Homeowners insurance 101

Brush up on home insurance basics

Home is where our stories begin. Home is where we spend time with our friends and family. Home is worth protecting. Our affiliated agents can help you protect what matters and make sure you get the right home insurance coverage, but in the meantime, it doesn’t hurt to know a few facts and terms.

Basic insurance terms

Here are some basic terms that can help you communicate when you need to talk insurance.

  • Actual cash value: Cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence. For example, a 10-year-old sofa will not be replaced at the current full value because of value depreciation.
  • Adjuster: A person who investigates claims and recommends settlement options based on estimates of damage and insurance policies held.
  • Agent: The person who sells and services insurance policies.
  • Carrier: The company that underwrites the policy (i.e. is responsible for paying claims covered by the policy)
  • Claim: A demand made by the insured, or the insured's beneficiary, for payment of the benefits as outlined by the policy.
  • Coinsurance: Property insurance requires policyholders to carry coinsurance — insurance equal to a specified percentage of the value of property — in order to be eligible for full payment on a loss.
  • Coverage: The scope of protection provided under an insurance policy.
  • Deductible: Amount of loss that the insured pays before the insurance kicks in.
  • Endorsement: An amendment or addition to an existing policy that changes the term or scope of the policy. It’s sometimes called a “rider.”
  • Indemnity: Restoration to the victim by payment, repair, or replacement.
  • Policy: The written contract stating the conditions of your insurance coverage.
  • Qualifying event: An occurrence that triggers an insured’s protection.

What is homeowners insurance?

Homeowners insurance can cover both damage to your property and the legal responsibility you might have for any injuries and property damage you, your family, or pets might cause.

So, it covers a lot of things, but there are exceptions. For example, policies rarely cover flooding, earthquakes, or issues related to poor home maintenance.

A standard policy usually covers these four key things:

1. Property (dwelling and other structures)

Property covers your home (dwelling) and the other structures on your property (such as sheds or garages). If you have a loss, this part of your policy would cover costs to repair or rebuild the structures. This also includes damage to fixtures such as plumbing, wiring, and heating.

2. Personal property

Furniture, clothes, and other personal items are usually covered if they are stolen or destroyed by certain types of natural disasters. Most companies provide coverage limits of 50 to 70 percent of the amount of insurance on the structure of the home.

What’s more, your belongings could be covered anywhere in the world, unless you decide to opt-out of what’s called “off-premises” coverage. Pricey items such as jewelry, antiques, and guns are typically covered, but there’s usually a dollar limit if those things are stolen. You can also buy an endorsement for specific, high-dollar items.

Coverage often extends to even your trees, plants, and shrubs if they are stolen, hit by lightning, catch fire, vandalized, destroyed by a riot, or blown to pieces by falling aircraft (seriously). However, damage by wind or diseases is typically not covered.

3. Liability protection

Liability coverage helps protect you and your family from claims and lawsuits filed by other people. This clause could also include your pets. That means if your dog decides to nibble on the leg of the neighbor next door, your insurer could help pay the doctor bills, whether it happened on your property or theirs. The liability portion of the policy pays for both the cost of defending you in court, and most court awards up to the limit of the policy.

Liability limits usually start at $100,000. For even more protection, many insurers offer an “umbrella” (see “What’s an umbrella policy?” below) or “excess liability” policy, which may include claims for libel and slander, as well as higher liability limits.

4. Additional living expenses

If your house is destroyed by a fire, storm, or other insured disasters, this could help pay the costs of living somewhere else until your home is repaired or rebuilt. It may cover hotel bills, restaurant meals, and other living expenses. Coverage for additional expenses differs from company to company.

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What are the disasters (also called “perils”) that a homeowners policy typically covers?

  • 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 eruption.
  • Falling object.
  • Weight of ice, snow, or sleet.
  • Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning, or automatic fire-protective sprinkler system, or from a household appliance.
  • Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot- water heating system, air-conditioning system, or automatic fire-protection system.
  • Freezing of a plumbing, heating, air-conditioning, or automatic fire-protection sprinkler system, or of a household appliance.
  • Sudden and accidental damage from artificially generated electrical current (does not include loss to a tube, transistor, or similar electronic component).

What are my options when it comes to policies?

The different types of homeowners policies are fairly standard across the industry. They’re often named HO-1 through HO-8. However, individual states and companies may offer slightly different policies that go by other names, such as "standard" or "deluxe."

Some highlights of the policies (please note that not all carriers offer all these coverages):

HO-1 Basic Form

An HO-1 is a bare-bones homeowners insurance policy that is rarely written anymore because of the availability of other affordable options that offer better coverage.

HO-2 Broad Form

HO-2 homeowners insurance provides coverage only for “named perils.” If your home is damaged by events other than those actually listed on your policy, those losses will not be covered.

HO-3 Special Form

HO-3 homeowners policy is the most common coverage for people who own their house. It provides coverage for the structures, personal belongings, and personal liability. It also provides the broadest coverage, protecting against 16 types of disasters. Owners of multi-family homes typically buy an HO-3 and add an endorsement to cover the risks associated with having renters live in their houses.

HO-4 Tenant’s Form

An HO-4 is created specifically for those who rent their home.

HO-5 Comprehensive Form

HO-5 A: An “open peril” form that covers more than an HO-3. It covers all perils unless the policy specifically excludes them. It’s the broadest coverage you can get, so it is typically more expensive than HO-3. It’s also not offered by as many insurers.

HO-6 Condo Form

The HO-6 condo form is designed for owners of condominiums and cooperative units. It provides coverage for belongings and the structural parts of the condo or co-op that the policyholder owns.

HO-7 Mobile Home Form

An HO-7 mobile home form is the same as HO-3 but specific to the risks of mobile or manufactured homes that aren’t covered by standard homeowners insurance.

HO-8

An HO-8 homeowners policy is used for older homes that would be extremely hard to replace if destroyed. Historic homes and registered landmarks usually carry this type of policy.

Your agent can help you decide how much dwelling coverage to buy, but your coverage should generally equal the full replacement cost of your home. It’s a good idea to occasionally review your dwelling coverage to make sure it doesn’t drop below the cost to replace your home.

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What’s an umbrella policy?

It’s a policy designed to add liability coverage above the limits of your homeowners insurance. Like an actual umbrella, it helps protect you from the elements, but these elements are more along the lines of major claims and lawsuits.

Where do I get flood insurance?

Flood insurance is provided by the federal government through the National Flood Insurance Program.

Where do I get earthquake insurance?

Earthquake coverage comes in the form of an endorsement.

How do I purchase enough homeowners insurance coverage?

Work with your agent to figure out coverage options for your budget and situation.

Actual cash value

Actual cash value (ACV) means different things to different insurers, so be sure to confirm which definition your insurer uses. Over the years, courts have defined actual cash value as one of the following:

  • Replacement cost (see below) minus depreciation (the one most commonly used).
  • Fair market value (what you could sell it for).
  • A combination of the two definitions above.

Replacement cost

Replacement cost (RC) is how much it would cost to completely rebuild your home on the same lot, to the same quality with comparable construction materials, up to the original value. It factors in rising labor, material, and transportation costs.

Extended replacement cost

Extended replacement cost pays a certain percentage over the limit to rebuild the home. Generally, it’s 20 to 25 percent more than the limit of the policy.

Guaranteed replacement cost

The Guaranteed replacement cost offers the highest level of protection. A guaranteed replacement cost policy pays whatever it costs to rebuild the home, even if it exceeds the policy limit.

For more information

Contact a local Grinnell Mutual agent to see if your current insurance gives you the coverage you need to protect the place you call home.

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