Homeowner’s Insurance

Homeowner’s Insurance is a broad type of insurance coverage designed to cover a home, its contents, and the property it sits on. This insurance is very broad, wrapping many different types of coverage into one package.

If you want to take out a mortgage on a home, the institution you borrow from will probably require you to have some level of homeowner’s insurance. They want to make sure that if there is a disaster, they do not lose their collateral on the loan. Homeowner’s insurance is like a broader form of renter’s insurance – it is a combination of property insurance and liability insurance.

History of Homeowner’s Insurance

firefight

What we now call “homeowner’s insurance” started in the 1600s as insurance against homes burning down in a fire.  It was created in direct response to the Great Fire of London. In the era before we had public fire fighters, private insurance companies would sell fire insurance to homeowners. That insurance company would then have its own staff of fire fighters who would put out fires at any insured home. There were many examples of the fire fighters arriving to a scene of a fire at an uninsured home, or at a home insured by another company, and just letting the home burn until the owners paid the company a hefty fee.

By the 1700’s, insurance companies began pooling resources into public firefighting stations. In America, Benjamin Franklin worked to popularize the notion of adding coverage for the actual damage caused by the fire, instead of just paying for firefighters. Throughout the late 1700s and 1800s, more types of property insurance were created and sold by insurance companies, including insurance against theft and burglary, insurance against water damage and weather, and insurance against someone getting injured on your property, known as liability insurance.

By the middle of the 20th century, most insurance companies bundled these separate policies together into a single “homeowner’s insurance” package. The type of coverage that was offered was standardized in 1950, but it has continued to evolve since then.

Types of Homeowner’s Insurance

There are two broad categories of homeowner’s insurance, named after the type of coverage provided. 

Named Perils

or loss to the insured home or property is caused by anything other than one of the listed risks, the insurance will not cover it. Named perils policies represent the minority of homeowner’s insurance policies sold.  Because the coverage is so limited, most homeowners prefer more comprehensive coverage. There are two types of named perils coverage:

H01 – Basic

smoke

This is the most basic form of homeowner’s insurance.  It is used for vacant buildings or if you lapse on your insurance coverage, but the bank holding your mortgage still wants to protect their investment. It covers the following named perils:

  • Fire and smoke damage
  • Lightning
  • Windstorm and hail damage
  • Explosions
  • Vandalism
  • Vehicle damage

H02 – Broad

This is a slightly more common type of insurance, which covers several additional named perils.

  • Everything from H01
  • Burglary/break-ins
  • Falling objects like trees
  • Collapse from ice and snow
  • Damage from frozen pipes
  • Accidental water damage
  • Damage caused by power surges

All Risk

home

All risk coverage is the opposite of named perils.  It covers all damage unless it is specifically listed as an exception. This type of coverage is used much more by homeowners, but policies can vary quite a bit in terms of the specific exclusions. There are some types of damage that are almost universally excluded from these policies, so homeowners will need to purchase separate insurance policies for these exceptions to be covered:

  • Earthquakes
  • Floods
  • Power outages
  • Neglect
  • War
  • Nuclear disasters
  • Damage the homeowner causes on purpose

What Does a Homeowner’s Policy Cover?

A homeowner’s insurance policy has four specific types of coverage.

  1. Structural Coverage – This covers the floor, walls, foundation, and other parts of the building itself.
  2. Material Coverage – This covers the personal property items contained within your home.  As with renter’s insurance, it is recommended that you walk through your home with a video camera at least once a year, pointing out any possessions that have significant value. Some homeowner’s insurance policies require an explicit list of the material possessions covered.
  3. Loss of Use Coverage – If your home is damaged and you need temporary lodging, this type of coverage will pay for the hotel nights while the damage is repaired.
  4. Liability Coverage – This protects the homeowner in case a guest is injured and sues for damages. Liability coverage is the biggest source of claims on homeowner’s insurance policies.

Types of Reimbursement

There are two types of reimbursement the homeowner can choose from when filing a claim. 

  1. Replacement Cost Value– If you choose this option, the insurance company will replace whatever was destroyed with a brand new item, and they will pay the full repair cost of anything that was damaged. This option is more expensive, so your insurance premium will be higher to reflect your choices. .
  2. Cash Value – If you choose this option, the insurance company will pay you for the current value of your item.  For example, if three years ago you purchased a television for $1200, the TV has depreciated in value, so right now it may only be worth $700.  The insurance company will pay you the $700 that the TV is currently worth.  Think of the cash value as the purchase price you would set for these items if you were selling them at a garage sale.

Coverage Limits

cash

All homeowner’s insurance policies have limits.  The limit is the maximum the insurance company will pay for a certain occurrence or claim.  For example, most policies include $100,000 of liability coverage, so if someone gets hurt on your property and sues you, the insurance company will only pay out up to that limit.

Different parts of your property include different coverage limits.

  • The structure of your primary dwelling (your house):  This number is the estimate of how much it would cost to rebuild your home based on current construction costs and the square footage of your home.
  • Other buildings on your property, like a shed or garage:  This number is calculated as percentage of your primary dwelling, so if you have a 60% limit on secondary buildings and your house is covered up to $100,000, your garage would be covered up to $60,000.
  • Personal possessions:  Coverage for your belongings is also calculated as a percentage of the insurance on your dwelling. 

How Much Will It Cost Me?

Homeowner’s insurance can be expensive compared to renter’s insurance, depending on your level of coverage. According to the National Association of Insurance Commissioners, the average annual homeowner’s insurance premium was $1,192 in 2019. 

Like all insurance policies, your choices increase or decrease your insurance premiums.

Increasing Premiums

The biggest factors increasing your premiums relate to your liability coverage – most payments insurance companies have to make is because someone is suing the homeowner. These items will probably see your rates go up the fastest:

  • biteDog Bites. If you have a dog that bites someone, your premiums will immediately increase. This is the single most common reason why homeowners file insurance claims – their dog bites someone, who then sues for damages.
  • Slip and Fall claims. If someone is injured on your property from a “Slip and Fall” (the second most common type of claim), your premiums also might jump, especially if it is more than once in a 3 year period.
  • Mold and water damage. Mold is extremely expensive to repair, so much so that some insurance companies have dropped it from their policies entirely (this is something you should confirm with your insurance company before signing). If you have one mold or water damage claim, insurance companies might raise a red flag that more might be coming in the future due to aging plumbing or improper repairs.

Decreasing Premiums

Premiums swing both ways.  Here are some ways to get your premiums to decrease over time.

  • Increase your deductible. Increasing your deductible means that you are agreeing to pay more before asking the insurance company to pay their portion.  The amount of your deductible and the cost of your premium have an inverse relationship.  The higher your deductible, the lower your premium. Another option to consider is to pay out-of-pocket for smaller damages and not filing a claim at all.  If you file too many claims, your premiums\ will definitely increase. 
  • Reduce your coverages. Many policies will over-insure your belongings, such as jewelry, so you can request that certain items be removed to reduce your premium before you sign.
  • Shop around. Like all insurance policies, you will benefit from shopping around once a year to find better terms. Companies change the way they categorize risk and the way they group customers into similar pools, so you could end up saving hundreds of dollars just by checking around occasionally to see if other insurance companies classify your property differently.

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1 of 3) What is the oldest aspect of homeowner's insurance?
2 of 3) If a bank were to buy insurance for you because your coverage lapsed, what type would they purchase?
3 of 3) Which of the following would be the least likely to be covered in a normal Homeowner's Insurance policy?

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Challenge Questions

  1. What is the purpose of homeowners insurance?
  2. Give examples of the type of things that a homeowner policy will cover?
  3. What is meant by coverage limits?
  4. In your own words and with examples, explain what a deductible is.
  5. What should you do when looking for insurance?