Home owners insurance is highly recommended for homeowners and renters today. Natural disasters and human-initiated damage can lead to costly repairs and replacements. In addition, a guest who might accidentally trip while inside the property and add to the homeowner’s financial burden if a lawsuit occurs. With homeowner’s insurance, all of this is covered.
In the U.S., every state has its own department that deals with consumer needs including home owners insurance. In the state of New York, the Department of Financial Services helps consumers understand the nature of homeowner’s insurance. In Oregon, the state’s insurance division outlines the requirements for homeowners insurance in the state. It is paramount to know the basics so that consumers are able to choose the most suitable policy for their situation.
According to the NAIC, there are two major reasons why buying homeowners insurance is a good decision. One is to protect assets, and the other is to satisfy mortgage lenders. Generally, mortgage lenders require borrowers to keep homeowners insurance while they have pending loans. There is no chance homeowners can escape from this because the lender will end up buying the insurance on their behalf. This means higher premiums and limited coverage.
Homeowners Insurance Coverage
Homeowners’ insurance policy coverage can be very tricky. Many consumers get confused about what their policy covers and what it does not. Basically, the insurance policy only covers the reason behind the loss or damage that has been stated in the policy. A person whose home was damaged and becomes unlivable due to an earthquake may only be able to file a claim if the policy covers earthquake-related damage. This means homeowners will never be compensated if this is not included in their policy.
The following are the main types of homeowners insurance policy coverage:
This insurance coverage pays for all damages to the house and any structures attached to it. It may cover damage to fixtures like electrical wiring, plumbing, permanently installed air conditioning and heating systems.
• Personal Property
The homeowners or renters insurance policy will pay for the value of belongings including clothing, furniture, appliances and electronics that were lost or damaged even if they are not inside the property such as things in storage facilities.
• Loss of Use
While the property is under repair, the homeowner gets payment for additional living expenses from the insurance provider.
• Medical Payments
Medical coverage pays for hospital bills incurred for guests who get hurt while at the property.
• Other Structures
Damage to structures that are not attached to the main property can also be covered in homeowner’s insurance. This includes tool sheds, fences, guest cottages and freestanding garages.
Types of Homeowners Insurance Policies
The homeowners’ basic policy or HO-1 covers the following things that are also offered in HO-3 along with the other perils.
• Personal property at home or away
• Medical payments
• Civil judgments
• Damage to others’ property
• Bodily injury
• Vandalism and malicious mischief
• Riot and civil commotion
• Aircraft or vehicle damage
• Glass breakage
• Theft and burglary
• Windstorm and hail
• Fire, smoke and lightning damage
HO-2 or broad form policies protect the property against the perils included in HO-1 and the following.
• Water heaters and heating system rupture
• Electrical damage to appliances
• Plumbing system freezing
• Water from plumbing systems
• Weight of snow or ice
• Falling objects
HO-3 is the special form policy that covers almost all risks of physical loss except for floods, nuclear accidents, war and earthquakes.
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HO-4 or tenants policies or contents broad form and HO-6 or unit owners policies pay for damages to the apartment’s contents, condominium or cooperative units and personal liability.
HO-5 or comprehensive form policies pay for damages and losses due to the same perils covered in HO-3. In addition, it covers all risks of physical loss. All of this coverage can also be obtained when purchasing a HO-3 policy that comes with the Special Personal Property endorsement.
HO-1 is simply the modified version of HO-1. It is also referred to as the market value policy. This policy pays for the actual cash value in lieu of the building’s replacement cost coverage.
The Coverage Limits
Generally, consumers can choose how much coverage they want when they first get their homeowners insurance. It is important to keep the coverage cost equal to the total home cost replacement. Also, consumers have to make it a habit to check their dwelling coverage to ensure that the policy’s value does not drop below the home’s replacement cost. The insurance company may reduce the amount of the claim when the cost goes below 80 percent of the full home replacement cost.
Typically, the personal liability and medical payments depend on the consumer’s choice. Meanwhile, the other structures’ limit of coverage is 10 percent of the dwelling coverage. Personal property coverage should be 50 percent of the dwelling coverage and loss of use of at least 20 percent of dwelling coverage.
Like the other types of insurance policies, homeowners insurance policy holders who opt for higher deductibles will also enjoy lower premiums. Depending on the property’s location, there are catastrophic deductibles that can also help consumers lower their premiums.
Most homeowners insurance policies do not offer protection against floods. Fortunately, the U.S. government created the National Flood Insurance Program that offers this coverage at a lower cost. Any properties located in communities that participate in the NFIP program can take advantage of this flood insurance coverage. Many federally-regulated mortgage lenders require this for consumers who have existing loans for properties located in high risk flood zones. Although not mandatory, the federal government also recommends flood insurance policies for those who have properties located in moderate risk flood areas.
Another kind of optional policy is guaranteed replacement cost coverage. This coverage pays consumers the complete amount to rebuild their homes. Alternatively, they can go for the personal property replacement cost endorsement that will fully replace their personal property.
There is also another option called the inflation guard endorsement. This type of coverage ensures an increase in the dwelling’s coverage limit on a yearly basis in relation to inflation.
Consumers can also opt for ordinance or law endorsement coverage that will pay for extra amounts needed to rebuild the home. However, this is only applicable for homes built in accordance with new building codes and related laws or ordinances that were not implemented at the time when the home was first built.
There is also another option called the scheduled personal property endorsement to cover the stamps, jewelry, fur, antiques, computers, guns and other items. It is also referred to as the personal article floater. In addition to these choices is the personal umbrella liability insurance that boosts liability coverage above the maximum amount covered in the policy. All of this coverage need to be purchased separately on top of the basic homeowners or renters insurance policy.
New York Department of Financial Services