WHAT IS HOME INSURANCE?
Home insurance is personal insurance coverage that protects you
against financial loss for damage to the physical belongings in your
home; the residence you live in; structures not attached to your
home; and mechanical fixtures in your home, such as furnaces, water
heaters, and appliances. It also protects you against financial liability
for the bodily injury or death of guests which arises because of an
accident that occurs while the guest is on your property.
Home insurance allows a homeowner to manage personal risk by
giving him or her the financial means to repair or replace damaged or
stolen items and to pay for bodily injury or death sustained by guests
while on the property. It can also pay for repairs to the home if it is
damaged by fire, wind, hail, or any of the named hazards of the
policy. This book will explain named hazards in more detail later in
this chapter. If the home is completely destroyed and cannot be
repaired, home insurance can cover costs of rebuilding the home and
can assist you in paying for temporary housing. These coverages can
help you, as a homeowner, through a situation that would otherwise
be financially and emotionally devastating.
Home insurance provides coverage for disasters, such as damage
caused by an aircraft, wind, hail, an explosion, riots or civil unrest,
fire, or lightning. It also covers damage caused by vehicles, volcanic
eruptions, theft, vandalism, smoke, and self-damaging occurrences.
An example of a self-damaging occurrence would be the home
collapsing in on itself.
Additions can also be made to the policy to cover further hazards,
such as falling objects, water damage, snow, sleet, ice, and electrical
surges. Selecting these additional coverages will result in higher
insurance premiums but could prove to be worth every penny if your
home is damaged or destroyed by one of these hazards.
WHY OBTAIN HOME INSURANCE?
It is impossible to foresee the future or to predict damage to your
home or theft of your belongings. A home contains all your family's
belongings and provides shelter from the elements, so a negative
event that occurs in your home can have a profound impact on
almost every facet of your family members' lives.
If damage to your home, vandalism, or a break-in occurred, it is
possible you may have to replace some, if not all, of the belongings in
your home. You may also have to repair or replace the physical
structure of your home, which can cost you tens of thousands of
dollars or more. Even if you have saved and invested a significant
portion of your earnings, finding the financial resources to replace
belongings, repair severe damage from fire, wind, or hail, and pay for
alternate housing while your home is being rebuilt or repaired can be
difficult. Without home insurance, these obligations could potentially
leave you homeless and in severe financial distress.
In addition to providing resources to repair or replace your home and
its contents, home insurance also provides coverage for legal
liabilities you may incur as a result of injury or death to others while
on your property. The liability portion of your home insurance would
pay for medical expenses, funeral and burial expenses, and property
damage, for which you are held legally liable as a result of events that
occur on your property.
If you think you may not need to carry liability coverage as part of
your home insurance because the people you invite onto your
property would not hold you liable for injury or damages, keep in mind
that you may also be liable for damage to people who have not been
explicitly invited onto your property, such as people delivering mail,
distributing flyers, or making unsolicited sales calls. In some cases,
you may be liable for injuries to trespassers if you have not taken the
appropriate steps to make sure these people are not permitted on
These insurance coverages help reduce the uncertainty of financial
loss associated with owning a home. Home insurance allows you to
trade some of the financial risks of owning a home for a certain
amount of periodic payment to the insurance company in the form of
Home insurance may also be required by your mortgage lender
before you can complete the purchase of a home. Your mortgage
lender is taking a substantial risk by lending money to home
purchasers, and home insurance protects these investments by
helping to ensure the lender will be paid if the home is damaged or
TYPES OF HOME INSURANCE
There are seven types of home insurance. Each type of insurance is
purchased to protect the specific needs of an individual or family.
Different types of homes require different types of coverage.
The first type is basic homeowner's. A homeowner's policy protects
the policyholder in the event one of the events mentioned earlier
occurs. It also provides liability insurance in case someone is injured
on the property. Homeowner's insurance does not cover maintenance
on the home.
The second type works the same as basic homeowner's but adds
coverage for additional perils. This additional coverage includes water
damage from water backup, snow, falling objects, and electrical
The third plan provides even broader coverage. This policy would
include extended and specialty items in addition to all the coverages
listed above. The only disasters this policy would not cover are flood,
earthquake, war, and nuclear blast.
The fourth type of home coverage is tenant or renter's insurance. This
is the type of policy that would be purchased by someone renting a
home or apartment. Personal property is covered against everything
listed on a basic homeowner's policy, including liability. Damage to
the structure is not covered under this type of policy and would be the
responsibility of the property owner.
The fifth type of home policy is a complete risk policy. This type of
policy covers the building and the property from any disaster that may
The sixth type of home policy is condominium insurance. This policy
would cover all personal property within the condo against all the
disasters listed above. Liability insurance is also included. The
structure and outside the condominium are the responsibility of the
The seventh type of home policy is tailored to older homes with
historic value. This policy protects against the same perils as a basic
homeowner's policy but pays out actual cash value for repairs as
opposed to replacement cost. Often the costs of repairing these
historical homes are higher because materials used when the house
was originally built are not as readily available.
As you may expect, the broader and more comprehensive the home
insurance coverage, the larger the premium you can expect to pay.
When considering the seven policy types, you and your agent should
take the time to evaluate your personal circumstances to determine
what types of coverage you need to adequately protect yourself, your
family, and your home.
THE DIFFERENT PARTS OF A HOME POLICY
Now let us look at the different parts of a policy and what they cover.
The first coverage part of the typical homeowner's policy insures the
residence itself from damage or complete destruction caused by any
of the hazards listed in the previous section. It is important to be
aware, when considering this coverage type, that replacement cost
and market value of your home are not the same thing. Market value
is the amount of money someone would be expected to pay you to
purchase your home if you were trying to sell it. This value is based
on the characteristics of your home, the neighborhood you live in, and
the sale price of similar homes recently sold in your area.
Replacement cost is what it would cost to completely rebuild your
home from the ground up. If you do not insure your home for 100
percent of the reconstruction cost, you could be paid a depreciated
amount to repair or rebuild your home. This leaves you paying the
rest of the money out of pocket or sacrificing certain features you may
have had in your home before the disaster struck. Your insurance
agent, or insurance company representative, can help you determine
replacement costs by using a computerized replacement cost
calculator. Most insurance companies also require a home inspection
before the policy is issued. Sometimes the home inspection can
change the value from the original calculated replacement costs.
The second coverage part covers damage or destruction of detached
structures. On most insurance policies, this coverage is equal to 10
percent of the total residence coverage on most insurance policies.
For example, if your home is insured for $250,000, your coverage for
detached structures would be $25,000. This portion of the policy
covers detached garages, storage barns, and in-ground swimming
It is important to remember that, if you are using your detached
building or garage for any business use, the building will not be
covered. If you are using the building for any business purpose,
including the storage of business equipment, you should talk to your
insurance agent or company representative about adding an
endorsement to cover business use.
The third section of coverage insures your personal property. This
includes any contents in your home not permanently attached to your
dwelling, even if those items are not located in your home at the time
of the loss.
If you are given the option of choosing between replacement cost and
actual cash value, it is to your advantage to choose replacement cost.
Replacement cost will pay the full amount to replace the stolen or
damaged item, while actual cash value will pay only what your item
was worth at the time of the loss.
Here is an example of how choosing replacement value coverage can
be more beneficial than actual cash value coverage: Let us suppose
you have a 28-inch color television that is ten years old. If you have
actual cash value coverage on the contents of your home, your
insurance company will base your claim payment on the amount that
a ten-year-old, 28-inch color television would be worth at the time
your television was stolen. A used television matching this description
could be inexpensively purchased from a consignment shop, garage
sale, or pawn shop, so you will not likely receive a substantial
payment for your stolen television under this type of coverage. You
will not be able to purchase a new television with what you would be
given for your ten-year-old television.
On the other hand, if you had chosen replacement value coverage,
your insurance company will pay you the amount it would cost you to
purchase a new 28-inch color television with comparable features.
If you choose replacement value coverage, your insurance company
will require you use the money paid on the claim to purchase
replacement items. Some companies pay only the depreciated value
of your items unless you show proof you replaced the item. For this
reason, always keep your receipts to document the item replaced and
the amount paid.
The fourth coverage portion of your home policy covers any
additional living costs you may incur if your home and belongings are
damaged or destroyed. The key word is additional. If you are required
to find an alternate place for you and your family to live or to eat all
your meals at restaurants while your home is being repaired, this
coverage will pay any additional money you are paying out of your
pocket monthly to live.
For example, let us suppose your home has been damaged by a fire
and is unlivable while repairs are being made. Although you and your
family are not able to occupy your home while workers are repairing
it, you are required to make your monthly mortgage payment during
this period. Your policy would pay for the cost of your temporary
residence so that you would not be financially responsible for both
your monthly mortgage payment and your temporary housing
The fifth coverage section is liability. This covers any property
damage or injury, except damage or injury that is related to the
operation, maintenance, or use of an automobile that occurs on or off
your property. Examples of covered damages or injury include:
• Injuries to a child that is hurt while in your care.
• Injuries or damage that you or your child causes during a
• Injuries that result from your dog biting a guest or passerby.
All these incidents would be covered under your home policy's liability
portion. A mistake many people make is failing to understand how
important this coverage is. As a result, policyholders often do not
purchase high enough liability limits. Talk to your insurance agent or
insurance company representative to find out how much liability
coverage you should carry.
The sixth coverage section is medical payments. If a guest is injured
on your property, this section can help pay for his or her medical bills.
Please note that the injury does not have to be the fault of the
homeowner. The accident may be a result of the guest's own
misjudgment or carelessness.