What Is Homeowners Insurance?
Homeowners insurance is a combination insurance policy that offers coverage on the building(s), the contents and liability for injuries that may occur to a third party.
How does homeowners insurance work?
Typically, when a home is purchased, the lender requires the buyer to purchase homeowners insurance. This protects the lender if the home is destroyed before the mortgage is paid off. In the event of a total loss, the lender will be paid first. Any remaining balance will go to the homeowner. However, a property without a mortgage still needs to be covered.
What does homeowners insurance cover?
Homeowners can choose between several standardized policies. A basic policy covers damage from 11 specific perils:
- Smoke damage
- Damage from vehicles or aircraft
- Riot or civil commotion
- Glass breakage
- Volcano eruption
- Personal Liability
A basic policy does not cover disasters such as floods or earthquakes, or anything that does not fall into one of the above categories. Most homeowners opt for a comprehensive policy called “All Risk” coverage. This type of policy covers all perils unless specifically excluded. Hurricane coverage may require an additional deductible.
Each policy specifies what is covered and the maximum amounts that will be paid for losses. Typically, the main dwelling section has a coinsurance clause stating that if it is insured for at least 80% of its actual value, coverage will be adjusted to replacement cost, up to the policy limits.
Other structures on the property, such as a detached garage or shed are usually covered at approximately 10% to 20% of the value of the dwelling.
Personal property coverage is normally limited to 50% of the dwelling coverage, with specific limits for money, jewelry and other collectibles. If the homeowner has additional valuables, he may wish to protect them by adding a rider to the policy.
Another section of the policy states the limits for loss of use expenses. This coverage pays rental expenses if the dwelling becomes uninhabitable.
Additional coverage such as repairs, debris removal or damage to landscaping may also be specified in the policy.
A section will be devoted to specifying the exclusions of the policy. Typical exclusions are earth movement, water damage, war, nuclear hazard, neglect, intentional loss, power failure and concurrent causation.
It is important for a purchaser to be informed and aware of the details contained in his homeowner’s insurance policy. Only in this way can he be confident that his needs will be covered.