Homeowners insurance is a type of coverage that pays out if your home or personal property is damaged as a result of an accident such as a fire or natural disaster. Personal liability coverage is also included, which protects you in the event of an accident or injury on your property.
Homeowners insurance is not required by law, but if you take out a mortgage, your mortgage lender will require you to have one to protect their investment.
Many people let their homeowners insurance policy lapse once their mortgage is paid off, but the financial protection provided by homeowners insurance can be life-saving for many homeowners.
If you're considering purchasing a home, read our guide to the best mortgage lenders.
There are four types of coverage available with homeowners insurance:
Property Coverage
Property insurance covers the structure of your home as well as any additional structures on your property (such as detached garages and sheds).
Personal Belongings
In terms of personal property, a home insurance policy can help cover damage to your personal (non-business) belongings, wherever they may be lost or damaged, as well as items belonging to other people if they are in your home.
Your insurance company may impose policy limits on the covered items, at least without special riders, or may only cover them up to a certain amount. High-value items, such as jewellery and artwork, may necessitate additional coverage.
To determine your personal property coverage, make a detailed home inventory, including cost and receipts if possible, which can also help a claims adjuster later determine the value of the damage.
Loss of Use
If your home is damaged and you need to stay somewhere else while the damage is repaired, loss-of-use coverage will pay for your additional living expenses. If necessary, this coverage could even pay for meals and transportation.
Personal Liability
Furthermore, homeowners insurance covers your personal liability if you are sued for causing bodily harm or property damage, as well as medical payments to others if their injury is caused by you or a condition in your home (e.g., if an uneven front step causes someone to fall and break a bone).
Keep in mind that some insurance companies will deny you liability coverage if you own a “high-risk” dog breed.
If you require more liability coverage than your insurance company is willing or able to provide, you should consider purchasing an umbrella liability policy, which can provide higher coverage limits for a wide range of covered perils (such as additional liability under your auto policy).
Types of homeowners insurance
Homeowners insurance policies are classified into eight types. Some have become obsolete as policyholders have demanded more coverage, while others are tailored to specific types of properties.
Perils | HO-1 | HO-2 | HO-3 | HO-5* |
Fire or lightning | ✓ | ✓ | ✓ | ✓ |
Windstorm or hail | ✓ | ✓ | ✓ | ✓ |
Explosion | ✓ | ✓ | ✓ | ✓ |
Riot or civil commotion | ✓ | ✓ | ✓ | ✓ |
Aircraft | ✓ | ✓ | ✓ | ✓ |
Vehicles | ✓ | ✓ | ✓ | ✓ |
Smoke | ✓ | ✓ | ✓ | ✓ |
Vandalism or malicious mischief | ✓ | ✓ | ✓ | ✓ |
Theft | ✓ | ✓ | ✓ | ✓ |
Volcanic eruption (but not earthquakes or tremors) | ✓ | ✓ | ✓ | ✓ |
Falling objects | ✓ | ✓ | ✓ | |
Weight of ice, snow or sleet | ✓ | ✓ | ✓ | |
Accidental discharge or overflow of water or steam | ✓ | ✓ | ✓ | |
Sudden and accidental tearing apart, cracking, burning or bulging of a steam or hot water heating system, air conditioning or sprinkler system or water-heating appliance | ✓ | ✓ | ✓ | |
Freezing of plumbing, heating, air conditioning or sprinkler system or a household appliance | ✓ | ✓ | ✓ | |
Sudden and accidental damage from an artificially-generated electrical current | ✓ | ✓ | ✓ |
*HO-5 policies are “open-peril,” which means they will cover any damage unless a specific peril is named and excluded.
HO-1
The most basic type of homeowners insurance policy is the HO-1 "basic form." It operates on a “named peril” basis, which means that the policy specifies which perils it will cover. It is not covered if it is not explicitly listed.
HO-1 policies are rarely sold nowadays due to their limited coverage.
HO-2
HO-2 policies, also known as “broad form” policies, function similarly to HO-1 policies but expand the list of perils to 16. HO-2 policies, like HO-1 policies, are nearly obsolete these days.
HO-3
An HO-3 policy, also known as a "special form," is the most common and standard homeowners insurance policy. It strikes a good balance between coverage and price.
The structures on your property are covered under this policy on a “open peril” basis. This means that the insurance will cover any claims that may arise, with the exception of those specifically excluded in the policy. In comparison, a HO-2 policy will only cover damage caused by the listed events.
However, a HO-3 policy will only cover your personal belongings if they are lost or damaged as a result of one of 16 "named perils."
HO-4
An HO-4 policy is not the same as a homeowners policy. This is commonly referred to as renters insurance, and it is very similar to HO-3 homeowners coverage, with the exception that it excludes dwelling coverage. When you rent a property, the homeowner is responsible for the structure's insurance and upkeep. Renters insurance can help you cover your personal belongings and liability as a tenant.
HO-5
An HO-5 policy, also known as a "comprehensive" policy, is similar to a HO-3 policy but provides more coverage. However, it is not as common as HO-3, possibly due to the higher cost.
This policy covers all of your property, including your home, structures, and personal belongings, against "open perils."
This means that the policy will cover everything except what is expressly stated to be excluded.
In comparison, a HO-3 policy only covers the dwelling on an open perils basis, while personal belongings coverage is limited to 16 perils.
HO-6
HO-6, or condo insurance, is another common type of homeowners insurance policy. This type of policy is only available to condominium residents. Because it is a “named perils” policy, it will only cover damage caused by the events specified on the policy.
Because condo associations have insurance that covers the structure and common areas of the building, a HO-6 policy will cover what is inside your unit, such as wiring and plumbing, and some policies will also cover fixtures and appliances.
HO-7
This is referred to as "mobile home insurance," and it protects the structure of your trailer, RV, or modular home in the same way that HO-3 policies do, on a "open perils" basis.
HO-8
HO-8 policies are also known as “modified coverage” policies because they are designed for homes that do not meet the criteria for coverage under other policies. Some insurers, for example, restrict their HO-3 policies to newer homes or those that pass a thorough inspection.
If you own an older home or a historical landmark that cannot be upgraded due to conservation concerns, you must purchase a HO-8 policy.
As previously stated, the most common homeowners insurance policy, known as HO-3, covers the structure of the home on an "open peril" basis.
Except for those explicitly excluded by the policy, all causes are covered.
The following perils are not covered by HO-3 policies:
However, damage caused by these perils may be covered in some cases.
For example, while direct earthquake damage is not covered by homeowners insurance, fire damage caused by an earthquake is.
Your policy may also reimburse you for expenses such as living expenses while your home is being repaired due to earthquake damage.
In many cases, a standard homeowners insurance policy is insufficient to protect your home. Floods and earthquakes, for example, are not covered by homeowners insurance, regardless of where you live.
To better protect their homes and families, homeowners in earthquake and flood-prone areas should consider purchasing separate earthquake and flood insurance in addition to homeowners insurance. You may also require a separate policy to protect your personal belongings from flood and earthquake damage.
The National Flood Insurance Program is a federal program that supports flood insurance in flood-prone areas in order to make it more affordable to a wider range of people.
Similar programs have been established to reduce the cost of earthquake insurance and wildfire insurance.
Wildfire damage is typically covered under standard homeowner policies. However, policies may be difficult or prohibitively expensive to obtain, at least from traditional insurers, in areas of states prone to wildfires.
Some states, such as California, Florida, and Texas, have state-backed insurance companies that sell wildfire insurance policies.
The average annual homeowners insurance premium in 2017 was $1,211. Your insurance rates will be determined by where you live as well as the coverage limits you select.
Location and coverage options
For example, if you live in a high-crime area, your insurance premium may be higher because you are more likely to file a theft claim.
If your home has a premium home theatre room and you increased your personal property limits to cover its cost, you'll probably pay more in premiums because of the potential cost to replace the theatre if it's destroyed by fire, for example.
Your cost is also affected by the deductible you choose. The deductible is the amount you must pay out of pocket before your home insurance coverage takes effect. A higher deductible equals a lower premium, and vice versa.
Actual cash value vs. replacement cost
The type of reimbursement you choose is another factor that influences your premium.
You can choose between actual cash value, which is subject to depreciation, and replacement cost, which reimburses the full cost of replacing the covered loss with an equal or similar item.
Because it is typically more expensive for the insurance company to cover, this last option results in higher premiums.
Discounts
You can usually get a discount on your premiums if you pay them in advance or electronically, or if you renew your policy more than 30 days before it expires.
Discounts for owning protective equipment such as smoke detectors, burglar alarms, sprinklers, extinguishers, or security cameras are also common.
If you combine your home and auto insurance policies, you may be eligible for an additional discount.
How to buy homeowners insurance
You can purchase homeowners insurance directly from your preferred home insurance provider. A home insurance quote can be obtained online or over the phone in as little as fifteen minutes. Most companies also allow you to file insurance claims online.
Alternatively, an insurance agent can assist you in comparing coverages and creating the policy that is best for you.
Homeowners insurance and home warranties are not the same thing.
A home warranty is not a form of insurance. Instead, it is a service contract provided by a home warranty company that will repair or replace major systems and appliances such as HVAC, plumbing, and wiring.
A home warranty works by paying a premium — which can range from $300 to $600 per year, depending on your home's amenities — and whenever something needs to be repaired, you pay a service fee between $50 and $200 to have a repair person evaluate and repair the system or appliance.
When it comes to home warranties, one thing to keep in mind is that the service contract does not cover appliances covered by the manufacturer's warranty.
Freestanding appliances such as refrigerators and washers, on the other hand, are not covered by homeowners insurance. If something were to happen to them, you would have to pay for repairs out of pocket.
Check out our guide to the best home warranties to learn more.
Check out our page on the best homeowners insurance companies to learn more about homeowners insurance and how to find the policy that's right for you.