Decoding Homeowners Insurance Policies
Home ownership is a fantastic achievement, but with it you open the door to new responsibilities and risks. That’s where homeowners insurance comes in, offering a safety net to protect your investment and everything inside. But here’s the tricky part: there are eight different types of homeowners insurance. In this comprehensive guide, we’ll focus on the two most popular choices, followed by standard and optional coverages, and briefly delve into specialty policies.
Understanding Homeowners Insurance
Before diving into specific policy types, it’s important to grasp the fundamental purpose of homeowners insurance. At its core, homeowners insurance shields you from financial losses due to unforeseen events such as natural disasters, theft, or liability claims. It typically covers your home’s structure, personal belongings, and liability for injuries or property damage sustained by others on your property. Plus, your mortgage lender will require it because they have a financial interest in your property.
Just The Basics: HO-3 Policy
The HO-3 policy, often referred to as the “special form” policy, is the most common type of homeowners insurance.1 It provides broad coverage for your dwelling and other structures on your property against all perils except those explicitly excluded in the policy. These exclusions often include earthquakes and floods, which may require separate coverage.
One of the key features of an HO-3 policy is that it covers both your home’s structure and your personal belongings on a named perils basis. Named perils refer to specific risks explicitly outlined in the policy. Common perils covered include fire, theft, vandalism, and wind damage.
However, if a peril is not listed, it’s typically not covered unless you opt for additional endorsements. You can also purchase endorsements to safeguard against additional risks. For instance, owners of multifamily homes generally purchase an HO-3 with an endorsement to cover risks associated with renters.2
The Step-Up: HO-5 Policy
For homeowners seeking more comprehensive coverage, the HO-5 policy, also known as the “comprehensive form” policy, offers an attractive solution. Unlike the HO-3 policy, which covers personal property on a named perils basis, the HO-5 policy extends coverage to personal belongings on an open perils basis. This means that unless a peril is specifically excluded, it’s covered under the policy. Another advantage is it will pay out for replacement costs rather than actual cash value.1
The HO-5 policy is often considered the Cadillac of homeowners insurance policies due to its extensive coverage. In addition to providing broader protection for your dwelling and personal property, it typically includes higher coverage limits and may offer additional benefits such as coverage for identity theft or unauthorized use of credit cards. An HO-5 also includes coverage for liability, medical payments to others, and additional living expenses.1
The catch? Not all home insurance companies offer HO-5 policies and if they do, you may not qualify. HO-5 policies tend to be for newer homes, or those located in low-risk neighborhoods with high property values.3 Also, while HO-5 policies are more comprehensive, even they don’t cover every claim. Common exclusions include everything from water damage from the outside to pest infestation.3
Standard Coverages: What’s Included?
Both HO-3 and HO-5 policies offer standard coverages that form the foundation of your homeowner’s insurance protection. These include:
- Dwelling Coverage: Protects the physical structure of your home, including walls, floors, roof, and built-in appliances, against covered perils.
- Other Structures Coverage: Extends coverage to structures on your property separate from your dwelling, such as fences, sheds, or detached garages.
- Personal Property Coverage: Reimburses you for the loss or damage of personal belongings like furniture, clothing, electronics, and appliances, whether they’re inside or outside your home.
- Loss of Use Coverage: Provides financial assistance for additional living expenses if your home becomes uninhabitable due to a covered loss, such as temporary accommodation or dining out expenses.
- Liability Coverage: Offers protection in case you’re legally responsible for injuries sustained by others or damage to their property while on your premises. It typically covers legal fees and court awards.
Optional Coverages: Tailoring Your Policy
In addition to standard coverages, homeowners insurance policies often offer optional endorsements or riders to customize your coverage based on your unique needs. Some common optional coverages include:
- Flood Insurance: Protects against damage caused by flooding, which is typically not covered under standard homeowner’s insurance policies. This coverage is essential for homeowners in flood-prone areas.
- Earthquake Insurance: Provides coverage for damage caused by earthquakes, which are also excluded from standard policies. It’s crucial for homeowners in seismic zones to consider this additional protection.
- Scheduled Personal Property Coverage: Allows you to insure high-value items such as jewelry, artwork, or collectibles for their full appraised value, providing broader protection than the standard personal property coverage.
- Umbrella Liability Insurance: Offers an extra layer of liability protection beyond the limits of your standard policy, safeguarding your assets in the event of a significant lawsuit or liability claim.
The Other Six Policies
HO-1 policies offer the most basic coverage and only cover 10 specific perils. This policy so bare bones that it’s not available in most states and, if you have a mortgage, your lender will usually require higher levels of protection.1
HO-2 policies offer more protection than HO-1 policies but cover fewer perils than HO-3. By choosing an HO-2 to save money, you could pay thousands more out of pocket if your home sustains damage from an unnamed peril.4
HO-4 policies are renters policies and only cover your belongings for the 16 perils of an HO-3.1
HO-6 policies are for condo owners. If a basic HO-6 policy doesn’t offer enough protection for your needs, you can typically buy extra coverage in the form of endorsements to your policy.5
HO-7 policies are for mobile homes and offer similar coverage to HO-3 policies.
HO-8 policies are for homes older than 40 years. Historic homes and registered landmarks often have HO-8 policies and offer coverage for only 10 specific listed perils.1
Who is Answer Financial?
When it comes to homeowners insurance, knowledge is power. If you still have questions about the nuances of policy types, the insurance experts Answer Financial are ready to help. As one of the nation’s largest and most reputable auto and home insurance agencies, Answer Financial has insured nearly 5 million homes and vehicles. We work with more than 40+ top-rated carriers to save our customers an average of $565 a year on insurance.*
On our mobile-friendly website, shoppers can quickly compare rates and customize coverages from multiple home insurers. By simply entering your zip code and home address, Answer can search publicly available records like square footage and year built to deliver side-by-side comparison quotes from reputable insurance companies. Finding the right policy for one of your most significant investments was never so easy!
February 6, 2024
- Forbes Advisor, “8 Types of Homeowners Insurance Policies,” https://www.forbes.com/advisor/homeowners-insurance/policy-types/
- Insurance Information Institute, “Homeowners Insurance Basics,” https://www.iii.org/article/homeowners-insurance-basics
- Investopedia, “With HO5 Insurance, You're in Charge,” https://www.investopedia.com/articles/insurance/09/ho5-home-insurance.asp
- Bankrate, “HO2 Insurance,” https://www.bankrate.com/insurance/homeowners-insurance/ho2/
- Nerdwallet, “HO6 Insurance,” https://www.nerdwallet.com/article/insurance/condo-ho6-insurance
*Results of a national survey of new Answer Financial customers reporting insurance savings 2023.