You can then purchase an additional rider to cover the full value of your property.
Renters insurance also provides liability coverage. A typical renters insurance policy covers you for accidents and injuries that occur in your home, as well as accidents outside of your home that is caused by you or your property. (This does not include automobile accidents.) This liability coverage includes legal defense costs if you are taken to court over such an accident.
Additional living expenses
If your house or apartment is unlivable as a result of any of the 17 named perils, renters insurance will typically cover your “additional living expenses.” That means that it will pay for you to live somewhere else (usually in a comparable house or apartment) while your home is being repaired. The dollar limit on this type of coverage is stated within the policy. There may also be a time limit on this type of coverage.
What does it cost?
The cost of renters insurance varies greatly depending on such factors as where you live, the construction of the building, your deductible, and how much insurance coverage you need. But renters insurance is much less expensive than homeowners insurance. Replacement cost coverage is somewhat more expensive than actual cash value coverage, but in the event of a catastrophic loss is always worth the extra premium.