While many people probably wish they could get a straightforward home and property insurance policy that covers everything, it doesn’t exist. If it did, you probably wouldn’t want to pay the premium that came along with it anyway.
Covering every possible situation would result in too many claims for the insurer. After all, they are for-profit businesses, and it would be difficult to make any money when they are constantly paying out settlements.
What is homeowners insurance and what does it cover?
Homeowners insurance is a policy that helps protect homeowners against losses due to specific events and circumstances.
What does it cover?
According to the Insurance Information Institute (III), a standard home insurance policy covers the following:
- Personal belongings
- The structure of your home
- Bodily injury and property damage liability
- Expenses for loss of use
Enhanced policies are also available, which can offer additional coverage on items such as other structures on your property.
Under what circumstances are the above covered?
Each insurance policy has a list of perils that it covers. III reports that HO-3 is the most popular policy type and it provides coverage if you incur damages as a result of the following perils:
- Civil commotion
- Volcanic eruption
- Damage from an aircraft or vehicle
- Falling objects
- Sleet, snow, and ice
- Sudden and accidental damage from home appliances and systems
While these perils are the most commonly covered, you can often choose from several policy options which offer more or less coverage.
Note, liability is not subject to the above perils. It covers bodily injury and property damages for which you, your family members, or your pets are found liable, whether at home or anywhere else in the world.
It helps to ensure that a lawsuit doesn’t cause you to lose your home.
How much is covered?
Most insurers offer three levels of coverage for homes and personal belongings: actual cash value, replacement value, and guaranteed/extended replacement cost.
- Actual cash value replaces the home or possessions minus the cost of depreciation, up to the policy limit.
- Replacement value replaces the home or possessions without deducting depreciation, up to the policy limit.
- Guaranteed/extended replacement covers whatever it costs to rebuild a home, and can exceed the policy limit in some cases.
Policyholders choose their levels of coverage along with their limits and deductibles. The amount of coverage that you need will vary depending on the cost to rebuild your home and the value of your personal possessions.
The more coverage you need, the higher your premiums and deductibles. As for liability and additional living expenses, they are covered up to the policy limits.
What does homeowners insurance not cover?
Homeowners insurance does not cover damages or losses due to any event that is not listed on your policy. Notable exclusions are losses due to earthquakes, floods, wars, sinkholes, landslides, and mudslides.
Additionally, damages that result due to a lack of proper home maintenance won’t be covered, and specific high-end items like furs, jewelry, and art may be excluded from coverage or limited.
Read about 6 things homeowners insurance doesn’t cover.
Many people ask about specifics like, “Does homeowners insurance cover water damage?” or “Does homeowners insurance cover decks, electrical panels, mold, attics, etc.?”
Long story short – homeowners insurance covers everything in your house, but only in certain situations.
Let’s look at a few examples.
- Let’s say you live near a volcano, it erupts, and your house is completely demolished. Homeowners insurance would pay to rebuild it and would reimburse you for your personal belongings and living expenses (while you didn’t have a home) because volcanic eruptions are a covered peril.
- If a thief breaks into your home, damages a window and steals several of your belongings, your belongings and window would be covered because theft is a covered peril.
- Say, for example, you have a pipe that has been leaking for a few weeks and you keep putting off the repair. If it bursts and fills your home with water, you may be upset to find out that the damages are not covered because the incident wasn’t technically “sudden and accidental.” Insurers will look for signs of previous damage and deny your claim on the basis that you didn’t take proper preventative action.
The primary determining factor is the cause of the incident, not the part of your home that incurs damages.
If you need more coverage than a standard policy offers, many insurers offer supplemental riders you can add. Further, if you want coverage for a cause not covered by your policy, you may need to get a dedicated policy elsewhere (i.e., flood insurance, earthquake insurance, home warranty plan, etc.)
How is renters insurance different than homeowners insurance?
Renters insurance is a policy that offers coverage against select perils to people who are renting their homes. According to the III, it typically covers the following in the event of covered damages or losses:
- Personal belongings
- Additional living expenses
It is very similar to homeowners insurance in that it covers personal liability, personal belongings, and additional living expenses, but it doesn’t include coverage for the home as that responsibility falls on the owner of the property.
Review and compare home and renters insurance companies
Because no home or renters insurance company covers everything, which insurer should you choose?
Companies will vary from one to the next in their pricing, coverage types, features, discounts, and quality of service. It’s wise to shop around, compare at least three companies, and then decide which one will offer you the best value.
Not a homeowner yet? Review renters insurance companies here.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.