June 22, 2019

What Does Home Insurance Cover

Read more about Home Insurance

Can you name all the coverage types that make up a homeowners insurance policy? How much coverage do you actually need? Read on to learn how to buy homeowners insurance.

The 5 Coverages That Make Up a Home Insurance Policy

A homeowners insurance policy typically consists of five coverages:

  1. Dwelling Coverage
  2. Other Structures on Your Property Coverage
  3. Personal Property Coverage
  4. Liability Coverage
  5. Additional Living Expenses Coverage

Let's take a look at each of these coverages separately.

Dwelling Coverage
This covers the structure of your home. Any structures actually attached to your home are also covered. These might include a garage, a sunroom, or a deck.

Dwelling coverage helps pay to repair or rebuild your home if it is damaged or destroyed by an event covered under the policy.

Other Structures Coverage
Other structures could include a garage, a shed, a swimming pool, or even a fence. This protection helps to rebuild or replace these detached structures if a covered loss occurs.

Personal Property Coverage
The insurance company either reimburses you for the value of your personal belongings or replaces items stolen or damaged in a covered loss.

Insurance companies use a broad definition for personal property. It's basically everything you own. Some examples are:

  • Cash on hand
  • Furniture
  • Appliances
  • Electronics
  • Musical instruments
  • Sporting equipment
  • Clothing and household items

Liability Coverage
This coverage pays toward the costs of an accident or damage for which you are responsible. This protection can be broken down into two circumstances:

  1. When a visitor is injured on your property, liability coverage pays for:
    • The medical bills of the injured person;
    • Legal expenses if you are sued by the injured person; and
    • Lost wages of the injured person.

  2. When anyone listed on the policy or your pet causes damage to someone else's property, liability coverage pays for:
    • Cost of repairing the damage of the other person's property; and
    • Legal expenses if you are sued by the person whose property was damaged.

Additional Living Expenses Coverage
You'll be reimbursed for additional expenses you incur if you have to live elsewhere while your home is being restored after a loss. Only costs above and beyond your usual weekly living expenses are covered.

Among the expenses that fall under this coverage are:

  • Hotel bills
  • Restaurant bills
  • Laundry bills
  • Rentals, such as a crib
  • Lost rental income, if you normally rent out part of your home

With all five of these coverages, how much the policy will pay out for a loss depends on:

  • How much coverage you purchased
  • Any coverage limits the policy may have
  • The deductible amount you select

More on those topics below.

Additional Homeowners Coverages

Beyond the basic policy, you can extend coverage or add optional coverages to meet your specific needs. Some additional homeowners insurance coverages are:

Extended Personal Property Coverage
This protection goes beyond the limit most homeowners insurance policies have for personal property coverage. It covers expensive items or valuables, such as jewelry, furs, collectibles, watches, fine art, coin collections, etc.

Personal Umbrella Policy
This policy extends the liability coverage on your homeowners policy. The coverage protects people with a lot of assets or a large amount of money in savings, investment, or retirement funds in the event they are sued.

Flood Insurance Coverage
Homeowners insurance does not cover floods. A flood insurance policy can be purchased separately to cover damage from this natural disaster. Most flood insurance policies are backed by the federal National Flood Insurance Program.

The Federal Emergency Management Agency (FEMA) administers the program and coverage is available to homeowners in flood-prone areas.

Earthquake Insurance Coverage
This natural disaster is not covered under homeowners insurance. In states at risk for earthquakes, homeowners can purchase a separate earthquake insurance policy that covers damage from an earthquake.

Water Backup and Sump Pump Discharge or Overflow Coverage
This added coverage to a homeowners policy covers water damage that occurs from:

  • Water backing up from a sewer or drain in your home
  • Water overflowing or discharging from your sump pump

What Home Insurance Doesn't Cover

As previously noted, home insurance does not cover floods and earthquakes. Most policies also contain these common coverage exclusions:

Air Conditioning Units
Homeowners policies do not cover damages from usage and wear and tear.

Insurance companies consider bedbugs and other vermin and pest control part of "home maintenance", and thus doesn't offer coverage.

Dog Bites
If your dog is doing the biting, a home insurance policy excludes coverage if:

  • There is a history of biting.

  • Your dog bites a member of your household covered under your home insurance.

  • Your dog is a breed considered a high risk. Insurance companies use national insurance data to determine high-risk breeds.

Which Breeds Insurance Companies Deem "High-Risk":

  • Pit bulls
  • Rottweilers
  • Doberman Pinschers
  • Presa Canarios
  • German Shepherds
  • Siberian Huskies
  • Great Danes
  • Staffordshire Terriers
  • Akitas
  • Chows
  • Alaskan Malamutes
  • Wolf Hybrids

Coverage is excluded if the damage is caused by:

  • Termites
  • Lack of maintenance or neglect
  • Mold

Homes with Aluminum Wiring
Generally aluminum wiring is considered "riskier" than traditional copper wiring because of how much heat aluminum wiring can emit. Because of the risk, companies don't usual cover it.

Landslides and Mudslides
Like earthquakes, landslides and mudslides are natural disasters not covered.

Unless its cause is from a covered loss, mold is an excluded coverage.

Power Failures
Policies may actually cover some lost food costs due to power failure, but that's usually the extent of the coverage. If you need to live somewhere else temporarily, they won't cover the expenses.

Roof Leaks or Roof Repairs
If the roof leak or repair is due to these reasons, it's not covered:

  • Flooding or earthquake damage
  • Age of roof
  • Wear and tear or deterioration
  • Lack of maintenance
  • Mold and fungus
  • Birds, animals, or insects

Same reasoning behind not covering earthquakes or other "natural" disasters.

Termite Damage
Like bedbugs, termites are considered pests that fall under "home maintenance".

Trampolines (exclusion varies among insurers)
Trampolines are considered a "risky" recreational activity. Some policies will cover harm associated with them.

Tree Damage
If the tree is leaning or rotting and you do nothing about it, it's not covered. This applies even if the tree causes damage during a covered peril.

Warfare or Nuclear Accidents Damage
A situation that hopefully nobody has to endure, though insurance companies certainly take it into consideration.

Water Damage
If water damage is caused by these situations, homeowners insurance doesn't cover it:

  • An outside sewage or drain backs up.
  • Neglected maintenance, such as not fixing a continuous leak.
  • Pipes that are corroded, moldy, or show signs of rot.
  • Plumbing issues that are part of regular home maintenance.

Coverage exclusions vary by policy type, where you live, the hazard itself, and the conditions leading up to the damage or loss. It's always best to read your policy or check with your agent or the insurer's claim service to see if a loss is covered.

How Much Is Home Insurance

The cost of home insurance differs based on the:

  • Age and type of home
  • City and state where you live
  • Coverages offered by the policy
  • Policy limits you select
  • Deductible amounts

The cost of homeowners insurance ranges from $300 to $3,500 per year. You can expect to pay about $450 a year for every $100,000 of your home's value.

In the U.S., the average cost of home insurance is $1,225 a year for a policy with $200,000 dwelling coverage, $100,000 personal property coverage, $100,000 liability coverage, and a $1,000 policy deductible.

However, home insurance costs differ greatly among insurers, so definitely shop around. Be sure to compare coverage to coverage among the different policies to get the best deal.

How to Lower Costs:

  • Choose a higher deductible, as long as you can financially handle it.

  • Select replacement cost for your dwelling coverage and actual cash value for your personal property if the value of your personal belongings is not that high (more on these below).

  • Take advantage of homeowners discounts by installing fire and burglar alarms, or for placing your auto and home insurance with the same company.

  • Reduce your risk. Some companies will increase the cost of your insurance if you file too many claims against your homeowners policy within a certain time period.

How Much Coverage Do You Need?

So, how much coverage should you buy? Here are some guidelines:

Dwelling and Other Structures
Buy enough dwelling and other structures coverages to rebuild your home. Factor in costs of materials and labor at current rates.

The cost to rebuild your home is not how much you could sell the house for, the revaluation amount, or the amount your municipality uses for your real estate tax bill.

Personal Property Coverage
Some people take out 50% to 75% of their dwelling coverage. But you can do a home inventory of your personal possessions for a more accurate number.

Here's how:

  1. Make a list of all your possessions, including items stored off premises.

  2. Indicate when each item was purchased, its make and model, and how much it cost.

  3. Add everything up. This is the minimum amount of coverage you should have for your personal property.

Check to see what the limits are for personal property. Most insurers limit the coverage amount to $1,500 and around $200 for stolen cash. If you have valuable items worth more than that or keep more cash on hand, look into extended personal property insurance.

Liability Coverage
Limits on liability coverage typically start at $100,000. If you have significant assets, consider higher liability limits to cover the amount of your worth.

Additional Living Expenses
Think of what you may need when living away from your home for a length of time when considering your additional living expenses coverage amount.

For example, if you have a large family, you might need coverage for a rental home rather than a hotel room.

Additional living expenses do NOT include those expenses you would have regardless of where you're living.

Types of Peril

Perils, also called risks or hazards by some insurance companies, are the types of losses your homeowners insurance policy covers. From an insurance standpoint, there are 2 different types of perils:

  1. Open Perils
    Protection is provided against anything that happens, except those situations specifically excluded in the policy. Usually, your policy's dwelling and other structures coverages are protected as open perils.

  2. Named Perils
    Protection is provided only for those risks listed in your policy. Your policy's personal property coverage is typically protected with named perils.

Generally, most homeowners insurance policies provide coverage for these named perils:

  • Theft
  • Fire and smoke
  • Wind and windstorms
  • Hail, snow, sleet, and ice
  • Lightning strikes
  • Vandalism and theft
  • Damage from riots and civil disturbances
  • Damage from vehicle or aircraft collision
  • Explosions
  • Falling objects

Limits and Deductibles

As previously noted, how much a home insurance policy will pay out depends on 3 things:

  • How much coverage you purchase
  • Any coverage limits the policy may have
  • The deductible amount you select

If you have a mortgage on your home, you are required to take out a certain amount of home insurance.

Coverage Amount Options
Home insurance covers a loss in one of three ways: actual cash value, replacement cost, or extended value.

  • Actual cash value
    Gives you the least amount of coverage, but it's also less expensive. With actual cash value, the insurance company factors in depreciation. That means you will not recover the full value of your home and your personal property in the event of a loss.

  • Replacement Cost
    Does not include depreciation. Your home and personal property are replaced based on the cost at the time of the loss. The total amount the insurer pays out is subject to the policy's limits.

  • Extended Value
    Goes beyond the policy's limits to repair or rebuild your home and replace your personal belongings. Some policies pay up to 30% over your policy limits. However, it's the most expensive coverage option.

Policy limits are the maximum amount of coverage you have. They are based on how much you purchased. In the event of a loss, the insurance company pays up to the limits of your coverage.

Limits also could mean the maximum amount of coverage an insurance company allows for a certain coverage.

For example, some insurers limit personal property coverage to $100,000. That means that's as much coverage as you can buy. If you need more, you would have to buy extended coverage.

Some home insurance companies also have limits for certain personal belongings. For example, an insurer may pay only up to $500 for electronics. In this case, you would need to buy extended coverage to protect all your electronic devices.

A deductible is how much you pay first before the insurance company pays out on the loss. For example, if your homeowners policy has a $2,000 deductible, you have to pay that amount first. Then the insurance company will pay its share.

Some policies may have more than one deductible. For example, there might be a separate deductible for a particular coverage, like windstorm damage.

Choose a deductible amount that you are comfortable paying. You don't want to put yourself in a financial jam and delay your insurance payout with a high deductible you can't afford to pay.

How Do I Buy Home Insurance

Home insurance is available to purchase through several avenues.

Work with an Agent
A home insurance agent can be either a captive agent or an independent agent.

  • A captive agent works for one particular property and casualty insurance company. The agent only sells home insurance policies from the company he or she represents.

  • An independent agent works independently or for an independent insurance agency. You have the ability to compare coverages and costs from numerous companies and select the one that suits your needs the best.

A Company Call Center
Many insurance companies have call centers where you can purchase home insurance over the phone. If you plan on going with the same company as your auto insurance, this is a good way to buy your home insurance.

Otherwise, this option does not provide coverage and price comparisons, unless it's an independent agency's call center.

Online Insurance Marketplace
This is a convenient way to get quotes for home insurance right from your computer or mobile device. Simply enter the requested information and you automatically receive a list of home insurance companies with policies that meet your requested coverages.

You can compare the policies, research the companies, and apply for a policy.

Through a Membership Group
Many membership groups, clubs, and associations offer home insurance to their members. While group home insurance typically offers better coverage for a competitive price, it's always good to comparison shop.

You can save time by comparing the group policy's coverages and prices with policies offered on an online insurance marketplace.

Bottom Line

Most of your financial wealth and personal assets are tied up in your home. That's why it's so important to know what your home insurance policy covers.

When a loss happens or a disaster strikes is not the time to find out you're not covered or have limited coverage.

Before buying home insurance or renewing your current policy, take some time to review the policy's coverages, excluded coverages, and policy limits to make sure they provide the protection you need.

Write to Maryellen Cicione at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

Read Next:

How Much Home Insurance Do I Need

Average Cost of Homeowners Insurance

Average Homeowners Insurance by State

Home Insurance

Does Homeowners Insurance Cover Mold

Mold is bad for your health and expensive to remove. Find out when homeowners insurance will—and won't—cover the cost.
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