Owning a home is fulfilling the American dream but doesn't come easy for many. That's because a home is the most expensive item most people buy in their lifetime. Typically, they are so costly when compared to annual incomes that it requires a 30-year mortgage to pay down a loan and own the home outright. Besides being a place to live, for most people, a home is their most precious asset. Few have the means to replace a house after a disastrous loss, which is why the right homeowners insurance program is not optional for them.
What is Homeowners Insurance?
Homeowners insurance is a mix of property insurance and liability coverage. The property insurance portion of a homeowners insurance policy intends to protect losses relating to interior and exterior damage, loss or damage to the homeowner's assets and possessions. The liability coverage insures against injury claims from others for accidents that occur while on the property. As with many forms of insurance, there is a deductible before the insurance begins to pay. Deductibles help lower the homeowner insurance program’s cost by having the homeowner self-insure for losses up to the deductible amount specified in the policy.
What Does Homeowners Insurance Cover (And Not Cover)?
There are different classes of homeowners insurance. In this report, we focus on the HO-3 policy because it is the version that is considered standard coverage. It is sold most often because it is open perils coverage, which provides the broadest range of protection that makes it the best option for homeowners. With an HO-3 policy, every potential peril is covered except for specific exclusions.
An HO-3 homeowners insurance policy offers protection for loss or damage to the dwelling, additional structures on the property, personal belongings, and liability claims related to injuries, damages, or losses to others while on the property.
- Protection of the dwelling's foundation, walls, and the roof is the primary coverage of a homeowner's insurance policy.
- Attached structures such as a garage, deck, or patio are typically included when specified in the policy. Additional structures on the property but separate from the home are also protected. Examples are pools, sheds, detached garages, and fences.
- Most personal belongings are also covered by homeowners insurance to repair or replace damaged, destroyed, or stolen items related to an insurable loss. Some items of high-value items such as jewelry, furs, and watches may exceed the personal property coverage limits and require an optional rider or extended coverage to insure them properly.
- Loss of use coverage will pay for living expenses when a homeowner must live elsewhere while their damaged house is undergoing repairs or is being rebuilt. The coverage might include paying rent for a temporary residence or the property's rental value if rented as an income source.
- Liability protection covers against legal claims of injury, damage, or loss from persons who do not reside in the dwelling. For example, a visitor may make a bodily injury liability claim if they trip or fall while on the property. In this case, the coverage would help pay medical bills if the homeowner is deemed to be at fault. Liability coverage has limits, and an optional personal umbrella is often advisable for homeowners with a net worth exceeding the limits.
A standard HO-3 policy contains the following list of exclusions from coverage:
- Water damage from floods, seepage through the foundation, sewer, and septic tank back-ups.
- Legal ordinances that require a house is brought up to code through construction or demolition.
- Earth movement caused by earthquakes, landslides, mudflows, shockwaves, and sinkholes.
- Power failures.
- Neglect where the homeowner fails to take reasonable steps to save the structures and property during or after a loss.
- Acts of war, including instances of both undeclared and civil wars.
- Nuclear hazards, including nuclear reactions, radiation, and radioactive contamination.
- Intentional losses occurring from actions by the homeowner with the intent to cause a loss or damage. For example, the homeowner burns a building down or rams it with a vehicle on purpose.
- Governmental and homeowners association actions that cause the destruction, confiscation, or seizure of the covered property.
- Losses due to defective construction or faulty zoning use defective construction materials, inadequate maintenance, and poor repair or inferior quality workmanship.
An HO-3 open peril policy may also exclude losses from frozen pipes in vacant dwellings, pets, pests, and other animals, ice or water weight damage to foundations and pavements, thefts from homes under construction, vandalism to vacant houses, settling, wear, and tear.
Additional Homeowners Insurance Policy Endorsements
In many cases, professional homeowner risk management will include supplemental protection to enhance standard policy coverage. Endorsement to cover equipment breakdown, water backup, and service line losses are typical. Depending on the home's location and other factors, endorsements for wildfire, earthquake, flood, windstorm, and hurricane insurance are necessary to protect homeowners from losses due to natural causes otherwise excluded from their standard policy.
Homeowners Insurance Coverage Limits and Deductibles
As with all insurance policies, homeowners insurance coverage has a maximum amount it will pay for covered losses. In most cases, homeowners can modify their coverage limits to match their higher limit needs. Insuring for losses comes with various options in the types of policies carriers offer. They are listed below with explanations of the unique reimbursement method each offers.
In nearly every situation, the homeowner is responsible for paying a deductible before the policy steps in to cover a loss. A deductible is a form of self-insurance that helps reduce the overall cost of homeowner insurance. The typical deductible is offered in a range of $500 - $2,000 but can be increased in some circumstances.
What are the Various Types of Homeowners Insurance?
As previously mentioned about reimbursement for losses, there are several options in the type of coverage available to homeowners. A brief explanation of each follows.
Actual Cash Value
In an actual cash value homeowners insurance policy, the amount the policy will pay is determined by evaluating the replacement cost and then deducting any depreciation from such factors as age, wear, and tear.
Each policy will provide an exact definition and explanation of how it defines "replacement cost." In general, a replacement cost policy intends to make payments to replace or reimburse losses to a property with similar property of comparable materials and quality, and that is used for the same purpose.
Guaranteed Replacement Cost/Value
With a Guaranteed Replacement Cost/Value policy, the homeowner is assured of receiving the full cost of replacing the home even when the amount required exceeds policy limits. Such policies fully indemnify homeowners facing uncovered losses from depreciation or underinsured due to exceeding the policy limits that otherwise would cap reconstruction reimbursement payments. This type of coverage is most helpful when the event is a total loss. Insurers will initial replacement costs and will automatically increase the amount as needed. State laws and policy nuances by insures cause this type of coverage to vary by state and insurer. Such policies are not available in all states or every insurance carrier.
How to Get the Best Homeowners Insurance
There is more to getting the best homeowners insurance than looking for cheap home insurance quotes. While considering prices and how much homeowners insurance should cost per month are essential considerations, more goes into making a decision that gets a satisfying result. How homeowners insurance works, what it covers, and the differences in policies are in this report. The information in this guide will help in choosing the best homeowners insurance coverage.
Insurance Company Health Check
Not all insurance companies are equal. There are several ways to learn more about them. Check out the Insurance Information Institute's informative article, How to assess the financial strength of an insurance company. It lists five independent agencies—A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody's, and Standard & Poor's that provide insurance company ratings. Recommendations from a property-casualty agency that represents multiple insurance companies is a good source of insider information.
Consumer Reports publishes a Homeowners Insurance Buying Guide that will help you determine how well insurance customers evaluate their providers.
Using the resources listed above is a good start. When you have a company in mind, you can do an internet search with its name and "claims response rates" in the query. Another option is to search the insurance company name for complaints. Remember that sometimes results are anecdotal and not always indicative of the overall level of a company's claims response.
Get Multiple Quotes from Various Companies (Don't solely focus on price)
A rule of thumb for obtaining any new service or changing providers for an existing one is to get at least three quotes. That way, you can compare prices and policy features before deciding. Keep in mind; the lowest price does not always mean it is the best solution. Homeowners should consider more than price. That's because the policy must include the right types of coverage, limits, features, and endorsements. The following are things to evaluate during the process of shopping for homeowners insurance.
Homeowners Insurance Costs
Rates fluctuate for all insurance products, including homeowner insurance programs. Among the factors that will affect the price of homeowners insurance, there is the age and construction type of the home, recent claims history of the insured and the company, the deductible and policy limits, and policy endorsements all go into the mix to determine a premium. Competition between carriers and their ability to earn from their investments also bears the cost of homeowners insurance.
Best Homeowners Insurance Programs
When researching for a Managing General Agency and Surplus Lines Broker specializing in homeowners insurance programs, Snyder Specialty LLC is one to put on your shortlist. For more than ten years, it has successfully met the demand for homeowners coverage in a challenging marketplace and has expanded its core business to include, but not limited to, Coastal Homes, Seasonal and Rental Dwellings, and Builders Risk.