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By Daniel Bortz and Javier Cruz
Updated: April 7, 2021 10:54 AM ET
A man stands in the middle of rain, surrounded by various house items. He holds an umbrella in the shape of a house roof.
Arad Golan Coll for Money

A typical HO-3 homeowners insurance policy comes with four tiers of coverage: dwelling, personal property, loss of use, and personal liability. Each protects you and your home in specific ways, generally against 16 known perils. More premium policies — such as the HO-5 — cover both personal property and the home’s structure for virtually anything that happens. This is called an open peril policy, since unless specifically excluded, coverage is eligible for damage from any disaster.

When you first look into homeowners insurance, you’ll find that most people simply need the basic four-part coverage of an HO-3 policy. Further down, you’ll learn what coverage you can and can’t expect, as well as any additional coverage or exclusions that exist. You can also check out Money’s top homeowners insurance picks for 2021.

Homeowners Insurance Table:

HO-3 Policy Features What it covers What it doesn’t cover
Dwelling Coverage Covers repairs and/or rebuilding costs of your home if damaged by specific hazards. -Specific natural events or disasters, like floods, earthquakes, and sinkholes.
-Damage caused by lack of maintenance.
-Intentional damage.
Personal Property Coverage -Covers personal items in your home, up to 50 or 70% of the amount of coverage your home is insured for.
-Coverage covers hazards, damage or theft.
-Additional coverage can be purchased via add-ons
-Any lost items.
-Damage to personal property due to natural disasters like floods and hurricanes.
Loss of Use Coverage -Coverage for additional living expenses that resulted from dwelling damage.
-It includes food, travel, and lodging expenses.
-Living expenses that surface after your dwelling is rebuilt.
Personal Liability Coverage -Liability protection for accidents and/or physical harm you or your family caused to someone else while in your dwelling.
-Lost wages reimbursement.
-Legal costs
-Pays medical expenses for people that don’t live in your dwelling.
-Personal liability coverage for people that live in your dwelling.
-Injuries that were inflicted on purpose.
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What does homeowners insurance cover

The Four Main Areas Covered by Homeowners Insurance:

A standard home insurance policy doesn’t just focus on protecting your home, but covers four distinct areas: the structure of your home, personal belongings and other contents in your home, temporary living expenses if you’re displaced, and liability protection. If you’re a tenant, you’ll need landlord insurance, and your renter should consider getting a renters insurance policy of their own — a simple homeowners policy will not cut it.

As with every insurance policy, there are limits and/or exclusions, so it’s important you take the time to familiarize yourself with each.

Dwelling Coverage:

Covers the structure of the home
Helps pay for repairs and/or rebuilding costs of your home if damaged by specific hazards.
These include fires, lightning strikes, windstorms, hail, explosions, vandalism, falling objects, ice or snow, and accidental water damage.
Can cover detached structures in your home, like garages, fences and mailboxes.

Dwelling coverage protects the main structure of your home from specific hazards or perils. These include windstorms, lightning, snowstorms, fires, accidental water damage, falling objects — like trees, for example — and even vandalism. Note that some insurance companies might offer additional protection, like septic tank protection, at no cost, while others might charge you extra.

Dwelling coverage can also cover damage to detached structures on your property, such as a shed, garage, fence, or gazebo — generally for “about 10% of the amount of insurance you have on the structure of the house,” says Janet Ruiz, director of strategic communications at the Insurance Information Institute.

However, some homeowners insurance policies might not cover detached structures in your dwelling, offering these instead as an add-on, so make sure to ask for availability before you sign up.

Types of Dwelling reimbursement policies:

Reimbursement type Definition:
Actual cash value Reimburses property damage based on the depreciated value of the item.
Replacement cost Reimburses accidents and property damage without depreciating its original value.
Guaranteed replacement cost/value Guarantees to rebuild your home completely if there is a total loss.

To make the best out of your dwelling policy, you need to understand the different reimbursement types that exist in the industry. Not all policies reimburse you the same amount of money that you lose if your home or personal property is damaged.

There are three reimbursement types: actual cash value, replacement costs, and guaranteed replacement cost/value:

  • Actual cash value: reimburses you for any property damage by reducing the depreciated value of the personal property. This means that if your sweater or your home catches fire, you will end up being reimbursed for less than what you paid for.
  • Replacement cost policy: reimburses you for the total amount of your home or personal property, no matter its depreciated value.
  • Guaranteed replacement cost/value: sold by insurers as an add-on to dwelling coverage, available regardless of your policy’s reimbursement form. It assures that your home will be rebuilt to its entirety, but only in cases where the damage to your home results in a total loss.

You might assume that picking a replacement cost policy over actual cash value coverage is the right way to go, but it might not be the best option for people that are financially strained.

Because replacement cost plans pay more, they usually have higher premiums and deductible costs. If you can afford one, then you don’t have to worry about being reimbursed at a depreciated value. However, if you can only afford an actual cash value policy, you can at least rest assured that your premiums will be lower than other policies.

A guaranteed replacement cost/value add-on works best if you live in a natural disaster-prone area, such as California and Florida.

Personal Property Coverage:

Covers the property in the home
Personal items in your home, up to 50 or 70% of the amount your home is insured for
Hazards, damage or theft.
Additional coverage can be purchased via add-ons.

With personal property coverage, your homeowners insurance policy protects the contents of your home from every form of damage that dwelling coverage covers. This includes fires, windstorms, and accidents, but also adds theft coverage.

The amount of coverage for each item varies from insurer to insurer, but runs between 50% and 70% of the amount of insurance you have on the home’s structure. You may need to provide evidence of your belongings to your insurance provider if you file a claim.

Loss of Use Coverage:

Covers temporary living expenses
Includes food, travel, and lodging expenses.

Loss of use coverage covers temporary living expenses while your home is being remodeled or rebuilt after an accident or disaster. These include hotel bills, meals, public transportation, gas costs, and other select living expenses that are listed in your policy. Many insurance companies set reimbursement limits that are tied to the dwelling’s property coverage total; around 20 to 50%. A dwelling that’s insured for $100,000, with a loss of use limit of 30%, will receive up to $30,000 to cover temporary living expenses.

If you rent out part of your home, most loss of use plans will also cover you for the rent you would have collected from your tenant while your home is being rebuilt.

Personal Liability coverage:

Covers physical harm
Liability protection for accidents and/or physical harm you or your family caused to someone else while in your dwelling.
Lost wages reimbursement.
Legal costs
Pays medical expenses for people that don’t live in your dwelling.

A standard homeowners insurance policy provides financial protection from liability, which covers physical harm to any outsider that doesn’t live in your home. That includes reimbursement of lost wages, as well as medical expenses that directly resulted from the accident.

Also covered are lawsuits for bodily injury or property damage caused by either you or family members. It pays for both the cost of defending you in court and for any court awards, up to the limit of your policy.

Liability limits generally start at about $100,000 — however, “we recommend looking at your assets to determine how much coverage you need,” Janet Ruiz says. “If you have a $1 million home, you probably want $1 million of liability coverage.”

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What Does Homeowners Insurance Not Cover?

HO-3 Policy Feature What it Doesn’t Cover
Dwelling Coverage Specific natural events or disasters, like floods, earthquakes, and sinkholes.
Damage to your home due to lack of maintenance.
Intentional damage.
Personal Property Coverage Lost items.
Damage to personal property due to natural disasters like floods and hurricanes.
Loss of Use Coverage Living expenses that surface after your dwelling is restored.
Personal Liability Coverage Personal liability coverage for people that live in your dwelling.
Injuries that were inflicted on purpose.

What dwelling coverage won’t cover

A standard home insurance policy’s dwelling coverage will not cover damage to your dwelling or detached structures from a flood, earthquake, or regular wear and tear. That’s why your mortgage lender may require that you purchase flood or earthquake insurance if your home is in a flood or earthquake-prone zone.

Flood insurance is available from the federal government’s National Flood Insurance Program (NFIP) as well as some private insurers. It typically costs an average of about $700 per year, but premiums will depend on your property’s elevation and other flood risk factors. You can get price quotes at FloodSmart.gov.

Lack of maintenance is another element that insurance providers keep an eye on, since it’s your job as a homeowner to keep your dwelling in pristine conditions. For example, water damage due to poor pipe maintenance won’t be covered, and neither will any mold that surges from non-accidental water damage.

Termites, roaches, and other pests aren’t covered either, since pest control services provide this service. Any intentional damage, like breaking a window by throwing a rock at it, won’t be covered either.
Finally, while having an older home won’t necessarily make it impossible to get homeowners insurance, it does involve more risk for the insurer. Premiums will likely be more expensive than for newer construction.

What property coverage won’t cover

As regards personal property coverage, expensive possessions like jewelry, art, or collectibles are not covered under basic homeowner’s insurance, though some insurance companies provide limited coverage for these items — usually up to $1,000 or $2,000 — under a basic insurance policy.

To insure these items to their full value, you’ll need to have them professionally appraised and purchase a special personal property endorsement or floater for your homeowners insurance policy. Rates can vary between providers, but expect to pay about 1% to 2% of the value of your item. For example, a $5,000 engagement ring would likely cost about $50 per year to insure.

Personal belongings damaged by natural disasters aren’t included in personal property insurance, either, since these are covered by their own, specific natural disaster insurance policy. Bear in mind that this coverage is not the same as for a home warranty, which helps pay for major appliance repairs due to normal wear and tear.

What loss of use coverage won’t cover

Living expenses that occur after your dwelling’s ordeal won’t be covered, as you no longer have the need to use the coverage. However, since loss of use coverage extends beyond your policy length, your insurer must continue to pay your expenses until your home is constructed, or until it reaches its cap.

What personal liability coverage won’t cover

Finally, personal liability has only two exclusions: it doesn’t protect the people that live in your home from accidents or harm, nor will it cover intentional damages. For example, if your neighbor comes for a visit, slips going down the stairs, and fractures his ankle, personal liability would cover his medical bills. However, if you caused the accident by pushing your neighbor intentionally, your insurer would deny your claim.

Important Information to Know When Choosing Your Policy Coverage

There are several factors that you should always weigh when making your final homeowners policy decision: never purchase less coverage than you actually need, and know that providers usually offer other insurance products as add-ons to complement their policies.

First, you really want your homeowners policy to be as effective as possible. Try to get as much coverage to rebuild your home and to replace as much personal property as possible in the event of an emergency. You can do this by going all-in on your insurance, or by choosing standard or low-premium policies and complimenting them with coverage add-ons, such as a guaranteed replacement cost dwelling add-on.

In terms of personal property, if you have many valuable items in your home — an expensive coin collection, for example — you should consider an enhanced personal property add-on to protect your personal property up to its intended value, not less.

For personal liability, you should always consider getting enough coverage to protect all your current assets, including your dwelling, personal property, and potential future wages. The reasoning is that, if someone is severely harmed in your home, chances are you’ll have to pay their medical expenses. If you then get sued, you’d incur more expensive costs.

Just as with personal property coverage, even your personal liability policy has its limits and won’t be able to pay for all legal expenses. To prevent losing your home or your personal property in a potential lawsuit, you need to be sure that your most important assets are covered by your policy.

There are a wide variety of add-ons for your homeowners insurance. These can help you customize your policy to fit your needs, but at an extra cost per add-on. Say you choose “Actual Cash Value” for your dwelling coverage reimbursement, and you really want to make sure your home is completely rebuilt in the event of a total loss. If your insurer offers the option, you can opt to get a guaranteed replacement cost/value add-on to cover your dwelling, without going all out on insurance.

Finally, take the time to see whether you can take advantage of policy bundling – often, you can access discounts when you purchase your homeowners policy with the same insurance provider who provides your auto insurance.

FAQs

What is homeowners insurance?

Homeowners insurance is a policy that protects your home from incidents, accidents and/or disasters, including weather events, theft, and vandalism. Additionally, most homeowners insurance policies include liability protection against potential harm to others or their property while they’re in your home. Finally, the policy also protects personal belongings, including devices, furniture, and clothing, for up to a specified amount. Not every policy is the same, so you should always read each one in-depth before choosing one.

How much is home insurance?

According to the Insurance Information Institute’s (III) 2018 data, the average annual premium for a homeowners insurance policy in the U.S. is $1,249. Insurance coverage costs can vary widely depending on where you live, since some states are considered high-risk areas for natural disasters, and insurers charge more to cover these homes.

When your home is being evaluated for a policy, there are several underwriting concerns: the environment and risk evaluation, the type of construction, and the personal property risk and valuation.

What is homeowners insurance?

Homeowners insurance is a policy that protects your home from incidents, accidents and/or disasters, including weather events, theft, and vandalism. Additionally, most homeowners insurance policies include liability protection against potential harm to others or their property while they’re in your home. Finally, the policy also protects personal belongings, including devices, furniture, and clothing, for up to a specified amount. Not every policy is the same, so you should always read each one in-depth before choosing one.

What are the six categories typically covered by homeowners insurance?

Your typical HO-3 homeowners insurance policy covers six categories: dwelling, other structure coverage, personal property, loss of use, personal liability, and medical payments. Dwelling protects your home from accidental and environmental damage, while other structure insurance covers detached edifices that your home might have, like fences and detached garages. Personal property coverage protects most items in your home from damage or theft, although every insurer sets up its own coverage limits. Loss of use insurance covers living expenses for you and your family if you’re unable to use your home properly due to reconstruction or other events. Personal liability coverage protects you from being liable if someone suffers personal and/or property damage in your home. Finally, medical payments insurance covers medical bills that arise from accidental injuries that non-family members suffer in your home.

What does homeowners insurance not cover?

Although it can vary according to provider and policy, there are various things that homeowners insurance won’t cover. These include damage from specific natural disasters like floods, sinkholes, earthquakes or landslides, since insurance companies usually sell these as a separate policy or as an add-on.

A typical homeowner’s policy also won’t cover maintenance issues, pest problems, sewer backup, and/or any vehicles on your premises. However, some policies protect personal belongings inside your car, up to a specific limit. Finally, some providers won’t cover dog bites from specific breeds that are considered “high-risk,” including pit bulls and German shepherds.

What type of water damage is covered by homeowners insurance?

A homeowners insurance policy will protect your home from storm-related damages that harm your dwelling’s structure, and from accidental water damage. These types of damage include accidental water discharges — like a pipe burst, for example — and may include coverage for accidental sewer backup or overflow.

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