What is Homeowners Insurance, and What Does It Cover?

Homeowners insurance is so important because, for so many people, your assets and wealth are tied up into your homes. While most people have a general understanding of how health insurance and auto insurance work, homeowners insurance can oftentimes be a confusing insurance policy to understand for both first-time home buyers and long-time homeowners.

 

What is Homeowners Insurance, and What Does It Cover?

 

What is Homeowners Insurance?

Homeowners insurance is made up of different coverages to protect your home, belongings, and personal liability. These provide coverage for injury and property damage to yourself, your home, and others in the wake of events like natural disasters, theft, fire, and more. Lenders require prospective buyers to purchase homeowners insurance when taking out a mortgage, so it’s imperative to understand all of the things that are, and are not covered when comparing policies. If you live in Texas, your insurance company will give you a copy of the Consumer Bill of Rights for homeowners insurance when you get or renew a policy.

 

Open Perils vs. Named Perils

When shopping for homeowners insurance, the terms open perils and named peril will come up frequently, and it’s essential to know the difference between the two to understand the kind of coverage you’ll be receiving fully. First, a ‘peril’ is insurance jargon used to describe covered events under your homeowners policy.

Open Perils

Your insurance will cover your dwelling (home) and any encompassing areas on your property, such as your driveway, fences, sheds, and more from whatever happens unless expressly excluded.

Named Perils

Named perils means your insurance company will cover you for a specific list of 16 (or 15 depending on your state of residence) disasters which include:

  • Fires or lightning
  • Windstorms or hail
  • Explosions
  • Riots or civil commotion
  • Aircrafts
  • Vehicles
  • Smoke damage
  • Vandalism
  • Theft
  • Falling objects
  • Damage from the weight of snow, ice, or sleet
  • Accidental discharge; overflow of water or steam
  • Sudden and unexpected tearing apart, cracking, burning or bulging
  • Freezing of plumbing
  • Unforeseen, accidental damage from artificially generated electrical current
  • Volcanic eruption

 

Actual Cash Value vs. Replacement Costs

Replacement Cost Policy

You are fully reimbursed for the cost of buying new items under this rider.

Actual Cash Value Policy

Under this policy, your reimbursement amount depends on the cost of the items minus any depreciation.

 

Coverages

Additional Living Expenses

In case you and your family are displaced out of your home or need relocation during repairs, homeowners policies cover this up to a certain amount. Additional Living Expenses covers things like hotel bills, restaurant meals, and other costs incurred while your home is under repair. If you rent part of your house out, ALE coverage will even cover the lost rent from the tenant.

Liability Coverage

In the event someone gets injured on your property, a homeowner’s policy can help protect a policyholder and their family members (even including pets) from lawsuits for bodily injury or property damage in which they’re to blame. It covers things like medical bills, protects you and your family, and in the case your dog bites someone (which is why some insurers won’t cover this if you own an aggressive dog breed). This portion of a homeowner’s policy even travels with you, going so far as keeping you protected if you spill a glass of wine on your neighbor’s rug and ruin it.

Personal Belongings

Most homeowners insurance policies will include a provision for contents-- your personal belongings not affixed to the home. That is why theft is typically considered a covered event for insurers. Personal belongings include anything from your furniture, clothes, jewelry, and more. The coverage is usually 50 to 70 percent of the insurance you have on the house, which is why it’s essential to conduct a home inventory to make sure you’re getting the appropriate amount of coverage.  Personal belongings coverage also extends to items kept off-premises, meaning you’re covered anywhere around the world. Some insurers limit the protection to 10 percent of the amount of insurance you have on personal belongings. There’s even coverage for up to $500 in the case of unauthorized use of credit cards.  While more expensive personal belongings like jewelry, furs, art, and antiques are covered by homeowners insurance, there’s typically a dollar limit. So, it’s a good idea to explore purchasing a particular policy endorsement or floater to insure the items for their actual appraised value.

 

What Is Not Covered In Your Homeowner’s Policy?

Although there are tons of perils that are covered by your prospective home insurance policy, there is a list of things that won’t be covered. Some of the more notable events that aren’t covered under typical home insurance plans are:

  • Earth movement (earthquakes, landslides, mudslides, subsidence, sinkholes)
  • Intentional loss
  • Mold, fungus, or wet rot (unless hidden within the walls, ceilings or beneath floors after an abrupt discharge or overflow of water from plumbing or HVAC systems)
  • Any animals owned by the insured
  • Mischievous acts
  • Nuclear hazard
  • War
  • Ordinance of law (meaning the government orders you to tear down, rebuild, or renovate your home to meet local regulations)
  • Neglect from the homeowner
  • Power failures
  • Water damage (when it occurs from flooding, tidal water, waves, sewer backup, groundwater seeping up to the home)

 

Are Floods and Earthquakes Covered Under My Policy?

One of the most common misconceptions is that home insurance covers events like floods and earthquakes. Now while the standard HO-3 does cover volcanic events (named peril), surprisingly, floods and earthquakes are not part of a primary home insurance plan. Flood insurance is available through the National Flood Insurance Program, and earthquake insurance is typically packaged as its own policy in areas where those are common.

 

Overlooked Homeowners Protections

While so far, we’ve given you a tentative idea of what to expect with your potential homeowner’s insurance, many smaller parts of home insurance are neither standard nor often considered. Here are some commonly overlooked elements of your homeowners policy that you may not have known. Trees, plants, and shrubs are covered under a standard homeowners policy, generally up to $500.  However, these would not be covered due to poor maintenance or disease.  Termite damage is covered in the case something abrupt or accidental happens in your home, and the termite or vermin damage entirely is hidden from view. Otherwise, termites are considered preventable, and most homeowners are made aware of any damage/problems before it becomes severe.  Green Home Coverage is one of the least-known elements under homeowners insurance. Also called “green reimbursement” or “green improvement,” this endorsement allows a home to be rebuilt with eco-friendly, green solutions or replace covered items with more energy-efficient products.

 

Homeowners Insurance Deductibles

A homeowners insurance deductible is the payment that you, the insured, are responsible for paying out of pocket in the case of a covered loss before the insurance company covers the rest. For example, if your deductible is $1,000 and your home sustains $40,000 in covered damages. Your insurance company will end up paying you $39,000 after you have paid the deductible.

Standard vs. Percentage Deductibles

There are two types of homeowners insurance deductibles to choose from when selecting your policy and the difference between the two could mean hundreds, if not thousands, in savings on your homeowners insurance policy.

Standard Deductible

This is the standard, fixed-dollar amount deductible that many people choose. Standard deductible rates can range anywhere from $500 to $2,000, but they can vary higher and lower.  The example provided above describes a scenario where a standard deductible was used-- a fixed dollar amount out of pocket while your insurer pays the rest.

Percentage Deductible

This type of deductible is specific to named storm, wind storm, and hurricane-related claims. The deductible amounts are determined based on a percentage (typically ranging from 1%-10%) of either your total dwelling coverage or the home’s insured value.  Let’s say your home is insured for $100,000 and your homeowners policy has a 1% hurricane deductible-- $1,000 would be deducted from your claim payment. If the home sustains $20,000 in damage, you would be compensated $19,000 by your insurance provider.

 

Where to Find and Compare Homeowners Insurance

Thankfully, you don’t have to go through this home insurance shopping experience alone. Whether online or in-person with a local insurance agent, resources are within arms-reach to help make this journey just a little bit easier. Sites like Phoenix Protection Group have all the information you need and can be a click away from ensuring you’re covered if and when disaster strikes your home.