HO-3 vs. HO-5 Homeowners Insurance Policy


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ByMargaret Wack
Edited byVictoria Copans
ByMargaret Wack
Edited byVictoria Copans

Updated: May 22, 2024

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There are two main types of home insurance policies: HO-3 and HO-5 insurance. While both insurances protect your home, there are key differences between the two that can influence your decision when purchasing a policy. Generally, HO-5 insurance is considered the most comprehensive form of home insurance you can get, but it often comes at a higher cost than HO-3 insurance.

While HO-5 insurance may seem tempting, HO-3 insurance might suffice depending on your situation. Knowing the differences between the two is key to get just enough coverage and avoid being overinsured.

Table of Contents
Key Takeaways

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Personal property coverage is the primary distinction between HO-3 and HO-5 policies. HO-3 only includes named perils, while HO-5 excludes only explicitly mentioned perils.

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Both HO-3 and HO-5 policies typically provide open peril dwelling coverage, meaning damages to the home are covered unless explicitly excluded.

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HO-3 policies reimburse personal property based on the actual cash value (ACV) of the damaged property, considering depreciation, whereas HO-5 policies reimburse based on the replacement cost value (RCV), ignoring depreciation.

Difference in Coverage Between HO-3 and HO-5?

The key difference between HO-3 and HO-5 home insurance policies is personal property coverage — HO-3 covers damages due to named perils, while HO-5 covers all perils except those explicitly excluded from the policy. Additionally, HO-3 policies cover the property’s actual cash value (ACV), which accounts for depreciation, while HO-5 policies cover replacement cost value (RCV), replacing your item without regard for depreciation.

Take a look at the key differences between HO-3 and HO-5 policies in the table below.

Criteria
HO-3 Policy
HO-5 Policy

Dwelling & Property Coverage

Includes dwelling coverage at replacement cost and personal property coverage at actual cash value. Personal property coverage can be upgraded to replacement cost at an extra cost.

Covers both dwelling and personal property coverage at replacement cost.

Coverage Type

Open-peril for dwelling, named-peril for personal belongings.

Open-peril for home and personal belongings.

Valuable Items Limit

Standard limits on items like jewelry and electronics.

Higher thresholds for items like jewelry, though with set boundaries.

Recommended for

Those who want tailored coverage options for their personal items.

Those with luxury homes and a need for all-inclusive protection.

What Is a Peril?

A peril refers to the causes or events that can result in damages to your home or personal belongings. There are two types of perils: named and open.

Named Peril
Open Peril

Description

Covers specific perils that are listed in the policy.

Covers all perils, except those specifically excluded.

Ideal For

Homeowners seeking cost-effective coverage.

Homeowners desiring extensive protection for their home and possessions.

Named perils typically include the following events:

  • Fire or lightning
  • Windstorm or hail
  • Explosion
  • Riot or civil commotion
  • Aircraft
  • Vehicles
  • Smoke
  • Vandalism
  • Theft
  • Falling objects
  • Weight of ice, snow or sleet
  • Accidental discharge or overflow of water or steam
  • Sudden and accidental tearing apart, cracking, burning or bulging of built-in appliances like water heaters or central air conditioning/heating systems
  • Freezing
  • Sudden and accidental damage from artificially generated electrical currents, such as power surges
  • Volcanic eruption

Dwelling Coverage Differences

Dwelling Coverage: HO-3 vs. HO-5

  • Dwelling coverage pays for your home’s structure if it gets damaged due to a covered peril.
  • Both HO-3 and HO-5 home insurance have open peril dwelling coverage.

Both HO-3 and HO-5 home insurance policies have open peril dwelling coverage — any damage to your home’s structure and foundation is covered unless it’s specifically excluded from your policy. For instance, if your walls or windows are damaged due to a fire, your policy will pay to repair the loss. However, if the damage is caused by mold and your policy excludes it, you won’t be able to file a claim.

Personal Property Coverage Differences

Personal Property: HO-3 vs. HO-5

  • Personal property coverage pays to replace or repair your personal belongings if it gets damaged due to a covered peril.
  • HO-3 home insurance covers personal belongings for named perils, while HO-5 home insurance covers open perils.

Personal property coverage is an essential component of homeowner's insurance, designed to safeguard your belongings against potential financial setbacks. Under an HO-3 home insurance policy, personal property is protected against specific, named perils detailed in the policy. In contrast, an HO-5 home insurance policy offers a more comprehensive protection approach. It covers open perils, meaning your personal property is protected against all threats unless explicitly excluded in the policy.

For instance, imagine having a prized art collection at home. Under an HO-3 policy, damages might be covered if you can prove that they were a result of a fire (a named peril on your policy). However, with an HO-5 policy, the art would be covered unless the insurance company can specifically show that it was damaged due to an excluded peril, providing broader coverage.

ACV vs. RCV Differences

ACV and RCV: HO-3 vs. HO-5

  • An HO-3 policy reimburses you according to the property's actual cash value (ACV), which takes into account the depreciation of the item.
  • An HO-5 policy reimburses you based on the replacement cost value (RCV) of your property, which does not consider depreciation.

Your home insurance policy can reimburse you for damaged personal property in two ways: actual cash value (ACV) or replacement cost value (RCV). HO-3 policies reimburse you based on the property’s ACV, while HO-5 policies pay you based on its RCV.

For instance, if you need to make a claim for a five-year-old laptop that you bought for $1,000, HO-3 insurance would consider the depreciated cost after five years, which could be around $500 or less. In contrast, an HO-5 policy would reimburse you to completely replace your laptop at today’s value, meaning that you could get $1,000 to buy a brand new laptop.

Claims Process Differences

Claims Processes: HO-3 vs. HO-5

  • With an HO-3 policy, you can only file a claim if reimburses you according to the property's actual cash value (ACV).

Because HO-3 homeowners insurance is less comprehensive, you’ll only be eligible to file a successful claim if a named peril has damaged your personal property. When you file your claim, you’ll need to provide specific evidence about how your property was damaged. Because HO-5 homeowners insurance is more comprehensive, you’ll most likely receive automatic reimbursement for your personal property damage.

Is HO-3 or HO-5 Better for You?

Choosing between HO-3 and HO-5 insurance policies largely depends on your particular circumstances, including where you live, the value of your personal property and whether or not HO-5 coverage is available in your area.

Choose an HO-3 policy if…
Choose an HO-5 policy if…

You don’t have much valuable personal property. While HO-3 policies aren’t quite as comprehensive as HO-5 policies, they still provide adequate coverage in many cases.

If an HO-5 policy isn’t available where you live, you can also opt to include extra coverage with your HO-3 policy for an additional cost.

You have a lot of valuable personal property and live in an area where coverage is available. They’re often not that much more expensive than typical HO-3 policies and can help protect your property in a wide variety of situations.

While the cost of an HO-5 insurance premium may be slightly higher, it can help save you money in the long run.

What HO-3 and HO-5 Policies Don't Cover

Both HO-3 and HO-5 have certain limitations and common exclusions, and understanding these can help you prepare accordingly. Some types of damage that neither HO-3 nor HO-5 policies typically cover include:

  • Flood damage
  • Earthquakes
  • Mold
  • Pollutants
  • Insect or animal damage
  • Wear and tear

Some exclusions can be covered if you purchase additional coverage. For instance, you can get hazard, flood and earthquake insurance to protect against natural calamities you might be prone to where you live. However, keep in mind that while insurance coverage is a significant first step to protecting your home from potential damage, you should also be sure to develop an emergency preparedness plan in case of natural disasters or other hazards.

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Cost Difference Between HO-3 and HO-5 Policies

HO-3 policies are typically less expensive than HO-5 policies since they offer less comprehensive coverage. However, HO-5 policies might not be that much more costly, depending on your circumstances. Additionally, since HO-5 policies provide broader coverage, they may save you money in the long run because they cover more claims.

Generally, however, the average annual homeowners insurance policy in the United States costs $2,520 annually or $210 per month, according to MoneyGeek's study of policies across the country. Besides whether you choose HO-3 or HO-5 insurance, costs can also vary widely depending on a number of factors, including where you live, your home’s value and more.

If you’re looking for homeowners insurance coverage for your home, we’ve ranked the best homeowners insurance companies to help you decide. As always, when shopping for insurance products, you should compare home insurance quotes to ensure you’re getting the best deal possible.

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About Margaret Wack


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Margaret Wack is a freelance writer who covers insurance, saving, investing, banking and more. Margaret earned a bachelor's degree in classics, comparative literature and poetry from Smith College and a master's degree from St. John's College.