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Homeowners Insurance Policy Types

With so many insurance [1] companies and types of home insurance coverage available to you as a consumer, knowing the differences is critical in making an informed decision when purchasing a homeowner’s insurance policy.

Whether you rent, own a condo or home, your primary residence should be covered against theft, damage and other potential risks.

Regardless if you are purchasing a homeowner’s insurance policy for the first time or you already have a policy, it is important to be well educated so you can be sure your home properly and adequately covered, what your deductible is and whether or not your rates are the best possible for the amount and type of insurance coverage you select.

There are several types of residential insurance policies available. Read on to learn more about the types of homeowner’s insurance you can purchase.

Standardized Homeowner’s Insurance Policies (HO)

  1. HO-A gives you limited actual cash value coverage on your home and its contents. Only specific types of damage listed in an HO-A policy will be covered. You can purchase HO-A amended policies that provide more extensive coverage than a base HO-A but the protection you get is still less than what is covered under an HO-B.
  2. HO-B coverage gives you replacement cost coverage for most insurable perils, with the exclusion of some risks.
  3. HO-C policies offer the most extensive coverage available.

When shopping for homeowners insurance, you must read the fine print to know what risks and items your policy will cover.

A homeowner’s policy is primarily intended to protect you as a homeowner from insurable perils, which can include fire, theft, hurricanes and others. Your individual policy is specified to cover only the perils and exclusions defined and policies differ from one homeowner to another, depending on many factors.
In order to receive full payment, less the specified deductible for a partial loss, insure your house for at least 80% of its replacement cost.

If your home is insured for less, your insurance company only pays a portion of the expense on claims for partial loss. Should your home be completely destroyed and all you have is actual cash value coverage, you likely will not receive adequate reimbursement needed to completely rebuild your home.

All policies have exclusions and typically do not cover injuries to animals or damage to motor vehicles, boat or aircraft. Risks such as a flood, mudslide, water damage caused by a sewer backup, damage caused by a war or nuclear threat, neglect, earthquake, power failure, seepage, dry rot or vermin are all risks that are generally NOT COVERED by a standardized homeowner’s insurance policy. Be very aware of these exclusions and consider special riders or additional policies if needed.

The perils covered and exclusions vary between insurers and types of policies so, again, it is critical that you read and understand all the provisions of your policy to understand the extent and kinds of coverage your policy includes.

Five Key Types of  Home Insurance Insurance Coverage

Rates for standard homeowner’s insurance policy include essential types of coverage, including:

  1. Coverage on the structure of your home.
  2. Coverage on other structures.
  3. Coverage on your personal belongings.
  4. Additional living expenses (ALE) also known as loss of use.
  5. Liability protection.

Coverage on the Structure of Your Home

Coverage on the structure of your home is the component of your homeowner’s policy that includes repair or rebuilding in the event your “dwelling” is damaged due to fire, hurricane, hail, lightning and certain other disasters specifically defined in the policy.

A "dwelling" is generally defined as your home, attached structures and fixtures in your home like built-in home appliances, plumbing and electrical wiring, and permanently installed heating and air-conditioning (HVAC) systems. Damage caused by floods, earthquakes or routine wear and tear is not covered.

Coverage on Other Structures

Most standard policies provide coverage on detached structures like garages, storage sheds, and fixtures attached to the land, including fences, driveways, sidewalks, and retaining walls. Typically these “other structures” are covered for about 10% of the total amount of coverage on your home.

Talk to your insurance company about the value of any “other structures” you have, such as a workshop or structure intended for business or commercial use on the same property as your home, which will not likely be covered by your homeowner’s policy and should be insured separately.

Coverage on Personal Belongings

Personal property like furnishings, clothes, and sporting equipment are typically covered in the event they are stolen or destroyed by specified insured disasters. Some policies include limited coverage for small boats like a canoe or kayak, but do not cover motorized vehicles unless unlicensed and used at home only.

Some personal belongings have limited coverage, including items such as artwork, firearms, electronic data and cash. Typically, the amount of coverage on belongings will be 50% to 70% of the amount of coverage on the structure of your home, but you should assemble a complete inventory of your belongings and their value in order to know how much coverage you need.

Expensive “luxury” items like silverware, jewelry, and furs are covered, but usually with specified limits. Many policies even cover "accidental disappearance," which means that lost items will be covered. In order to ensure expensive items for full replacement cost, you will need to cover them under a special personal property endorsement.

Landscaping such as trees, plants and shrubs will also typically be covered under the Personal Belongings provision of your policy if damaged by insurable perils, which does not include damage caused by disease or wind. This coverage is generally about 5% of the total coverage.

Homeowner’s policies also include “off-premise” coverage anywhere in the world, usually limited to 10% of policy’s coverage, as well as up to $500.00 coverage against unauthorized use of your credit cards.

It is critical that you document all personal belonging you own with photos, receipts when possible and/or expert evaluations of the worth of expensive items like artwork, collectibles, etc. If not, you will have a much harder time convincing your claims adjuster that you owned something and how much it was worth should you have need to make a claim due to its unfortunate theft or destruction!

Coverage on Loss of Use or Additional Living Expenses

Your homeowner’s insurance policy also covers additional expenses you incur above and beyond normal living expenses in the event you are unable to live in your home for some period of time due to damage resulting from insurable perils. This typically covers expenses such as hotel costs, meals, and other living expenses during the time your home is undergoing repairs or rebuilding.

The amount covered for additional living expenses is usually equal to 20% of the insurance coverage you have on your home. If you rent part of your home, the loss of income will also be reimbursed, although policies differ from one insurer to another. The Loss of Use provision is intended to allow you to maintain a "normal standard of living” should you suffer a loss resulting from insured perils.

Coverage for Liability Protection

Your standardized homeowner’s policy also personal liability coverage against lawsuits for bodily injuries or property damage that you or other members of the family who live in the home cause to others on your property. It also covers any damage or injury your pet may cause. This provision in your policy includes no-fault medical coverage so medical expenses are paid with no liability claim filed against you.

Legal defense costs and court awards are also covered, up to the liability protection limit of your policy. This coverage covers you, your family members, or your pets anywhere in the world. I once had a friend who was hit in the head by a golf ball. The golfer whose wayward tee shot hit him was responsible for his medical expenses and lost income, but fortunately the liability protection provision of his homeowner’s policy covered the damages!

While the amount of liability coverage you need is typically dependent on factors like your net worth and income, a typical limit of such coverage would be at least $300,000.

If needed, you can also get an umbrella or excess liability policy, which covers you for slander or libel claims. The typical cost for umbrella liability coverage runs from about $200 to $300 annually for each $1 million of additional coverage purchased.