What Does Homeowners Insurance Cover
If you own a home, then you probably have homeowners insurance. If you are planning to buy a home, then you need to know what homeowners insurance is and why it is so important for you to get the right policy.
Homeowners insurance is a type of property insurance that protects you from any losses or damages to your most valuable asset – your home. Homeowners insurance also gives you liability coverage if someone gets injured while at your home.
Homeowners insurance is different from mortgage insurance or a home warranty.
A home warranty is something a homeowner purchases for a fixed duration and it covers certain repairs and replacements due to problems with quality, poor maintenance, or natural wear-and-tear.
Homeowners insurance does not cover any of those issues. Plus, a warranty isn’t mandatory. But, your mortgage lender may require you to get homeowners insurance.
If you want to protect your most important financial asset, then homeowners insurance is a must. In order to know how to purchase a policy, you first need to understand what coverage a homeowners insurance policy offers.
Protection against damage
The primary coverage (often known as Section 1 coverage) that homeowners insurance offers is that against damage to your property.
The damage could be a result of weather-related events like lightning, windstorms, tornadoes, hailstorms, or volcanic eruption.
Man-made events like a riot, airplane crashes, vandalism, explosion, fire, and theft can also cause damage to your property and are covered under homeowners insurance.
Damage due to the weight of snow, ice, or sleet on your roof, accidental damage caused by household appliances, or damage due to plumbing or sprinkler systems is also generally covered under homeowners insurance.
Note that events like an earthquake and flooding are typically not covered by homeowners insurance.
If you live in an area that faces the threat of either of those events, then you need to pay for an add-on to get additional coverage. The price of the add-on can be high if your location is historically prone to an earthquake or flooding.
What else is covered?
Your belongings, such as clothing, furniture, and appliances are also covered if they get damaged by any events which are covered under the homeowners insurance policy. Some insurers also offer an add-on option that covers valuables like jewelry and antiques.
However, the key thing to find out is the amount of reimbursement that the insurer will provide for the loss/damage of a valuable item. It is important to understand how the reimbursement value is calculated.
Actual Cash Value
If the coverage is Actual Cash Value, then the reimbursement is calculated by subtracting depreciation from the initial value. If your home gets damaged, then the cost of your home minus the depreciation is calculated.
If the coverage is Replacement Cost, then the actual value without any depreciation is reimbursed. That way, you can replace your lost items or your damaged home up to its original value.
Extended or Guaranteed Replacement Cost
If the coverage is Extended or Guaranteed Replacement Cost, then you get more reimbursement than your policy limit. However, the extra coverage over the limit is usually capped at 20% or 25% over the policy limit.
This type of coverage is the most desirable because it adds a buffer to the cost of your home. Due to inflation, the replacement cost for a damaged home might be slightly more than the value estimated when the homeowners insurance was purchased.
If you bought homeowners insurance to simply satisfy your mortgage provider, then having a buffer is very important because the mortgage is not equal to the 100% value of the home. Some portion of that value is contributed by your down payment.
Loss of Use
Another coverage offered by homeowners insurance (and that can be very useful) is loss-of-use.
If your home gets severely damaged and needs major repairs that require you to temporarily move out, then you will effectively lose the opportunity to use your home.
In such a situation, loss-of-use coverage reimburses you the cost of any temporary housing or rental that you might have to pay till the time the repair work on your home gets done.
Many policies also reimburse food expenses, hotel room costs, and some incidental expenses which are incurred during your temporary time away from your home. There are daily limits to such reimbursements and each policy will vary.
Protection against liability
Also known as Section 2 coverage, legal personal liability coverage protects you from a financial liability that may arise if someone visiting you or someone on your property gets injured. The cost of any legal defense, if involved, also tends to get covered by the homeowners insurance policy.
Medical expenses arising due to the treatment of any injury sustained on your property also get covered under Section 2 of a homeowners insurance policy. There may be a deductible or a copay involved in the reimbursement of certain expenses.
Personal liability coverage may also include pets. So, for example, if your pet bites someone visiting your home, or if your pet bites your neighbor while on his/her property, you can get reimbursed for any medical expenses that the neighbor or a third-party may demand from you.
What is not covered under homeowners insurance?
Besides some weather-related events mentioned above, certain events and natural disasters are excluded from the homeowners insurance coverage.
These include power failure, war, “acts of God”, and nuclear accidents. Damage to your home due to mudslides, landslides, and sinkholes are also not included in the coverage offered by a typical homeowners insurance policy.
One of the biggest exclusions is damage from neglect. If the homeowner is deemed to have neglected a flaw or a repair, then the claim can get rejected. Think of the homeowner who hasn’t replaced the roof in 40 years and the roof gets blown away during one intense storm.
Damage due to sewer or drainage backup is also not covered under a basic policy. Though, there are add-ons available for those kinds of damage.