Having to pay for a full year of homeowner's insurance when buying a house might seem like a huge expense. Most mortgage companies, however, require buyers to get homeowner's insurance. And even if you're not taking out a mortgage, buying homeowner’s insurance can be wise, so that you're financially protected if and when disaster strikes and damages your home or its contents.
It's important to know what types of damage your homeowner's insurance does and doesn’t cover. Although policies vary according to where you live and what features your house has, and they pay out different amounts depending in part on how much you've paid in, the scope of coverage is fairly standardized throughout the United States.
"Perils" and "Hazards" Covered by Homeowner's Insurance Policy
The sources of damage the typical homeowner's insurance policy covers are usually referred to as "perils" or "hazards." They typically include damage caused by:
- theft or vandalism
- explosions
- lightning strikes
- fires and smoke
- windstorms, including hurricanes and tornadoes
- hail
- weight of ice or snow on your roof, and
- freezing pipes bursting.
Most standard homeowner's insurance policies will also cover damage due to water discharging from air conditioners, plumbing or pipes, water heaters, and fire-protection sprinkler systems.
Sources of Damage That Are Excluded From Standard Homeowner’s Insurance Policy
Most insurance policies do not cover damage caused by:
- flooding
- earthquakes
- landslides
- mudslides
- sinkholes, or
- sump pump failure.
You can purchase extra coverage for most of these perils, though. Often, the extra coverage does not cost much more.
Standard homeowner's insurance does not include flood insurance, which must be separately purchased through the U.S. Government's National Flood Insurance Program (NFIP). NFIP typically covers only structural damage, not damage to personal property (discussed below).
Homeowner's insurance also does not cover natural wear and tear and aging of a house or property, nor damage from your failure to maintain your property. For example, if a tree from your property falls on your house during a storm, the insurance company will consider factors such as whether the tree was properly pruned and maintained or whether it was rotting. If you failed to maintain the tree properly, the policy will probably not pay for the damages caused by its fall.
Sometimes it can be difficult to determine what actually caused the damage, and insurance companies are known to split hairs. For example, if your house is damaged by a hurricane, your policy will likely cover the directly resulting costs. But if the hurricane also causes flooding, your policy will not likely pay to fix the resulting damage.
Will Damage to Home and Structures Be Covered?
Homeowner's insurance will normally cover damage to your house and other structures on your property, such as a garage, deck, or pool. There are monetary limits to the coverage, though. Those are set when you buy the insurance and are based on features your house has and how much the insurance company thinks it will cost to rebuild your house.
Your policy will probably also cover damage stemming from a neighbor's property, such as if a neighbor's tree falls on your house. The insurance company will work directly with the neighbor or the neighbor's insurance company so you don't have to get involved.
If your property is damaged by a storm or fire and the government declares the area a federal disaster area, then you can potentially apply for a grant or loan through the Federal Emergency Management Agency (FEMA) to help cover expenses not covered by your homeowner's insurance.
Will Damaged Personal Property Be Covered?
Homeowner's insurance covers damaged or stolen personal property that is normally kept within the house (assuming the source of the damage isn’t excluded from coverage). It will also cover personal property that is damaged or stolen in another place, such as your car or a child’s dorm room, if that property is normally kept in the house.
However, there are monetary limits. Very expensive items, such as jewelry or art, may need a separate policy.
Also, if you run a small business out of your home, you'll likely need a separate policy to cover damaged items related to the business.
How much you’ll receive back per item is usually based on its "replacement value." This is the amount it would cost you to buy new, similar, or equivalent items. Try to avoid getting a policy that instead calculates their "fair market value," which might be little more than you’d receive were the items sold on eBay or at a garage sale.
The insurance company will need you to prove the value of your lost items. The easiest way to do this is make a list and store the list in a safe place, preferably online. United Policyholders, a nonprofit organization, provides tools and resources to help with this.
Coverage of Living Expenses If You Must Move From Your Damaged Home
Your homeowner's insurance policy will also pay for accommodations if covered damage to your house makes it uninhabitable. This includes reasonable costs of rent or hotel bills, meals, laundry, and other living expenses, at a standard of living no higher than you enjoyed before.
Your insurance company will probably cap how much you can spend and how much time you're allotted to either repair the damage to your home or find a new home altogether.
If you have to leave your house because of an evacuation order, your policy is not likely to pay for living expenses while you are evacuated and waiting to return to your house. If your house ends up sustaining damage, however, you can probably make a claim for coverage.
Liability Coverage for Damage to Other People on Your Property
Your homeowner's insurance policy will also cover injuries other people receive on your property due to accidents or your negligence. This is referred to as "liability coverage." It covers medical bills for someone hurt on your property and reimbursement for damage to someone's personal property while on your property.
Liability coverage also covers medical bills for injuries that happen away from your property. For instance, if you take your child and your child's friend to the park and the friend gets injured, your homeowner's insurance may cover the cost of the medical bills if you are found to have been negligent while watching the child.
How High a Deductible Will You Be Responsible for Before Your Homeowner's Policy Will Kick in and Pay?
The typical policy has a cap on how much it will pay for certain types of damage. This depends in part on your deductible. You have some choice as to how high the deductible(s) in your policy go (either when you first purchase the policy or upon renewal). The higher the deductible, the lower your premium, because the insurer knows that most expenses will be paid out of your pocket, and you might never call on the insurer at all, unless there's major damage. But your mortgage lender, if you have one, might limit how how a deductible you can sign up for, out of fear that you won't keep sufficient cash on hand to fix major damage, and its collateral will drop in value as a result.
Consider the amount of your deductible before making a claim. If it’s high, and you would not receive much, if anything, over and above it, then think twice: Your insurance company can raise premiums after you make a claim, so making many small claims can work against you in the long run.
If you have a "hurricane deductible" in your policy, it’s probably higher than a regular deductible. That’s because it is based on a percentage of the house's insured value rather than a fixed dollar amount.
If Your House Is Destroyed or Sustains Major Damage, How Will the Policy Calculate Total Coverage?
Standard policies include what's called "replacement cost" coverage, meaning money to repair, replace, or rebuild a home with materials similar to the kind and quality used in constructing it; but only up to a preset limit. (If your policy were to pay 100% of the costs to rebuild the home you had before, that would be a rare and different type of coverage, called "guaranteed replacement cost.")
One positive feature of replacement cost coverage is that, even as your home ages and possibly declines in physical condition, the policy will make no deduction for depreciation (a decrease in value over time due to age or wear and tear).
By contrast, another type of possible coverage known as "actual cash value" uses a method for settling loss claims that's based on the amount of money needed to repair or replace a home based on its depreciated value. This means you would in all likelihood receive less money to rebuild or replace your home than you would have with replacement cost coverage. Thus it's an option to be avoided.
When initially purchasing or renewing your policy, it's wise to not only choose replacement cost coverage, but to not to get cheap about your home's likely replacement cost in an effort to save a few premium dollars. For one thing, construction costs tend to increase over time, and the cost to rebuild your home with similar materials and workmanship could be higher than the amount for which you could sell it after a disaster. Also factor in such as changes in building codes, particularly if new, additional, or more expensive components are required upon reconstruction, for things like energy efficiency or fire safety. These only increase the likelihood that replacing all or part of your home will cost more than the home's market value. And if your home is damaged in a disaster that affects nearby homes, expect local construction costs to go up, due to high demand.
Most insurers require that a house be valued at its replacement cost in determining adequate coverage. Your mortgage lender might require you to obtain replacement cost coverage as well, as a condition of your loan.
What's more, some states have enacted legislation protecting consumers from the risks of not obtaining replacement cost coverage. In Florida, for example, homeowners' insurance companies must at least offer replacement cost coverage.
Policy Limits on Replacement Cost Coverage
Where replacement cost is used in determining coverage, the policy limit is usually set for at least 80% of the home's replacement cost. If you fail to insure your home for at least 80% of the replacement cost, your insurer may assess a penalty on partial loss claims. For example:
- If the replacement cost of your home is $125,000, 80% of that gives you $100,000 in coverage. So, if you insure your home for $100,000 and suffer fire damage of $20,000, your insurer will pay the full $20,000 loss claim.
- If you insure your home for only $80,000 to cover the mortgage, and then suffer fire damage of $20,000, your insurer will pay only a portion of the $20,000 fire loss, very possibly prorated based on the percentage by which your home was underinsured.
As you make improvements to your home, keep track of and report them to your insurance company. Each improvement increases the replacement cost of your home. You should check with your insurance agent each year to be sure that you have adequate coverage.
To make sure that you're not among the American homeowners who are underinsured (as most are), you might also want to include in your policy an inflation guard endorsement, which automatically adjusts the replacement cost coverage limits of your home to ensure that your coverage is adequate.
And don't forget to consider including a scheduled personal property endorsement, which provides separate protection, over and above your policy limits, for such items of personal property as jewelry, furs, stamps, coins, and fine art. Normally, these items are covered on an actual cash value basis, with sub-limits that cap the items' replacement cost. Also called a personal article floater, the additional protection requires each item to be itemized and described.
What If You're Having Trouble Obtaining Homeowners' Insurance at All?
Because of recent major losses from various natural disasters such as fires in California and floods in the South, the insurance industry has tightened up its requirements. Some are quite careful about what homes they choose to insure, others have stopped offering insurance in entire states or regions. You could find yourself literally unable to obtain coverage on the home you'd like to buy. If this happens to you, you might need to either:
- seek coverage from a non-admitted excess or surplus insurer (which might be legitimate, but under less state regulation, and with no backup from a state guaranty fund if the claims filed against it exceed its financial reserves)
- go to a state entity for "last-resort" coverage (though this itself has its risks, since the state could run out of money in a major disaster), or
- pursue some combination of these options.
An insurance broker can help you sort through the possibilities.
When to Contact an Attorney
If you have a dispute with your homeowner's insurance company regarding what's covered under your policy and whether or when the insurance company will pay, you might want to talk to an attorney, especially if a lot of money is at stake.