First-time FAQ: what does homeowner’s insurance cover?

You probably know that buying a home comes along with the need for a homeowner’s insurance policy. However, many of us don’t know much beyond that when it comes to protecting our property.

If you need a little guidance when it comes to the ins and outs of homeowners insurance, you’ve come to the right place. Below is an explanation of what you need to know about your eventual policy, starting with the basics:

So, what is homeowner’s insurance?

Put simply, homeowner’s insurance is a policy that you can buy to to protect your home and belongings in the event of an unforeseen disaster. Typically, these policies are intended to cover incidents like theft, fire, or vandalism. In the event that one of these incidents occur, you have the ability to submit a claim and be reimbursed for the cost of repairing your property or restoring your belongings.

For most homeowners, carrying this type of insurance policy is a requirement.

Many mortgage companies will make having a policy a condition of issuing the loan since it protects their interests as well as yours. Though there is no industry-wide limits to how much or how little insurance you can have, your loan officer will probably specify a minimum coverage amount, based on the value of your home.

Unfortunately, how much you can expect to pay for one of these policies can vary wildly, depending on where you live, how much coverage you’ll need, any past claims you’ve made, and your credit score.

Your best bet in finding the right policy for you is to connect with an insurance agent who can help you discover your options and talk to you about ways to save, such as bundling your policies.

Types of homeowner’s insurance

It’s worth noting that every homeowners insurance policy is different, so you’ll want to be sure to read yours carefully in order to understand exactly what’s covered. That said, there are eight distinct types of policies that you can buy.

They are:
HO-1 Basic Form
The most basic form of homeowners insurance, this type of policy only safeguards against specific events, including:

  • Fire or smoke
  • Explosions
  • Lightning
  • Hail and windstorms
  • Theft
  • Vandalism
  • Damage from vehicles
  • Damage from aircraft
  • Riots and civil commotion
  • Volcanic eruption

This type of policy isn’t seen much anymore due to its strict limitations. Most insurers find it isn’t enough coverage to provide true protection. Also, depending on the policy, it may or may not cover your belongings, as well as the structure of the home itself.

HO-2 Broad Form
An extended form of HO-1 coverage, this policy covers all of the events named above, as well as the following:

  • Falling objects
  • Weight of ice, snow, or sleet
  • Freezing of household systems like AC or heating
  • Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems
  • Accidental discharge or overflow of water or steam
  • Sudden and accidental damage from artificially generated electrical current

It also typically covers your belongings. However, it’s important to note that since this is still a specified policy, any events that are not named in the above lists will not be covered.

HO-3 Special Form
HO-3 policies are the most common form of homeowner’s insurance these days. Rather than issuing specific events that are covered, these policies will cover any damage to your home’s structure or belongings, except certain excluded events.

Events like floods and hurricanes are typically excluded, so you may want to look into separate rider policies for those, if you live in an area where these events are common.

HO-4 Tenants Form
Also known as renter’s insurance, this form will not be applicable to you as a homeowner. It differs from other forms of homeowners insurance because it works under the assumption that the landlord will have the home’s structure insured separately. Therefore, these policies only protect the tenants’ belongings.

HO-5 Comprehensive Form
HO-5 policies are similar to HO-3 policies in that they protect against any sudden or unexpected event, except those that are specifically included. However, these policies are usually broader with fewer exclusions. They also allow you to choose your own coverage limits. This is the broadest form of coverage that you can buy.

HO-6 Condo Form
Specifically made for condo owners, HO-6 policies protect the structure of your unity itself, as well as your belongings and personal liability. It works off the assumption that the rest of the building is covered by the policies carried by other owners and the governing association.

HO-7 Mobile Home Form
A policy specifically for mobile home or manufactured homeowners, these policies are essentially the same as an HO-3.

HO-8 Older Home Form
Historic homes and registered landmarks usually carry this type of policy. Again, it’s essentially the same as an HO-3, except for a few specialized provisions that are tailored to suit the needs of older homes.

How these policies work

Homeowners insurance policies work by issuing you a payout to rebuild your home and/or replace your belongings after a disaster.

If you make a claim that is covered under the policy, the insurance company will reimburse you in one of three ways:

Market Value Coverage
Sometimes also called Cash Value Coverage, the insurance company will issue a payment for the cost of replacement, minus a deduction for appreciation. This is generally the most affordable type of coverage, but be aware that a payout will most likely not cover the entire cost of replacement.

Replacement Cost Coverage
These policies resolve to repair or replace your items, without deducting for depreciation. However, your coverage only extends to the policy limits, so if replacement costs more than that, you could still be paying out of pocket.

Guaranteed or Extended Coverage
Guaranteed or extended coverage is the most comprehensive (and most expensive) option. These policies agree to repair or replace your items, even if the amount goes above policy limits. However some companies do have caps on how much they’ll pay, such as 25% above the limit.

When should I make a claim?

Unfortunately, homeowner’s insurance is something you buy, hoping you never actually have to use.

Conventional wisdom states that you should only ever make a claim in the event of severe, unavoidable damage, or any damage that is so great there’s no way you’d be able to afford to fix it on your own.

The reasoning behind this thinking is due to the fact that even one claim is enough to substantially raise your premium. Insurance companies have found that customers who submit one claim are more likely to do so in the future, so they try and deter you from it by raising your rates.

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