Homeowner Insurance 101

Homeowners insurance provides financial protection against disasters. A standard policy insures the home itself and the things inside.  It covers damage to your property as well as your liability for any injuries or property damage caused to other people.  This includes damage or injuries caused by pets.

Disasters that are not covered by homeowner's insurance.  Damage caused by most disasters is covered, including fire, smoke, lightning, wind, hail, frozen plumbing, theft, explosion, vandalism, the weight of ice and snow, and a few others. But there are exceptions. Damage caused by floods, earthquakes or poor maintenance are NOT covered. You must buy two separate policies for flood and earthquake coverage. Maintenance-related problems are the homeowners' responsibility.  Other conditions that may not be covered include mold, fungus, wet rot, dry rot and bacteria.

Types of homeowner’s insurance coverage.  A standard homeowner’s insurance policy includes four essential types of coverage:

  • Coverage for the structure of your home
  • Coverage for your personal belongings
  • Liability protection
  • Additional living expenses if you are temporarily unable to live in your home because of a fire or other insured disaster

Homeowner's insurance varies by structure type.  Structures vary so widely that a different policy is usually required for each type of home. For example, a condo policy typically covers interior structures like wallboard and lighting fixtures. Depending on your state, your association by-laws and insurance company, external walls may not be covered.  A home insurance policy usually includes sheds and detached garages, but a manufactured home policy may require additional coverage for sheds and garages. Renter's insurance typically covers only liability and personal belongings.

Liability protection.  Liability Insurance helps protect you against injury (or property damage) that you or your family may cause to other people. It typically covers injuries whether they happen on or away from your property. If you or anyone in your household is accused of accidentally causing injury or property damage, your insurance coverage can cover legal defense fees and damages (up to the amount of your policy limit).  Failure to pay for liability protection could jeopardize assets such as your investments, bank accounts, retirement accounts, home and personal property.

Additional living expenses. This pays the additional costs of living away from home if you can't live there due to damage from a fire, storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt. Coverage for additional living expenses differs from company to company.

Actual cash value vs. replacement cost coverage.  Actual Cash Value and Replacement Cost coverage options differ in the way they determine the value of your belongings in the event of a covered loss. Many of your belongings will decrease in value over time, so it's important to consider this when you purchase coverage for protecting your personal property.

  • Actual Cash Value Coverage -- Covers your personal property for the cost of what you might expect to get if you sold it at fair market value (at a garage sale, online auction site, etc.).  This coverage uses the replacement cost minus depreciation, and may allow for the insured item to be replaced with a used item. Actual Cash Value insurance coverage generally costs less than Replacement Cost coverage.
  • Replacement Cost Coverage -- Covers your insured personal property for the amount it costs to buy them new.  This type of insurance typically costs more than Actual Cash Value insurance coverage.