What Does Homeowners Insurance Cover?

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Homeowners insurance covers what will likely be the largest purchase of your lifetime. After years of saving for a down payment, you’ll want to protect your investment with a homeowners policy. Plus, your lender will require it.

Even if you’re paying cash for a home, or if you own your home mortgage-free, you’ll want this coverage. Homeowners insurance protects against the financial devastation of major property damage, a liability claim, or a total loss.

Here’s what homeowners insurance covers in more detail:

What is homeowners insurance?

Homeowners insurance provides financial protection against many different causes of damage, from natural disasters to accidents. When a covered event occurs, your insurance carrier will pay your claim based on the coverage you’ve purchased.

All policies don’t cover the same perils. Insurers use different policy forms (called HO-1, HO-2, HO-3, HO-5, and HO-8) to provide different levels of coverage that you can then customize to some extent. Make sure you understand what risks you face so you can get the homeowners insurance coverage you need.

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Perils covered by homeowners insurance

A peril is the cause of property damage or personal injury — in other words, the cause of loss.

There are two different types of peril policies:

  • Named peril: Named perils coverage only covers damages specifically listed in the policy. For instance, if you live in a wildfire-prone state, you might choose to purchase a named peril policy that only covers fire damage and wind damage.
  • Open peril: Open perils coverage will cover most damages except those specifically listed as exclusions in the policy. For example, an open peril policy might not cover your dog biting someone.

If you need coverage for something that isn’t included in your policy, most times you can get an additional endorsement (also called a floater) or purchase a separate policy for that peril.

What types of coverage are included in a homeowners insurance policy?

A standard home insurance policy includes six types of coverage:

Type of coverage What it covers Coverage amount
Dwelling Damage and destruction to the home You get to choose
(subject to minimums required by your mortgage lender)
Other structures Structures on the property that aren’t attached to the home, including sheds, fences, and free-standing garages About 10% of dwelling coverage
Personal property The cost to repair or replace damaged or stolen personal items, like furniture, appliances, clothing, and electronics. Also usually includes off-site storage units. Often between 50% to 70% of dwelling coverage
Loss of use Hotel expenses and some other living expenses while your house is being repaired About 20% of dwelling coverage
Liability Legal expenses if you are sued for any injuries or property damage that you or a family member cause to others on your property Limits usually start at $100,000
Medical payments Direct payments of medical bills for someone who was injured on your property Usually between $1,000 and $5,000

Dwelling coverage

Dwelling coverage pays to either repair or rebuild your home if it’s damaged by severe weather, fire, lightning, and other disasters. Typically it also covers attached garages.

Important: Dwelling coverage usually does not cover flooding or earthquakes.

You get to decide how much coverage you want for your dwelling, as long as you get at least the minimum required by your mortgage lender. Insurance agents will often make a recommendation based on current, local building costs or give you a couple of options. Make sure to choose an amount that covers the cost to rebuild your home.

Other structures coverage

Other structures coverage is just what it sounds like. It covers structures that are not attached to your home, such as fences, tool sheds, guest houses, and detached garages.

Since this coverage is typically a percentage of your dwelling coverage, you should make sure that it’s enough to cover what you have.

Personal property coverage

Personal property coverage insures your personal belongings, like furniture, televisions, clothes, electronics, and appliances, even when they’re not in your home — when you’re traveling, for example.

It’s a good idea to take photos or videos of each room in your house every couple of years. If you were to lose everything in a fire, these records would be indispensable in assessing what needs to be replaced — and making sure your insurance company pays you for it.

Tip: Keep your home inventory photos and videos backed up on a cloud drive or on an external hard drive that you don’t keep at the house. You don’t want to lose these records in the same incident that damages your home.

Loss of use coverage

Loss of use helps to cover your extra living expenses while your home is being repaired and you can’t live in it. Here are some common expenses that normally qualify:

  • Cost of temporary housing, including utilities
  • Added transportation expenses (such as a long drive to work, public transportation, etc.)
  • Extra food expenses you would not have at home
  • The cost of boarding pets
  • Laundry expenses
  • Parking fees
  • Moving costs
  • Storing personal property
Note: Loss-of-use expenses must be “reasonable,” as defined by your policy. Usually, high-end hotels and expensive restaurants are not covered. Rather, expenses are normally covered at your typical standard of living.

Additional living expenses (ALE) will be covered up to your policy’s limit for this category. However, some policies also have time limitations.

For example, ALE may be covered for 24 months after the date of your loss. Make sure that you’re familiar with all your policy inclusions, exclusions, and limitations before incurring expenses that may not be reimbursed.

Personal liability coverage

Personal liability coverage protects you from financial losses related to lawsuits for bodily injury or property damage that you or family members in your household cause to other people. It also covers damages caused by your pets.

If your dog bites a delivery person — or another person’s dog at the dog park — personal liability coverage can help you pay for any legal costs. Personal liability coverage pays the costs of court defense and any judgment against you, up to specified coverage limits.

Medical payments coverage

Medical payments coverage pays the medical bills (and sometimes the lost wages) of people who are hurt on your property or by your pets.

This type of coverage doesn’t apply if you are being sued (see personal liability coverage, above). Instead, it applies when someone is not suing but is requesting reimbursement.

Types of reimbursement

For your dwelling, other structures, and personal property, you can purchase different levels of reimbursement coverage.

Actual cash value

Actual cash value reimburses you for what your property is currently worth at the time of loss. You’ll pay a lower premium for this level of coverage, because the value of physical assets usually decreases over time through regular use. Accountants and insurance professionals call this “depreciation.”

Let’s say your teenager starts a grease fire in your kitchen (last remodeled in 1995) while attempting to deep fry a candy bar. Your oak-veneer cabinets and laminated wood countertops are now charred. The microwave above the stove is partially melted. The range hood is toast.

All of these items must be replaced. However, since they’re more than two decades old and are made from inexpensive materials, your actual cash value insurance coverage leaves you with very little money to fix the damage, especially after subtracting your deductible.

Replacement cost

Most homeowners insurance policies provide replacement cost coverage. While your premium may be higher than an actual cash value policy, the additional cost can be minimal compared with how much more coverage you get.

In the kitchen fire example above, you’d get a much larger claim check with replacement cost coverage. You’d get enough money to purchase new cabinets, countertops, and appliances of the same quality. If you wanted to upgrade to higher-quality materials, you would have to pay out of pocket for the upgrades.

Extended replacement cost

It can also be helpful to carry extended replacement cost coverage, which kicks in if a widespread disaster causes rebuilding costs in your area to increase substantially.

You may be able to rebuild your home from scratch for $200,000 if it’s the only home in the neighborhood that burns down. But if a wildfire tears through your area and reduces hundreds of homes to ashes, increased demand and insufficient supply of labor and materials may push rebuilding costs to $300,000.

If you have 150% extended replacement cost coverage, your entire cost to rebuild, minus your deductible, will be paid for. Expect to pay more for this feature, and ask your insurer exactly how much additional coverage you can purchase. Limits vary by insurer.

Guaranteed replacement cost

Some insurance companies may offer guaranteed replacement cost coverage for an additional premium. Similar to extended replacement cost coverage, guaranteed replacement cost coverage kicks in when the cost to repair your home is higher than your policy limit.

However, this coverage is not capped at a percentage of your policy limit the way extended replacement cost coverage is. As a result, insurance companies may be more likely to offer extended replacement cost coverage.

Important: Guaranteed replacement cost coverage doesn’t mean you can underinsure your property to reduce your premium, then rely on this coverage as a backstop. Insurance companies will require you to purchase a certain level of basic coverage as a condition of giving you this guarantee.

What isn’t covered by homeowners insurance?

There are certain perils that no homeowners policy covers. These include acts of war, neglect, and intentional damage. Other perils, such as mold, may or may not be covered. It depends on whether the damage was caused by a covered peril (like a burst pipe) or neglect (failure to ventilate the bathroom where you shower).

Floods and earthquakes are a couple of perils that aren’t covered by homeowners insurance, but can be insured against through separate policies (flood insurance and earthquake insurance).

A standard policy covers other perils as well, but the coverage may be limited. Having a $200,000 policy on your home, for instance, doesn’t mean your grandmother’s diamond ring is insured for $200,000. To fully insure expensive jewelry, art, firearms, furs, and other high-value items, you can usually add scheduled coverage to your existing homeowners policy (for an additional premium) with a personal property floater or endorsement.

Your basic policy may not cover certain perils at all, but you can add coverage for those things (again, for an additional premium). An example is sewer backup, water backup, or sump overflow.

Good to know: In some cases, you may need to change insurers to get the coverage you need. For example, many insurers won’t cover homeowners with certain dog breeds or homes in high-risk areas, such as wildfire-prone locations.

How to purchase homeowners insurance

Follow these steps to purchase a homeowners insurance policy:

  1. Gather basic information. Common questions on a home insurance application include the year your home was built, the foundation type, the construction type, the square footage, and the distance from the nearest fire department.
  2. Decide how much coverage to buy. Find out how much homeowners insurance your mortgage lender requires you to carry. Compare that to the amount the insurance company recommends based on recent rebuilding costs in your area.
  3. Choose your deductible. It should be an amount you could comfortably afford in an emergency. You can always increase or decrease it later.
  4. Select additional coverages. These might include an endorsement for sewer backup or for an expensive piano.
  5. Submit an application. Ideally, you’ll apply with several insurance companies to see who offers the best coverage for the price. Simplify this process by comparing home insurance quotes from multiple providers through Credible (powered by Young Alfred).

Disclaimer: All insurance-related services are offered through Young Alfred.

About the author
Amy Fontinelle
Amy Fontinelle

Amy Fontinelle is a mortgage and credit card authority and a contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

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