Around five percent of insured homeowners file a claim each year. Most claims involve property damage caused by weather—wind, hail, and lightning.
But it’s fire that does the most damage, costing about $7.2 billion each year. Are you covered if catastrophe strikes? Not all homeowners insurance coverage types are equal.
Understanding the differences can help you ensure you’re protected. Here’s what you need to consider when shopping for home insurance.
Three Levels of Coverage
The amount an insurance policy will pay varies based on the level of coverage. This is true no matter which homeowners insurance coverage types you choose. There are three standard levels of homeowners insurance coverage.
Cash value homeowners insurance coverage pays up to the current value of your home. This is the amount you could get if you sold your property, not what you paid for it. It might be less than the cost to rebuild it too.
Most basic coverage homeowners insurance policies will pay the replacement cost. That means they’ll pay what it takes to rebuild your home up to its original value. But replacement cost insurance will only pay up to your policy limits.
Guaranteed Replacement Value
This homeowners insurance coverage is also called unexpected replacement cost coverage. It usually guarantees to pay to rebuild your home exactly as it was before the incident. That’s regardless of policy limits.
Some policies will instead pay an additional 15-25% above the replacement cost. Either way, these extended policies protect you against unexpected increases in construction prices.
Homeowners Insurance Coverage Types
Basic coverage homeowners insurance policies vary. But most include at least three different types of homeowners insurance coverage.
Dwelling Repair or Replacement
This covers damage to the structures of your home. Those include your roof, walls, floors, foundation, fixtures, and attached structures like garages. IIt covers damage caused by fire, hail, lightning, and vandalism, etc. up to policy limits.
It’s also called personal liability insurance. This is homeowners insurance coverage that protects you from lawsuits. It pays for injuries to other people that occur on your property.
It also covers damage you cause to someone else’s property, like if a fire at your home spreads to your neighbor’s house.
Content insurance protects your personal property. It covers your clothing, furniture, and personal possessions if they’re stolen or damaged by a covered disaster.
Most basic coverage homeowners insurance policies include content insurance. However, you may need an extra rider to cover damage to expensive items like jewelry and antiques.
What’s Not Usually Covered?
Most homeowners insurance does not cover damage caused by neglect or animals (including pets, mice, and termites). Mechanical breakdowns, damage from war, or government action are also not covered.
Basic coverage homeowners insurance generally doesn’t cover unattached structures. That includes detached garages, barns, or accessory dwelling units.
Most policies also won’t cover damage caused by earthquakes, flooding, or sewer backups. But riders are usually available to fill these coverage gaps.
Some homes, like those built on flood plains or in hurricane zones, are considered to be at a higher risk for damage. Construction materials can also increase risk, like brick homes built near fault lines.
In these cases, an insurance company may deny coverage or choose not to renew your policy. When that happens, homeowners need to understand their rights and learn more about their options.
Additional Coverages and Policies
Many homeowners make the mistake of thinking their insurance policy covers everything. But there may be gaps in your coverage. The good news is there are often relatively inexpensive riders (extra coverage) you can add to your policy.
Additional Living Expenses
Some basic coverage homeowners insurance policies will provide for additional living expenses if your home becomes uninhabitable. This coverage pays your expenses (hotel, temporary rental, restaurant meals, etc.) while you’re unable to live in your home due to a covered event.
Keep in mind that some policies don’t include this coverage. And those that do will set strict limits on daily expenses and total payout.
Personal Umbrella Insurance
Umbrella insurance provides protection that goes beyond the limits and coverages of standard homeowners insurance coverage types. Umbrella insurance takes over when a liability claim exceeds your homeowners insurance coverage.
Homeowners Insurance Coverages Explained
What type of homeowner’s insurance coverage should you get, and which riders should you add? That depends on your personal financial situation.
Your home insurance policy should be as unique as you are. That’s why homeowners insurance coverage comes in so many different types and levels.
If you found this informative, check out other helpful articles in our Business & Finance section.