Homeowners Insurance

How to Pick the Right Policy and Coverage to Protect Your Property

Insuring your home against financial catastrophe can involve a number of high-stakes decisions. From which carrier to use to how large a deductible to choose, the insurance industry has become endlessly complicated. Volcanic eruptions, riots and falling planes? Your standard policy definitely covers those unlikely events. Pit bull bites, sinkholes and mold infestations? Perhaps, perhaps not. Flooding? Definitely not.

Here you will find an overview of what homeowners insurance protects and what it doesn’t, and how you can make informed decisions about buying coverage.

CONTRIBUTING EXPERTS
Jack Hungelmann
Jack Hungelmann Author of Insurance for Dummies

written by

Jeff Ostrowski

Average Homeowners Insurance Cost by State

If you have a mortgage, homeowners insurance isn’t just extra security and protection — it’s required. Find out the average cost of home insurance in your state by using the below map.

Source: National Association of Insurance Commissioners (NAIC).

Home Insurance Reviews by Company

Do You Need Homeowners Insurance?

Unless you have the means and money to rebuild your home from scratch, say, in the event of a fire or flood, home insurance is likely the best way to protect you and your family. These are the main reasons to buy it:

Financial protection

A homeowners’ policy covers the structure of your home and your personal property in case of a fire or a burglary. Many policies also cover falling tree limbs and water damage from burst pipes or malfunctioning appliances. What’s more, homeowners insurance can cover your legal liability if someone
is injured on your property.

The mortgage lender requires it

If you have a mortgage, you must buy homeowners insurance. Even if you own your house free and clear, a homeowners policy is a wise investment. If you live in a condo or townhouse, your association probably buys a master policy that will satisfy your lender and cover major damage. But if you have special
financial needs, it might make sense to
explore additional coverage.

What Type of Homeowners Insurance Should You Get?

The most popular insurance is an “all risk” policy, although people with newly constructed homes may qualify for comprehensive coverage. Whether you live in a mobile home, condo, single family home, or rent an apartment, you can find a policy to protect your home and/or property.

Types of Homeowners Insurance at a Glance

HO-1: The Bare Bones Policy

A bare-bones policy that doesn’t include liability coverage. It’s no longer available in most states, according to the Insurance Information Institute.

HO-2: The Named Peril Policy

Also called a “broad form” policy. The coverage protects your home from 16 different types of perils (see above list).

HO-3: The All Risk Policy

A “special form” policy that covers the attached structures of your home as well as detached structures like a garage, cottage and fence. It also includes personal liability coverage. The name “All Risk” Policy is misleading as the policy doesn’t cover all risks. It does cover the aforementioned 16 perils and everything except the named exclusions in the policy, which include war, power failure, flood, vermin and nuclear disaster, among others.

HO-4: The Renters Policy

This is an insurance policy for renters. It covers your personal belongings, though not the structure of the property you rent.

HO-5: The Comprehensive Policy

A “comprehensive form” policy that covers the structure of your home and offers broader coverage for personal property. You’re protected from the same perils as an HO-3 but don’t have to prove your belongings were damaged by a peril named in the policy. This form of coverage is usually for new or recently constructed homes.

HO-6: The Condo/Co-op Policy

A policy for condo and co-op owners that works similar to HO-2 coverage. It covers the structural parts of the building you own, plus your personal belongings.

HO-7: The Mobile Home Policy

This coverage is like an HO-2 policy, but it protects mobile homes.

HO-8: The Older Home Policy

A policy that typically covers the replacement cost — minus depreciation — of damage to an older home.

Comparing Insurance Quotes

Homeowners insurance is complicated, and rate quotes hinge on numerous variables. Check out our guide on comparing homeowners insurance quotes.

Hazard, Flood and Earthquake Insurance

Homeowners and renters insurance policies almost never cover floods, hurricanes, earthquakes and other natural hazards. Learn how to protect yourself from Mother Nature’s worst.

Emergency Preparedness

You can’t control the wrath of nature, but you can prepare for the worst. Here are steps to take to get ready for an emergency, and what to do if disaster strikes.

What it Covers

Homeowners coverage varies based on the type of policy you buy and where you live. The most bare-bones insurance policy is known as “dwelling fire,” also known as HO-1 coverage, and it insures against hazards that include fire, smoke, lightning and explosions.

The HO-2 policy insures against 16 common disasters, but most homeowners buy the more generous coverage, known as an HO-3 policy, which insures against the 16 perils and all other causes of loss except war and other “named exclusions.”

‘16 Perils’: Property Damage Covered by the Most Common Policies

  1. Fire or lightning

  2. Windstorm or hail

  3. Explosion

  4. Theft

  5. Vandalism

  6. Falling objects, including trees

  7. Aircraft

  8. Frozen or ruptured pipes

  9. Vehicles

  10. Smoke

  11. Sudden cracking, burning and bulging caused by a fire sprinkler, hot water or air conditioning system

  12. Weight from ice, sleet and snow

  13. Sudden, accidental electric current

  14. Accidental overflow of water or stream from a plumbing, air conditioning or other household system or appliance

  15. Volcanic eruptions

  16. Riots or civil unrest

No homeowners policy covers flood damage if it’s caused by rising water. That peril is covered through a separate flood insurance policy from the federal government.

10 Events Homeowners Insurance Surprisingly Doesn’t Cover

  • 1 Floods

    You need a separate federal flood insurance policy.

  • 2 Earthquakes

    This risk is covered by separate earthquake insurance.

  • 3 Hurricanes

    If you live in Hurricane Alley, you might need a policy from your state’s windstorm plan.

  • 4 Mold

    Many carriers have begun to exclude mold damage from policies.

  • 5 Sewer backups

    You might be able to buy a special rider for this peril.

  • 6 Aggressive dogs

    Some insurers exclude such breeds as pit bulls, Akitas and Rottweilers.

  • 7 Sump pump overflow

    You might be able to buy a special rider for this hazard, too.

  • 8 Nuclear accident and war

  • 9 Liability related to business use of your home

    Say FedEx delivers work-related package to your house, and the driver slips and falls. Your policy doesn’t cover liability.

  • 10 Normal wear and tear

    If your roof is simply old rather than damaged, you pay for the repair.

Does Your Location Affect Your Coverage?

Yes, where you live affects your coverage and policy costs. If you live in California, earthquake coverage isn’t part of your standard policy. You’ll need separate coverage, which usually carries a high deductible. And if you live in Florida or another hurricane-prone state, you might need separate windstorm insurance.

Some of the language in your policy might seem ridiculously specific, but there’s a reason for the hairsplitting. “Civil unrest” is covered in standard policies, but “war” isn’t. And the extensive damage left by Hurricane Katrina led to many lawsuits over whether water damage was technically caused by a flood or a windstorm.

For most homeowners, the high-value part of the policy applies to the structure of your home. If an insured hazard hits your humble abode, your coverage will pay to fix or rebuild your house. Insurers typically cover not just your living quarters but also garages, fences, tool sheds and gazebos. In addition, insurance policies generally pay to replace personal belongings if they’re stolen or damaged in a fire, hurricane or other covered disaster.

Warning

Be sure to review your dwelling coverage occasionally because capital improvements and inflation can affect your home’s cost of replacement. Due to the so-called 80 percent rule, if your coverage limits fall below 80 percent of the full replacement cost of your home, your insurance company may reduce the amount it pays on a claim.

In a typical policy with $200,000 in coverage for the dwelling, the insurer would cover up to $100,000 to replace furniture, electronics and other personal items. Pricey items such as jewelry, furs and silverware typically are covered, but many insurers impose dollar limits if they’re stolen. If you have an extensive jewelry collection, though, you might consider paying for an endorsement, which specifies coverage under certain special circumstances or for itemized valuables.

Homeowners policies also include liability protection, which pays for legal costs and any court awards in the event of a lawsuit against the homeowner. Typically, this coverage is limited to $100,000. Finally, your policy might pay for your living costs if your home is rendered uninhabitable.

Policyholders typically can choose from three levels of coverage:

Actual cash value

Pays to replace home and possessions minus a deduction for depreciation — so don’t expect to get $2,000 for that ancient laptop.

Replacement cost

Dispenses with depreciation discount.

Guaranteed replacement cost

The most generous coverage that pays to rebuild your home no matter the cost, useful if you’re the victim of a disaster that causes a spike in the costs of labor and construction materials.

Taking Inventory

Don’t forget to take photos and video of the exterior and interior of your home including valuable personal items. Here are some other things to keep in mind when creating your home inventory:

Don’t get
overwhelmed

If you’ve lived in your house for years, creating an inventory might seem tedious. Start with your most recent purchases and then work backward to your older possessions. It’s better to have an incomplete list than no list at all.

Check with your agent about
big-ticket items

Your art work, collectibles and jewelry may have
increased in value since you’ve received them. Double-
check with your insurance agent that those items
are fully covered and insure them
separately if necessary.

Maintain a
digital record

Use your laptop or mobile device to create and
store your home inventory list. Take advantage of
apps or websites for guidance, such as
KnowYourStuff.org.

Source: Adapted from the Insurance Information Institute.

Tip

Don’t feel like cataloging every article of clothing, book and knickknack in your home? Jack Hungelmann, author of Insurance for Dummies, suggests tallying the value of furniture, TVs and other major items, then doubling it. That should approximate the value of all your stuff.

Apps to Tap for Your Home Inventory

  • Encircle

    The average user is able to develop “a complete picture inventory of a property and generate detailed reports” in about an hour or less by using this app, according to its iTunes Store description.

  • Home Contents

    This app gives you the ability to quickly produce a complete estimate of your belongings. The free version has a 25-item limit, while the $4.99 version unlocks all of the app’s available features.

  • MyStuff2

    Doubling as an organizer and home inventory resource, MyStuff2 allows you to keep track of your personal possessions. The “Lite” version is free; the main version of the app is $4.99 and the “Pro” version is $8.99.

  • Sortly

    This free app is described as the “perfect companion for your move.” It helps with creating a visual inventory of your belongings through photos, videos, tags and other features.

  • Stuffanizer

    Stuffanizer is a visual inventory app that allows users to set custom locations, create tags and take photos to keep track of their stuff — for $2.99.

What Affects Your Premium Costs

Insurance premiums come in all over the map, but below are a few things influencing the price you’ll pay for homeowners insurance:

Geography

One of the most important variables determining how much you’ll pay for coverage. Hurricane Alley and Tornado Alley are the most expensive places to insure a home — Florida, Louisiana, Texas and Oklahoma top the list of priciest markets. Idaho, Oregon and Utah are the cheapest states to buy homeowners coverage.

Construction

If your Florida abode is a wood-frame house with jalousie windows, you’ll pay more. If it’s a concrete-block structure with impact-resistant windows, you’ll pay less. Insurers use a catastrophe model to determine prices. Rate regulation is the duty of insurance commissioners in each state.

Competition

If State Farm, Allstate, Nationwide and other carriers are competing for customers in your area, rates are likely to fall. This is known as a soft market. In the opposite case, a hard market, rates tend to rise.

Catastrophe reinsurance

How much insurers pay for this form of reinsurance can affect rates. Catastrophe reinsurance indemnifies the insurer for losses in excess of a stipulated sum arising from a single catastrophic event or series of events.

What Kind of Discounts Might You Expect?

This varies by insurer, but you can usually get discounts by:

  • Bundling your home insurance with your car insurance (buying it from the same insurance carrier). These are known as multi-line discounts.

  • Installing smoke alarms.

  • Having dead-bolts and/or a home security system.

  • Bringing your old wiring up to code.

  • Installing impact-resistant
    roofing.

  • Not smoking (nonsmoker credit).

  • Being age 55 or older.

  • Installing sensors that detect natural gas and/or
    water leaks.

Using Your Insurance

What happens if you’re the victim of a burglary, fire or other insured claim? First, your policy requires you to mitigate the damage as soon as possible. So, for instance, if you have a water leak, turn off the water and immediately call a company that handles water damage. Next, contact your insurance company to report the damage. When you reach your company’s adjuster, be sure to get his name and cell phone number, along with your claim number. In most cases, your carrier will come through with a check to cover your claim, up to the limits of your policy.

A checklist of things to do before something happens:

  • Keep a copy of your policy in a safe place

    Whether you store it in the cloud or in a filing cabinet, your policy spells out what your insurer owes you in case of a loss.

  • Buy extra coverage, if you need it

    If you have a large collection of jewelry or art, buy an endorsement to insure it.

  • Know your coverage limits

    Say you have a $1,000 deductible and your $500 bike is stolen from your garage. In that case, you’d be wise to keep your insurer out of the matter.

  • Know when to file a claim

    Hit by a storm or significant water damage, it makes sense to file a claim. However, you may want to skip a small, non-weather claim, lest your insurer drop you when your policy comes up for renewal.

Filing a Claim: What to Expect

Insurers handle each type of claim a bit differently. In case of a burglary, you’ll need to provide a police report and an inventory of the items taken. In the event of a fire or weather-related claim that damages the structure of your house, you’ll need to hire a contractor, and your insurer ultimately will reimburse you for your costs.

However, Hungelmann warns against getting a written estimate directly from your contractor. Instead, he says you want to connect your adjuster and your contractor, and then step aside. Otherwise, you run the danger of having two written estimates for two different amounts. “We have to constantly remind our clients not to get in the middle,” Hungelmann says. “It’s a miserable experience.”

Also, expect some delays and headaches when trying to collect an insurance claim, Hungelmann warns. “Sadly, the industry takes too long to respond,” he says. “Each type of claim is handled a little bit differently. I’d give the insurance industry an A on auto claims, but a B- on homeowners claims.”

Largest Property Catastrophes
1 Hurricane Katrina (2005): $48 billion
2 World Trade Center attacks (2001): $24 billion
3 Hurricane Andrew (1992): $24 billion
4 Superstorm Sandy (2012): $19 billion
5 Northridge earthquake (1994): $18 billion

Source: National Association of Insurance Commissioners. Cost adjusted to 2014 dollars.

Do I Need a Public Insurance Adjuster?

The typical insurance claim goes relatively smoothly, and the carrier pays up as promised. But in some cases, an insurer simply refuses to pay what you think you’re owed. If you’re faced with an unreasonable settlement offer, it might make sense to hire a public adjuster. Unlike an adjuster who’s employed by your insurance company, a public adjuster works for you and is paid by you.

Public adjusters say they know policies and insurers’ processes, and they can persuade insurers to pay up when you can’t. You’ll pay your public adjuster a percentage of the settlement he negotiates on your behalf. Public adjusters stress that they’re not insurance agents nor paid by carriers, which puts them firmly on the side of policyholders. The National Association of Public Insurance Adjusters offers a listing of its members.

Home Insurance: By the Numbers

National average annual homeowners premium:

$1,096
Idaho, $561

Cheapest state to buy
homeowners insurance

Most expensive state to buy
homeowners insurance:

Florida, $2,115
97.3%

Percentage of claims involving property
damage, including theft:

Percentage of homeowner liability
payments resulting from dog bites:

More than one-third
Wind and hail

Causes of the most frequent claims:

Homeowner insurance claims:

$39.9 billion

Sources: National Association of Insurance Commissioners, based on average annual premiums for 2013; Insurance Information Institute.

Difference Between Homeowners Insurance and a Home Warranty

If you own a car, you’re familiar with the difference between insurance and a warranty. If your car is stolen or damaged in a crash or natural disaster, that’s a matter for your insurance policy. If your transmission blows out, you’ll turn to your warranty for financial help. The concept is similar for real estate.

A home warranty is a service contract that helps offset expenses if the roof springs a leak or the air conditioning needs a repair. Home warranties are a type of insurance, but they’re designed to cushion the blow of the smaller costs of routine maintenance rather than some significant loss from a catastrophic event. Sellers often provide home warranties as a tool to market their homes. A lender will require you to have homeowners insurance but not a warranty.

Terms You Need to Know

Adjuster

An individual employed by an insurance company to evaluate losses and settle policyholder claims.

Catastrophe model

This computerized method of predicting claims combines long-term disaster trends with current demographics and building patterns. The result is a prediction of the potential cost of catastrophic losses for a given area.

Catastrophe reinsurance

Insurers typically can handle billions of dollars of losses, but to protect against major disasters such as Hurricane Andrew and Hurricane Katrina, they buy reinsurance that helps cover claims filed after large-scale catastrophes.

Deductible

The amount of loss paid by the policyholder. It’s either a specific dollar amount or a percentage of the claim amount.

Dwelling fire

A cut-rate type of insurance policy that covers only the most basic risks.

Earthquake insurance

This type of policy covers a structure and its contents but has a high deductible.

Endorsement

A written form attached to an insurance policy altering the policy’s coverage, terms or conditions.

Exclusion

A provision in an insurance policy disallowing coverage for certain risks.

Flood insurance

Coverage for flood damage is available from the federal government under the National Flood Insurance Program. It is sold by licensed insurance agents.

Hard market

A period when carriers are reluctant to sell coverage.

Insurance score

A numerical ranking based on a consumer’s credit history. Insurers say people with poor credit histories have proven more likely to file claims.

Peril

A specific risk or cause of loss covered by an insurance policy, such as fire or theft.

Public adjuster

A person who negotiates with insurers on behalf of policyholders and receives a portion of a claims settlement.

Rate regulation

The process by which states monitor insurance companies’ rate changes.

Soft market

An environment of plentiful, low-cost coverage.

Windstorm plans

State-sponsored insurance pools sell hurricane coverage to people who can’t buy it in the voluntary market because of their high risk. Alabama, Florida, Louisiana, Mississippi, North Carolina, South Carolina and Texas offer these plans. Georgia and New York also have special windstorm pools for certain coastal communities.