A Guide to Homeowners Insurance

Homeowners insurance, or hazard insurance, is a type of property insurance that pays for losses related to your home.  A homeowner’s insurance policy can include losses to your home, additional living expenses, loss of personal belongings, and liability insurance for accidents that may happen. There are many things that could go wrong for homeowners that make having homeowners insurance a must.

Why You Need Homeowners Insurance

If you are still making mortgage payments on your home, then your mortgage lender will require you to have coverage. If something bad should happen and your home is lost, your lender will probably lose a lot of money. So one of the conditions of them lending to you is having active homeowners insurance on the property.

Once you pay off the home, you could technically discontinue coverage—you’re not legally required to have it. But this would be a terrible mistake. One bad storm or accidental fire could mean you lose everything you have in one night. Insurance isn’t just a way to protect your mortgage lender—it protects you from losing your largest and most important asset. It also pays to replace personal belongings, and provides liability coverage in case accidents occur in the home or on the property.

What Homeowners Insurance Covers

Damage to Your House

Insurance covers many different kinds of damage that can happen to your property, including fire, smoke, hail, lightning, wind damage, water damage, accidental damage, electrical damage, rioting, vandalism, and more. Some of these kinds of damage might be excluded based on your location—if you live in an area prone to earthquakes, expansive soils, hurricanes, landslides, floods, water, and wind damage might not be covered by your homeowners policy. Depending on where you live, you may need to buy separate policies to cover these events.

Theft

Besides the house itself, the contents of your house are covered, so if someone breaks in and steals from you, you can file a claim.  Personal property coverage typically comes with limits. If you have valuable items, you may need a separate rider to cover certain belongings that are worth more than your current limit.

Falling Objects/Trees etc.

You are responsible for coverage for falling objects that land on and damage your home—if your neighbor’s tree falls on your house, it’s your insurance that will be billed. Similarly, if a plane crashes into your house, your insurance policy will cover you. Damage from heavy weight on your roof might also cover your home, like an extreme amount of snow or ice.

Lodging While You’re Displaced

If you and your family are forced to live in a hotel while your home is repaired and made habitable again, this will typically be covered by your homeowners insurance policy.

Liability

If someone is injured on your property, your homeowners’ insurance policy will cover your liability and help with medical bills for the injured party.

What Homeowners Insurance Doesn’t Cover

A lot of things aren’t normally covered by insurance policies, and might require extra coverage of some sort:

Acts of God are a tricky category for homeowners insurance. An ‘Act of God’ is something that was not under anyone’s control, like a storm or natural disaster. Some of these events are usually covered by homeowners insurance, like wind and hail, while many natural disasters are not covered, like floods, hurricanes, earthquakes, volcanoes, tornados, and landslides.

Sewer Backups are typically not covered by insurance unless specifically added to the policy. Keeping the sewer line flowing is considered a maintenance obligation for the homeowner, so it’s not automatically included in one’s policy.

Pet Damage caused by your animals isn’t covered by homeowners insurance. If your pet damages someone else’s property, then that’s probably covered by your liability coverage, unless you have a dog breed that is specifically excluded, which we’ll talk about next.

Liability for Excluded Dog Breeds is not part of your homeowners insurance. Depending on what state you reside, some insurance companies are no longer providing liability insurance for dog bite claims for certain breeds of dog they consider dangerous, and you will not get insurance for any damage or harm they might do. It’s not uncommon for your insurance company to ask how much your dog weighs and base part of your insurance premium on that.

Insect Infestations are not included in homeowners insurance, nor is damage from other pests, like birds and rodents. Like your sewer line, preventing this damage is considered a home maintenance obligation, not an insured event.

Deliberate Damage is excluded from your homeowners’ coverage. Some people might think they can damage their own home and collect a large settlement, but your insurance company will investigate and if they find evidence of fraud, they will deny your claim.

Mold is another home maintenance issue that your insurance does not usually cover. Sometimes, if mold results from other covered damage, it will be covered too, but only if you reported the initial damage claim right away and that incident is covered.

Wear and Tear isn’t covered—add this to the list of things that fall under home maintenance, not insurable damage.

War or Government Action isn’t covered.

Special items of a high value, like jewelry, guns, stamp collections, etc. are not covered. If you have any valuables that you think might not be covered, bring this up with your insurance company so you can get the extra coverage you need. Some kinds of high-value property will be less expensive to insure if you keep them in a safe or vault.

Types of Insurance

ACV

This is the “Actual Cash Value” of your insured property. It is calculated as the cost of the property when it was new, minus depreciation. This is the cheapest kind of insurance but doesn’t protect you as much—for example, if you own a lot of books or movies on DVD, and they are all lost in a fire, your insurance adjuster will find the lowest cost version of that book or DVD online and give you that much—probably a few cents for each item. This leaves out the cost of shipping & handling, etc.

Replacement Cost Value

Or RCV, insures you for the actual cost to replace the lost property, not just the cheapest version your insurance company can find online. In this case, you’d get enough money to replace your lost property with a new version, including the cost of shipping & handling, installation, etc. RCV policies are more expensive than ACV policies, and provide much better protection.

Guaranteed Cost/Extended Replacement

This ensures you that your rebuilding costs are covered. Often the value of your home when you buy insurance isn’t the same as the cost when you go to rebuild, due to inflation and/or property value fluctuations. Or a widespread shortage of building materials can make the cost to rebuild higher than estimated. Guaranteed or extended replacement cost policies make sure you get more money than the insured value (typically up to 125%) to cover this gap.

It’s possible for different parts of your home to have a different type of insurance. Your home structure might have replacement cost value coverage, while your belongings inside the home could have actual cash value coverage.

Optional coverage

You can opt for extra coverage for specific circumstances:

• Anything not included. The things we listed above might not always be included. Depending on where your property is, wind damage might not be covered automatically. Ditto water damage from a sewer backup. Find out what isn’t covered and see what it takes to get that kind of coverage added. An entirely different insurer might provide certain things, like flood damage, through something like the government’s National Flood Insurance Program.
• Identity theft coverage. These days, consumers need to act to protect themselves from Identity Theft, and many insurance companies offer protection for victims of identity theft. If you’re not insured, then work to avoid being a victim by checking your credit reports, get a credit report review, or subscribe to a credit monitoring service.
• Personal Property not covered. Not all of your personal property is automatically covered by your homeowners’ insurance policy. Jewelry, fine art, or valuable collections might need separate coverage or a rider that extends your coverage beyond its normal limit.
 

Comparing Insurance Companies

Insurance companies tend to have similar policies and business practices, but you can get quotes from multiple companies to see if one makes a better offer than another. Every company has their own formula for calculating insurance premiums, but these are trade secrets and the only way to know for sure what they will charge is by asking them for a quote.

But it’s not all about premiums. Insurance isn’t necessarily something you want to buy on price—sometimes a slightly more expensive policy comes with much better service.

One way to compare companies is to look at their “complaint ratios,” which are tracked by the National Association of Insurance Commissioners, or your state’s Department of Insurance. These complaint ratios will show you which insurance companies get the most complaints about how they handle claims, and might help you avoid a company with a bad reputation.

Be sure to compare apples to apples. If you ask one insurance company for a quote, provide the same information to the second company, so you can get a true comparison of their rates. Any different information you give can throw off the calculation and you won’t truly know who’s offering the better deal.

Buying Insurance

There are 3 kinds of companies that sell insurance:

1. Direct sellers are insurance companies who sell their products directly to consumers, typically online or by phone. You won’t have an insurance “agent” or representative with a direct seller.
2. Captive agents represent a single insurance company and sell insurance through a local office. This local agent gives you a single point of contact when you have to talk to your insurance company.
3. Independent Agents are agents who sell policies from multiple insurance companies, so they can help you compare different policies with one stop. With independent agents, if you decide to switch insurance companies later, you may be able to do so while keeping the same local agent.

Typically, you will pay for homeowners insurance through your mortgage lender. Your house payment will be divided into PITI—principal, interest, taxes, and insurance. The mortgage lender handles disbursement of the insurance premium to your insurance company, and pays the property taxes. If your insurance or tax rates change, your mortgage company may contact you and adjust your mortgage payment to make up for any shortfall.

Once you’ve paid off your mortgage and own your home, you will be responsible for paying taxes and insurance directly. Let your insurance company know you’ve paid the mortgage in full, and they’ll start sending the insurance bill to you directly rather than to your mortgage lender.

No matter your situation, if you are a homeowner, you need this insurance. If you are a renter, you can get renters insurance to cover your belongings, and your landlord will handle the homeowners insurance.

There are a lot of specific exceptions and clauses that make individual policies differ—compare multiple offers not just for the price of the insurance premiums, but the kinds of things they cover and exclude; the reputation of the insurance company for promptness and fairness when handling claims; and whether it’s important to you to have a local agent to work with.

If you are buying a home for the first time, be sure to get first-time homebuyer education, which will teach you more about insurance and what to look for when choosing a policy.

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