Homeowner's insurance

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Homeowner's insurance, renter's insurance, and landlord's insurance generally provide coverage for loss of one's own property and liability to others which occurred because of their presence on your property. Deductibles are usually available. While a homeowner is paying off a mortgage on their house the lender will usually require homeowner's insurance, as may a buyer during the process of selling the house. There are always excluded perils, which means that if the loss is caused by one of those items then the insurance provides no coverage. There may be ways to cover these exclusions, either by riders amending the standard policy for an additional fee or by purchasing specialty insurance such as earthquake or flood insurance.

According to a 2011 poll conducted by the Insurance Information Institute, 97% of US homeowner's held homeowner's insurance, while 29% of renters held renter's insurance. In 2008, the average annual cost of homeowner's insurance was $791 nationally, ranging from a low $432 in Utah to a high $1,460 in Texas. [1]

Types of homeowner's insurance

Standard policies are often referred to as [2]:

  • HO-2 Broad Form (Named Peril)- a basic policy covering 16 or more common disasters. [3]
  • HO-3 Special Form- The typical, most comprehensive form used for single-family homes. This policy protects your home from all perils except those specifically excluded. [4]
  • HO-4 Renters Insurance (Contents Broad Form)- this policy protects a renter's possessions, and can provide liability protection.
  • HO-5 Comprehensive Form (HO-3 with HO-15, Special Personal Property Coverage)- Covers the same as HO3 plus more. On this policy the contents are covered on an open peril basis, therefore as long as the cause of loss is not specifically excluded in the policy it will be covered for that cause of loss.
  • HO-6 Condominium Unit Owners - For condo and co-op owners, this policy provides coverage for both one's belongings and the structural parts of the building that one owns.
  • MV Market Value or Older Homes Forms (Modified Coverage Form)- usually this coverage will be based on an actual cash value basis (replacement minus depreciation).

The homeowners policy contains two sections. Section I provides property coverages (A, B, C and D) while Section II provides liability coverages (E and F). A brief description of the individual coverages follows [5]

  • Coverage A - Dwelling
  • Coverage B - Other Structures
  • Coverage C - Personal Property
  • Coverage D - Loss of Use
  • Coverage E - Personal Liability
  • Coverage F - Medical Payments to Others

The typical policy has the following limits on coverage:

Typical Policy Limits [6]
Coverage Component Typical Limits
Dwelling You choose
Other Structures 10% of Dwelling coverage limit
Personal Property 50% of Dwelling coverage limit
Loss of Use 20% of Dwelling coverage limit
Personal Liability You choose
Medical Payments You choose

Replacement cost vs. market value

When insuring the value of a home, homeowner's can usually choose among three levels of coverage.

  • Actual cash value - This value covers the house plus the value of your belongings after deducting depreciation.
  • Replacement cost - This is the actual cash value without the deduction for depreciation.
  • Guaranteed (or extended) replacement cost - This policy pays whatever it costs to repair or build your home. Some insurers only offer extended replacement insurance, providing for a 20-25% increase over the replacement cost value. [7]

Discounts and deductibles

There are a number of steps a policyholder can take to reduce the cost of homeowner's insurance without reducing the amount of coverage. Insurance companies may provide discounts for the following actions: [8]

  • Adding smoke detectors, fire extinguishers, dead bolts and burglar alarms can often result in a discount.
  • Some insurer's will discount homeowner insurance premiums if you also insure your automobile with the company.
  • Discounts are often available to non-smokers and senior citizens.
  • Discounts are often available if you stay with the same insurer for many years.

The insurance premium can also be reduced by increasing the deductible you are willing to pay for each claim. Deductibles on homeowners policies usually start at $250. Depending upon the insurer, deductibles can be reduced as follows:

  • increasing your deductible to $500, you could save up to 12 percent;
  • increasing your deductible to $1,000, you could save up to 24 percent;
  • increasing your deductible to $2,500, you could save up to 30 percent;
  • increasing your deducible to $5,000, you could save up to 37 percent. [9]

Hurricane deductible

The heavy damage associated with hurricanes and tropical storms has led insurance companies to levy a hurricane deductible assessed to claims associated with storm wind damage. The deductible is triggered only when there is a hurricane or tropical storm. Currently, eighteen states have the hurricane deductible: Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Rhode Island, South Carolina, Texas, Virginia and Washington DC. [10]

The deductible can be either a dollar amount, or more commonly, a percentage amount (usually 1 to 5 percent, but can be higher in some coastal areas with high wind risk). In many states a policyholder may be given the option of paying a higher premium for a dollar deductible, but in high risk coastal areas the percentage deductible is usually mandatory.

Example: Arthur and Mary have a homeowner's policy that includes a hurricane deductible since they live in a high risk coastal region of North Carolina. Their policy has a $500 standard deductible, so they must pay the first $500 of a standard claim out of pocket. The hurricane percentage deductibles are based on the home's insured value. Their house is insured for $200,000 and has a 5 percent hurricane deductible, so the first $10,000 of a claim due to storm damage must be paid out of their pocket. [11]

References

  1. Homeowner's and Renters Insurance Insurance Information Institute
  2. Homeowners Insurance Guide, Commonwealth of Virginia SCC Bureau of Insurance
  3. These enumerated perils include: 1.Fire and lightning 2. Removal of property endangered by any insured peril 3. Windstorm 4. Hail 5. Explosion 6. Riot and civil commotion 7. Vehicle or aircraft damage to your property 8. Smoke 9. Vandalism and malicious mischief 10. Breakage of glass 11. Theft 12. Falling objects 13. Weight of ice, snow or sleet damage 14. Collapse of building and any part thereof 15. Sudden and accidental damage, cracking, burning or bulging from steam or hot water heating system or appliances for heating water 16. Accidental discharge or overflow of water or steam from plumbing or heating systems 17. Freezing of plumbing, heating or air conditioning systems and domestic appliances 18. Sudden and accidental injury from artificially generated electrical currents 19. Limited coverage for trees, shrubs or plants 20. Additional living expenses 21. Personal liability insurance protection 22. Medical payments coverage
  4. Are there different types of policies?, Insurance Information Institute
  5. Consumers:residential insurance, California Department of Insurance:
  6. NAIA Consumer's Guide to Home Insurance
  7. The Beginner's Guide To Homeowners' Insurance, investopedia, (January 23, 2011)
  8. Twelve Ways to Lower Your Homeowner's Insurance Costs
  9. Twelve Ways to Lower Your Homeowner's Insurance Costs
  10. Hurricane and Windstorm Deductibles, Insurance Information Institute, September 2011.
  11. Hurricane and Windstorm Deductibles, Insurance Information Institute, September 2011.

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