What Does Homeowners Insurance Cover?

At least 85% of U.S. homeowners carry insurance because it provides reimbursement in the wake of events that might otherwise be personally and financially catastrophic.

Rate Simple can craft you an excellent home loan to purchase the house you want, and then you face the question of how to protect your investment. That's what homeowners insurance does.

An emergency fund won't always be sufficient to pay for the kind of damage a home can sustain. If high winds knock a tree branch onto your roof, you'll be glad to have homeowners insurance. If a hit-and-run driver makes toothpicks out of your white picket fence, you'll be glad to have homeowners insurance. Those are examples of the losses for which standard home insurance reimburses people.

But if you smash a hole through your wall trying to park the new SUV, or your indoor hot tub bursts and floods the rumpus room, then you're probably on your own.

What Coverage Does Home Insurance Provide?

Homeowners insurance policies can be divided into two categories based on whether they cover named perils or all risks except named exclusions. Furthermore, the policy might apply to the home or might expand to include all structures on the property.

Let's simplify the matter by explaining the most common type of homeowners insurance coverage in America, because the half-dozen or so alternatives are variations of it. Some 80% of home insurance policies are the type called Special Form, also called HO-3.

HO-3 is a comprehensive policy that covers your house and detached structures like garages, sheds, fences, and decks. These items are insured on an open-perils basis, meaning every kind of loss or damage is covered unless it is named in the list of exclusions. Examples of such exclusions include flood damage.

Your home is covered for everything EXCEPT this.

In addition to the following exclusions, the policy will not cover loss from demolition or seizure by a public authority to bring the property up to code.

• Water damage from flood, sewer backup, or a seeping foundation
• Certain water damage such as floods and storm surges
• Intentional loss
• Neglect
• Power failure (if the source of failure is off-residence)
• Wear and tear
• Damage caused by freezing
• Nuclear hazard

Your belongings are covered if this happens.

In addition to the house and detached structures being covered on an open-perils basis, your belongings (furniture, electronics, clothing) are insured against 16 named perils when you carry an HO-3 policy. These are:

• Fire or lightning
• Windstorm or hail
• Explosions
• Damage from vehicles (unless caused by the insured)
• Damage from aircrafts
• Riots and other civil disorder
• Theft (with limited liability of up to $1,000)
• Malicious mischief or vandalism
• Smoke
• Volcanic eruptions
• Falling objects
• Accidental discharge of steam or water
• Weight damage due to snow, ice, or sleet
• Freezing of household systems
• Accidental tearing, cracking, bulging, or burning of pipes or household systems
• Accidental damage due to manmade electrical current

With an HO-3 policy, your personal property (furniture, appliances, clothing) is covered by up to half the dollar amount of what your home itself is covered for. This excludes vehicles, trailers, and accessories. Some very expensive items (art, jewelry) might be assigned separate limits from the rest of your belongings.

Deductibles are in effect with home insurance policies, the same as with automobile insurance. A deductible is your share of the claim to pay, then the policy covers the rest. Often a dollar amount, these deductible can sometimes be a percentage. For example, if your home suffers damage in a hailstorm, the insurer may require you to pay 1% to 5% as a special wind/hail deductible.

HO-3 is referred to as a hybrid policy because it combines open-perils coverage for the house and other structures with named-perils coverage for personal property. The more limited but also more affordable homeowners insurance varieties, HO-1 and HO-2, cover only the house and only for named perils; that means if the loss isn't listed, it's not covered. Beyond HO-3 are more comprehensive policies; HO-5, for example, reimburses you for replacement value, not just current value. More about this distinction later.

More coverage you get under an HO-3 policy.

Loss of use: If a covered incident is severe enough to render your home uninhabitable, an HO-3 homeowners insurance policy will reimburse you for a hotel, transportation, food, and other living expenses temporarily. This coverage is usually limited to 30% of your dwelling coverage.

Personal liability: Personal liability coverage is another feature of HO-3 homeowners insurance. If an accident happens that would be your responsibility to pay for—for instance, you knocked over your neighbor's cinder-block wall with your new riding lawn mower—liability coverage applies. This coverage will help you pay for damages, medical bills, legal fees, or lost wages.

Summary: What's covered by the most popular homeowners insurance policy.

Under an HO-3 policy, you enjoy the following levels of coverage.

• Home covered for all risks unless specifically excluded
• Detached structures covered the same as the home
• Personal property covered for 16 named perils
• Loss of Use, also called Additional Living Expenses, covers hotel stays and more
• Personal liability coverage in case you are responsible for an accident that hurts a person or their property

Variations on the Most Popular Homeowners Insurance Coverage

Now that you understand two key factors of homeowners insurance coverage—(1) named perils versus open perils; and (2) just the house or other structures too—you can more easily grasp how the alternatives to HO-3 change one or both of those key factors to affect price. If your options were on a menu, the four choices might look like this:

• $: House covered for named perils
• $$: House and structures covered for all risks (open perils)
• $$$: House and structures covered for all risks, and belongings for named perils
• $$$$: House, structures, and belongings covered for all risks

Actual Cash Value vs. Replacement Cost

Aside from those two factors, you face another important decision when setting up a homeowners insurance policy. Would you like to be reimbursed for the current cash value of what was lost, or for what it will cost to replace the item?

HO-3 coverage reimburses you for cash value, not for what a replacement would cost. In fact, the key difference between HO-3 and HO-5 is reimbursement. HO-5 coverage ensures that you get enough money to replace what's lost or damaged.

The insurance industry says that rebuilding costs have surged 55% since 2019. Contractors and tradesmen cite rapidly rising costs too. Today, it's not likely that the current cash value of, say, an automatic garage door you've owned for five years would be sufficient to replace it. HO-5 provides the more desirable level or reimbursement.

Who determines actual cash value (ACV)? The insurance company. Let's say your teen driver ran into your tilt-up garage door, an item that This Old House estimates costs $950 but which, five years ago, cost you $775. Although insurance companies have their own formulas for deriving ACV, what basically happens is they start with your original cost and deduct a certain percentage for every year of wear-and-tear. In the end, the company might pay out $500 as the actual cash value for the garage door—ouch! A new one will cost $950. Now you see why replacement-cost coverage is more desirable.

How Much Does Homeowners Insurance Cost?

The cost of homeowners insurance varies by location, coverage, and home prices, to name just a few factors. The average price of home insurance is $1,500 per year, or about $125 per month. (That annual figure varies by a couple of hundred dollars depending on who conducts the survey.)

Residents in disaster-prone parts of the country pay more—often a lot more. Rates in Florida are four times the national average, for example, due in part to the frequency of damaging storms but also because big national insurers avoid the state, with Farmers Insurance announcing a pullout from the state only this month.

Factors That Affect Homeowners Insurance Cost

High cost or not, homeowners insurance is rarely optional. Most mortgage lenders require you to take out insurance. The rate you pay will depend on the value of your home, its age, the location, your credit score (in most states), and many other factors.

Open-perils policies are more expensive than named perils. Insuring detached structures along with the house is more expensive than insuring only the house. Wanting to be reimbursed for replacement costs means you'll pay a higher premium than reimbursement for actual cash value. Finally, accepting higher deductibles will lower your premiums.

No. 1 tip to save on homeowners insurance: Comparing home insurance quotes from at least three companies. Once a hassle, this task was made a lot easier on BindRight, where you can generate a short list of top matches and compare homeowners insurance quotes.

Bundling is our second top tip for saving. If you get home insurance from the same company as other insurance (life, car, boat), you could save around 10%, per Investopedia.

Snapshot: What Homeowners Insurance Covers

• Home insurance covers damage from fire, wind, and other events and accidents.
• Bare-bones home insurance covers the house only.
• The most popular homeowners insurance policy combines coverage for the house, detached structures on the property, and personal property (like furniture and electronics, but not vehicles) .
• Premiums are higher when you want to be reimbursed for the replacement cost of an item rather than its current cash value.