Homeowners insurance has been a common topic in news lately, from rising costs, to major carriers like AIG, State Farm, and Allstate
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An HO-3 policy is the standard insurance policy form for most homeowners policies in the United States. Although different insurance providers offer varying coverages, the core of the policies are often quite similar, regardless of the provider. Coverages define what a section of the policy protects, such as damage to the home, damage to personal property, or unintentional injury an insured person causes others. Perils are events that result in a loss, such as windstorms, theft, or hail.
Summary Of Homeowners Insurance Coverages
There are 6 major coverages common to most homeowners insurance policies — in particular, the HO-3 policy.
Coverage A: Dwelling — covers the main structure of the home.
Coverage B: Other Structures — covers additional structures at the insured address, generally detached from the main structure of the home, including garages and carports.
Coverage C: Personal Property — covers the contents of a home and personal property, anywhere in the world.
Coverage D: Additional Living Expense — covers the costs of living incurred when damage to the dwelling as a result of a covered peril makes the dwelling uninhabitable.
Coverage E: Liability — covers expenses the insured incurs due to injury or property damage they cause others.
Coverage F: Medical Payments To Others — covers medical expenses to invited guests of the insured if they sustain an injury at the insured premises as a result of an accident, or as a result of an animal owned by or cared for by the insured.
Explanation Of Homeowners Insurance Coverages
Coverages A and B typically compensate for direct physical damage to the home and detached structures at the home address against all perils except those perils explicitly excluded from the policy. The list of excluded perils can be extensive, including floods and earthquakes, which require separate policies.
Coverage C, however, generally lists specific perils that are covered, such as fire, lightning, windstorm, hail, vandalism, theft, and others. This is a crucial point, as the protections on personal property or contents of the home is limited in scope relative to the protection offered on the home itself in HO-3 policies. Yet, Coverage C protects property anywhere in the world (subject to limitations). Some contents and personal property — including jewelry, cash, collectibles, and art — are subject to maximum limits or excluded from the policy entirely. They also would need to be otherwise specifically disclosed to the insurance provider. For example, motorized vehicles are explicitly excluded from Coverage C.
Another point of distinction between Coverages A and B and Coverage C is how the insurance provider pays claims. Generally, the insurer pays the replacement cost for items covered under Coverage A and B, but actual cash value for items under Coverage C. That is, subject to the maximum policy limit, the insurer will reimburse to repair or replace, at current market prices, damages due to covered perils for property protected by A and B. For contents and property, however, the insurer will generally reimburse for the depreciated value of the damaged property. For example, if a television cost $1,000 when purchased years ago but has depreciated to $500 before being destroyed by a covered event, the insurer will pay $500 rather than the amount to purchase a comparable replacement television at today’s prices.
Coverage D pays reasonable expenses incurred, such as rent or hotel costs, when a home becomes unlivable due to physical damage. Keep in mind the damage the home sustained resulting in the displacement must have been caused by a peril covered under Coverage A.
Coverage E pays expenses associated with actions brought against the insured for injury or property damage they are responsible for, anywhere in the world. There are exclusions, however, such as injury caused intentionally or injury due to operating certain vehicles. Finally, Coverage F makes medical payments to invited guests injured on the insured property, or injured by a pet owned or in the care of the insured.
Homeowners Coverage Amounts And Deductibles
Generally, a consumer will purchase an amount of Coverage A based on the estimated replacement cost of their residence. For example, a person might purchase $500,000 of Coverage A if estimating that amount to be the cost to rebuild the home following a total loss. In the event of a total loss, the insurer would pay up to $500,000 to rebuild. The annual premium paid to the insurer rises as the amount of Coverage A purchased rises.
Some other coverages are often automatically calculated as a percentage of Coverage A. For example, Coverage B, C, and D are usually 10%, 75%, and 20% of Coverage A, respectively. Thus, if a policyholder carries $500,000 in Coverage A, the most the insurer would pay for claims on other structures, personal property, and additional living expenses would be $50,000, $375,000, and $100,000, respectively, in the event of a covered loss.
Coverages A, B, and C are generally subject to deductibles that the insured is responsible for paying before the insurer kicks in. The premium is generally lower when the insured selects a higher deductible. Depending on the policy, deductibles can vary based on the peril. For example, the insured may be responsible for paying the first $1,000 if there is damage to their home due to fire, but responsible for paying the first $2,500 if the home is damaged due to wind or hail. Coverages D, E, and F usually do not carry a deductible and coverage will kick in immediately upon a covered claim.
Summary
Consumers should speak to a licensed agent and read their policy carefully to understand the components of their policy, as policies can vary substantially from the basic HO-3 structure described here. Never assume your homeowners policy is a standard HO-3 or it covers every possible loss. A policy will also indicate the actions the insured must do following a loss, such as reporting thefts to police or taking reasonable action to prevent further loss. In taking time to understand the basics of a homeowners policy, consumers are empowered and prepared if ever subject to a loss of coverage or a loss due to a peril.
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