A crash course in homeowners insurance
Where do you start when trying to figure out the proper homeowners policy for an insured? With the basics.
Editor’s note: This column is part of PropertyCasualty360’s Foundations of P&C Insurance series, which aims to bring new insurance professionals up to speed, while keeping industry veterans sharp. On Fridays, PC360 will offer up fresh content covering the nitty-gritty details of P&C insurance, tips for professional development, articles looking at the industry’s more niche concepts, and the history of certain lines and programs.
Homeowners insurance can be a high-stress purchase, as customers want to ensure that they’re not only getting a fair rate from their insurer, but also coverage that will properly cover their assets.
So, where do you start when trying to figure out the proper policy an insured needs? With the basics.
Types of homeowners policies
There are several types of homeowners policies, with some providing limited coverage and others providing broader coverage. The HO 00 03 Special Form is commonly used and provides broad coverage for the dwelling and limited coverage for personal property. The HO 00 05 provides broad coverage for both the dwelling and personal property, and the HO 08 and the HO 00 02 both provide coverage on a more limited basis for both the dwelling and personal property.
But what if you don’t own a house? Coverage is available through an HO 00 04 for tenants or HO 00 06 for condominium owners. These policies are very similar to the HO 00 03, but are tailored to the specific needs of the tenant or condo owner.
Covered perils
Insurance coverage is described in two ways – open perils and named perils. Open perils means that all perils are covered other than what is listed as specifically excluded. For example, under the HO 00 03, the dwelling has open perils coverage. If a UFO lands on your house and damages it, since there is no exclusion for UFO damage, the damage would be covered. However, under the HO 00 02 or HO 00 08, coverage is on a named perils basis. Since UFOs landing on the house are not specifically named perils, there is no coverage for the damage caused by that UFO.
Most standard policies such as the HO 00 03 provide open perils coverage on the dwelling and named perils coverage on personal property. The most common named perils are as follows:
- Fire or lightning
- Windstorm or hail
- Explosion
- Riot or civil commotion
- Damage caused by aircraft
- Damage caused by vehicles,
- Smoke
- Vandalism or malicious mischief
- Theft
- Volcanic eruptions
- Falling objects
- Weight of ice, snow or sleet
- Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning or fire-protective sprinkler system or household appliance
- Sudden and accidental tearing apart, burning or bulging of a steam or hot water heating system, an air conditioning or automatic fire-protective system
- Freezing of a plumbing, heating, air conditioning or automatic, fire-protective sprinkler system, or of a household appliance.
- Sudden and accidental damage for artificially generated electrical current
- Volcanic eruption
Any policy can be modified by endorsements, which add or remove coverages. Exclusions from these policies usually include damage from floods, sewer backup, earthquakes, intentional acts, and other hazards.
Insurance considerations for multi-family dwellings
Put simply, multi-family homes are those that aren’t designed to be single-family only homes. These can include duplexes, condos, villas and apartments, among other buildings that typically consist of units occupied by different families.
When dealing with tenants – even if the owner occupies part of the dwelling themself – multi-family dwelling owners need to consider coverages that go beyond a standard single-family policy. To properly protect the building – and the owner – coverages in a multi-family building policy should include coverage for the building itself; any contents of the building owned by the landlord; business income coverage to reimburse the landlord for lost income if the home is uninhabitable because of a covered loss; extra expense coverage to keep the business running when repairs or a temporary relocation is necessary; medical payments coverage; equipment breakdown coverage; water backup and sump pump overflow; and floods.
Levels of homeowners coverage
Actual cash value
As mentioned earlier, when a policy pays actual cash value, that means it pays to replace your home or property, minus depreciation.
Replacement cost
Policies with replacement cost will pay the cost of repairing or rebuilding your home or replacing your property without a deduction for depreciation.
Guaranteed/extended replacement cost
Guaranteed or extended replacement cost is the highest level of coverage. These policies pay to rebuild your home as it was prior to the offending peril – even if it exceeds the policy limit.
It’s important to realize that the amount of coverage for personal property is set as a percentage of the coverage A amount; this may or may not be enough. Many people underestimate how much personal property they have, and an inventory is recommended to document belongings and determine whether you have sufficient coverage.