The Basics of Home Insurance: Coverage, Policy Types, and Settlements

Home insurance offers a safety net against a variety of perils, from fires and theft to natural disasters and liability issues. However, understanding what your policy covers, the types of policies available, and how settlements work can be daunting. This guide breaks it all down to help you make informed decisions.

What Does Home Insurance Cover?

A standard U.S. home insurance policy, often referred to as an HO-3 policy, typically includes six primary types of coverage:

• Dwelling Coverage: This covers the structure of your home, including walls, roof, and built-in appliances, from specific perils like fire, windstorms, or vandalism.
• Other Structures: Covers detached structures such as garages, sheds, and fences, usually up to 10% of your dwelling coverage.
• Personal Property: Protects your belongings (furniture, electronics, clothing) against damage or theft. Coverage is typically 50–70% of the dwelling amount, according to the Insurance Information Institute (III).
• Loss of Use (Additional Living Expenses): Pays for temporary housing and other extra costs if your home becomes uninhabitable due to a covered peril.
• Liability Protection: Covers you against lawsuits for bodily injury or property damage that you or your family members cause to others.
• Medical Payments: Pays for medical expenses if someone is injured on your property, regardless of fault.

Note: Floods and earthquakes are generally not covered by standard policies. Separate coverage must be purchased, often through the National Flood Insurance Program (NFIP).

Types of Home Insurance Policies

The U.S. home insurance market offers different policy forms to suit a range of needs. Here's a breakdown of the most common types:

HO-1: Basic Form

• Offers the most limited coverage.
• Covers only 10 named perils (e.g., fire, theft, vandalism).
• Rarely used today due to its restricted protection.

HO-2: Broad Form

• Covers more perils than HO-1.
• Includes everything in HO-1 plus additional threats like falling objects or damage from weight of snow/ice.

HO-3: Special Form (Most Common)

• Covers your home against all perils except those specifically excluded (like earthquakes or floods).
• Personal property is still covered only for named perils.

HO-4: Renters Insurance

• Designed for tenants.
• Covers personal belongings and liability but not the building structure.

HO-5: Comprehensive Form

• Offers the most extensive coverage.
• Covers both the dwelling and personal property on an “open perils” basis, meaning everything is covered unless explicitly excluded.

HO-6: Condo Insurance

• Designed for condo owners.
• Covers interior structures (e.g., walls, fixtures) and personal property.

HO-7 and HO-8: Mobile Homes and Older Homes

• HO-7 is tailored to mobile and manufactured homes.
• HO-8 is suitable for older homes where replacement costs exceed market value.

How Settlements Work

If you file a claim, the amount you receive depends on the type of settlement your policy provides and the extent of your coverage.

1. Actual Cash Value (ACV)

• Pays out the replacement cost minus depreciation.
• For example, if your 5-year-old TV is destroyed, you’ll be reimbursed for its current value, not what it would cost to replace it.

2. Replacement Cost Value (RCV)

• Reimburses the full cost to replace damaged property with new items of similar kind and quality.
• Does not deduct for depreciation.

3. Guaranteed or Extended Replacement Cost

• Covers rebuilding costs even if they exceed your policy limits, typically up to a certain percentage (e.g., 20–25% more).
• Particularly valuable in areas with fluctuating construction costs.

Average Costs and Considerations

As of 2023, the average annual premium for homeowners insurance in the U.S. is approximately $1,428, though this varies by state, home value, and coverage level, according to Bankrate. States prone to natural disasters like Florida or California often face much higher premiums.

When choosing a policy, consider:

• Deductibles: Higher deductibles mean lower premiums, but more out-of-pocket cost if you file a claim.
• Discounts: Many insurers offer discounts for bundling with auto insurance, installing security systems, or upgrading plumbing/electrical.
• Exclusions: Carefully read your policy to understand what’s not covered, such as mold, pest infestations, or wear and tear.

Filing a Claim

To ensure a smooth claims process:

• Document Damage: Take photos or videos immediately.
• Notify Your Insurer Promptly: Most policies have deadlines for reporting.
• Submit Required Documentation: Including receipts, inventory lists, and repair estimates.
• Work with Adjusters: The insurer will send an adjuster to assess the damage.