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By Mayra Paris
November 20, 2020
Rangely GarcĂ­a / Money

Homeowners insurance is a type of coverage that pays out if your home or personal property suffers damage due to an accident, including a fire, or certain natural disasters. It also includes personal liability coverage, which protects you in case a bodily injury or property damage lawsuit is filed against you.

Homeowners insurance premiums can be costly, depending on your location, coverage limits, and the value of your home and property. To approve a mortgage, lenders require that borrowers buy a homeowners policy. Coverage is otherwise optional, though, and some policyholders allow their coverage to lapse once their mortgage is paid off. However, about 1 in 20 homes has an insurance claim every year, and the peace of mind a homeowners insurance policy could offer may be worth more than its cost.

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What You Should Know

  • An HO-3 policy, the most common kind of homeowners policy, covers all perils that damage the structure except those explicitly excluded from the policy.
  • Under an HO-3 policy, personal property, such as your furniture, electronics, and jewelry, are covered on a “named perils” basis, meaning that coverage is in effect only if one of the causes listed in the policy is responsible for the loss or damage.
  • An HO-5 policy, known as a “comprehensive form,” covers your dwelling and your personal property on an “open perils” basis. Its lack of a specified list of covered perils makes this insurance more expensive than an HO-3 policy.
  • Personal liability coverage covers you for lawsuit damages if someone suffers bodily injury or property damage and you’re found responsible in a court of law.

What Homeowners Insurance Includes

Homeowners insurance has two components: property coverages and liability coverages.
The information below focuses on HO-3 policies, also known as “special form” policies, which are the most frequently sold type.

Property Coverage

Property coverage includes your dwelling, additional structures on your premises (such as garages and sheds), and your personal property.

In some cases or areas, basic homeowners insurance isn’t enough to protect your house adequately from these listed perils. According to the Insurance Information Institute (III), property insurance covers damages from wind storms such as tornadoes and hurricanes. Damage from wildfires is generally covered under regular homeowners policies. However, policies may be difficult or very expensive to purchase, at least from regular insurers, in areas of states that are particularly prone to wildfires. In California, Florida, and Texas, just to name a few states, there are state-backed insurance companies that sell policies to cover wildfire risk.

An HO-3 policy operates on an “open perils” basis. This means the insurance will cover any claims that may arise for any reason except for the reasons explicitly excluded in the policy.

Damage related to these perils may, however, be covered. For example, while damages from the direct effects of an earthquake aren’t included in homeowners insurance, fire damage resulting from an earthquake is. Your policy may also reimburse you for expenses such as living costs while earthquake damage to your home is repaired.

As for your personal property, HO-3 policies will cover your personal (not business-related) belongings, wherever they may be lost or damaged, or items that belong to other people if those are in your dwelling. Your insurance company may place limits on the belongings that are covered, at least without special riders, or may only cover them up to a certain amount.

Liability Coverage

Homeowners insurance also covers your personal liability when you’re sued for causing bodily injury or property damage, or for medical payments to others when their injury is caused by you or due to a condition in your dwelling (e.g., if an uneven front step causes someone to fall and break a bone).

In the case of personal liability, insurance will pay for the damages for which you are legally liable up to a maximum amount. For medical payments to others, the insurance will cover the costs the injured person incurs for medical treatment and funeral services. In both cases, your own injuries as a policyholder are excluded from this coverage.

Many insurance companies exclude bodily injuries and property damage caused by certain dog breeds or exotic pets from coverage. Some companies may even deny homeowners insurance coverage outright if you have a non-covered pet. If you have an unusual pet, be sure to confirm with your insurer whether your liability for it will be fully covered.

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If you need more liability coverage than your insurance company is willing or able to sell to you, you might consider an umbrella liability policy, which can cover a wide range of covered perils (such as additional liability under your auto policy) with higher coverage limits.

How Much Does Homeowners Insurance Cost?

According to the National Association of Insurance Commissioners, the average annual homeowners insurance premium in 2017 was $1,211. How much you’ll pay will vary, and depend heavily on where you live and the coverage limits you choose.

For example, if you’re in an area with a high crime rate, your insurance premium may be higher because you’re more likely to file a claim for theft. If your house includes a premium home theater room, and you adjusted your personal property limits upward to cover its cost, you’ll probably pay more in premiums due to the potential cost to replace the theater should it be destroyed by fire or another calamity, for example.

Another factor that helps determine your premium is the type of reimbursement you select. You can choose either actual cash value, which means the coverage is subject to depreciation, or replacement cost, which reimburses the full cost to replace lost property with an equal or similar item. This last option results in higher premiums because it’s typically more expensive for the insurance company to cover.

You can usually get a discount on your premiums if you pay them annually in advance or via automatic electronic payments, or renew your policy more than 30 days before it expires. Other common discounts include those for owning protective equipment such as smoke detectors, alarms, sprinklers, extinguishers, or security cameras.

To learn more about homeowners insurance and how to find the policy that’s right for you, check out our page on the Best Homeowners Insurance Companies.

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Advertiser Disclosure

The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

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