After investing in your homeowners insurance, it is important to have it properly insured. What coverages, forms and exclusions do these policies have?
Why has homeowners insurance?
A home is the largest investment most people will make in their lifetime; it is normally the largest asset on the family’s “balance sheet.” In addition, the contents of a typical home, in the form of furniture, appliances, clothing, family heirlooms, and other personal belongings that can be moved, represent a significant additional investment. The unprotected loss (or partial loss) of a home and its contents through burglary, fire, windstorm or some other disaster could be financially devastating.
In addition, everyone is at risk for personal liability. For example, a guest in the home could slip and be injured. Such accidents can result in court rulings awarding the injured person a large amount of money in medical bills and “pain and suffering.”
Coverage under a homeowner’s policy
Originally, a standard homeowner’s policy only covered the risk of fire. Today’s homeowner’s policies provide protection against a number of the “perils” of modern life in a single “package” policy. A typical homeowners policy may provide insurance protection for the following:
- Dwelling: The physical structure of the dwelling and other structures attached to it.
- Other Structures: For example, a detached garage, pool house, guest house, conservatory, or tool shed.
- Personal Property: Covers the contents of the home, such as furniture, appliances, or clothing. Certain types of property may have specific dollar limits.
- Loss of use or additional cost of living expenses: If a home is damaged by a covered peril, loss of use coverage helps cover the costs of hotel, apartment or rental housing bills, eating out and other living expenses while the house is being repaired. This section of the policy can also reimburse a homeowner for lost income if a room in the home was rented. This is sometimes insured based on the actual loss suffered.
- Personal Liability: Provides protection against statutory liability for bodily injury or property damage if a third party is accidentally injured.
- Medical payments: Also known as guest medical payments, this section provides coverage if a third party is accidentally injured and requires medical treatment.
Homeowners Insurance Policy Forms
There are several organizations that work with insurance companies to develop standardized homeowners policies. Although the details of a particular policy may vary, these standardized policies or “forms” are generally very similar.
- Long Form Policy (HO-02): This policy covers dwelling, other structures, and personal property based on “specified perils.” Only the perils listed are covered.
- Special Form Policy (HO-03): Home and other structures coverage is written on an “all risks” basis; damage from any peril is covered, unless specifically excluded. Personal property coverage is provided based on specific perils.
- Broad Form (HO-05): This policy covers dwelling, other structures, and personal property on an “all risks” basis; damage from any peril is covered, unless specifically excluded. This form is typically used for more expensive homes.
- Modified Form Coverage (HO-08): This policy form is generally used with homes where the cost of rebuilding exceeds the property’s market value. Protection is provided based on specific hazards. Payment is generally limited to actual cash value.
Standard homeowner’s insurance policies specifically exclude a number of perils from coverage. Policy coverage for these excluded perils can usually be added for a supplement and the payment of an additional premium. Typical policy exclusions might include the following:
- Ordinance or Law: Many homeowners’ policies do not cover losses, or have limitations, due to a law or ordinance of the community where the home is located. For example, if a home is damage or destroy, changes in building codes could result in additional out-of-pocket expenses when the home is repair or rebuilt. Ordinance or statutory coverage is included in some policy packages, often as a percentage of the home’s coverage (10%, 25%, 50%, etc.). This coverage is require in some states.
- Earth movement: Excludes losses caused by events such as an earthquake, volcanic eruption or landslide.
- Water Damage: Refers to damage caused by water overflowing from sewers or drains, or water seeping through walls. Many policies contain dollar limits for water damage due to things like a pipe bursting.
- Flood damage: Refers to damage caused by overflowing water, mud slides or the force of waves.
- Mold Exclusion: Due to the high number of claims for mold losses, many insurance companies are excluding coverage for mold damage.
- Other Exclusions: Other specific exclusions include war, nuclear hazards, negligence or intentional loss.
Understanding insurance policies
An insurance policy is a written contract between the insured and the insurance company. The protection provided by the policy generally represents an important part of a person’s overall risk management program. Therefore, it is important that an insured person read and understand key policy provisions such as the following:
- What perils are cover in the policy? A basic policy may not provide the amount of protection needed.
- What perils are not cover? For an additional premium, perils or situations not cover can often be add to the policy.
- What are the coverage limits? This refers to the maximum dollar amount the insurance company will pay in the event of a covered loss.
- What are the deductible amounts? The deductible is a dollar amount or percentage that the insured must pay before the insurance company pays its share of the loss.
- In the event of a loss, what are the insured’s obligations? A policy will usually specify certain steps that must be take in the event of a loss.