For many Americans, their home is their most valuable asset and it makes sense to protect it. Most homeowners believe that their insurance policy covers any major repairs to damage. But, basic property insurance doesn’t cover every calamity that could potentially befall your home and belongings. This is the reason why it’s so important to fully understand your homeowners insurance policy to assess the risks. Any gaps in the coverage can be filled to ensure that you’re fully protected.
What Does Homeowners Insurance Cover?
A typical homeowners insurance policy will cover a wide range of potential damages. The physical dwelling and certain other structures on your property should be covered too, including: fences, sheds, driveways, garages and more. But, if you’re running a business from your home in a separate structure, it’s probably not covered.
Most homeowners insurance will include personal property too and this is usually referred to as contents insurance. The coverage can be limited in relation to specific high-value items, such as: artwork, jewelry, antique furniture and more. For these assets, you should seek out additional coverage and this should be discussed before you commit to a new homeowners insurance policy.
Understanding Fair Value vs. Replacement Cost
Some insurance policies will not offer the homeowner the replacement cost of property. Additional coverage for the replacement cost can fill any gaps created by the loss of value and inflation when the property has aged. If this is not addressed, the damaged item will be assessed using the current fair market value, if you decide to claim the loss. Bear in mind that some items may depreciate quickly and there may be insufficient money from the claim to replace lost or damaged items.
Purchasing replacement-cost coverage will ensure that items can be replaced with something similar. So, if you want to ensure that your home and content are covered for a replacement-cost value this is a must have.
Car Insurance Cover
Many homeowner insurance policies have cover for personal items and separate structures located on the property. But, this raises an interesting question: what if your car is damaged or broken into when it’s parked in the garage or on the driveway?
There can be a blurry distinction between your auto and home insurance policies in this scenario. Although homeowners insurance will not cover car damage, there are policies that will cover personal items that are stolen from the car. But, the more comprehensive auto insurance policies are likely to cover these items too. The homeowners insurance policies tend to limit the available coverage if the stolen items were purchased to use in the vehicle.
Fire Coverage
A common cause of catastrophic damage to homes is the house fire and virtually every homeowner insurance policy will offer protection for structures and contents affected by them.
In the event of a total loss caused by a house fire, a standard policy should cover additional living expenses. This will extend to home rentals, hotel stays, restaurant bills and more up to a specific pre-set period.
Flood Coverage
In many cases, flooding is caused by an internal issue, such as an overflowing toilet, leaky water line, burst pipe and more. These problems are usually covered by homeowners insurance, but the same cannot be said for flooding from external sources. In a similar manner to natural disasters below, the causes could be natural like a flash flood or man-related like a burst dam. In both scenarios, there would be no cover from a basic homeowners insurance policy.
Natural Disaster Coverage
Some natural disasters are usually covered, such as thunderstorms, lightning strikes, hail and hurricanes. There could also be coverage for falling items caused by severe winds, smoke damage from wildfires and more. But, the majority of homeowner insurance policies don’t cover natural earth movements such as earthquakes.
So, if you live in an area prone to this phenomena, you should add the appropriate catastrophe insurance. If you live in a home at risk from hurricanes, you need adequate insurance coverage to protect your home. Some standard homeowner insurance policies may offer some hurricane damage, leaving you to pay the remainder. In this case, it’s advisable to purchase a dedicated hurricane policy to add an extra layer of protection.
Personal Injury
Many homeowner insurance policies do include coverage for any injuries that are incurred on the property, if the policy holder is liable. This can include events like slipping on the front walk, falling due to a broken step and more. These types of events are often limited to a very specific dollar value. So, if you feel like you need more cover, it’s a great idea to look into umbrella insurance to add extra liability coverage.
Vandalism Coverage
This tends to be covered with an all-risks or all-perils policy unless it has been excluded. The vandalism coverage may apply to an unoccupied home, but not a vacant home after a certain period of time has elapsed. The home is considered to be unoccupied if it contains the policy holder’s personal property even if the owner is absent.
If the property is completely empty with no property present, it is considered to be vacant. A prime example would be a home that is on the market after the policy holder has moved out. In this scenario, there are no personal belongings or furnishings left in the home. After a specified period of time the vandalism coverage would not apply to the policy.
Identifying Home Insurance Coverage Gaps
Now that you have a better understanding of what basic property insurance covers for the homeowner it’s important to identify where the gaps are. This will help you to arrange additional coverage to ensure that you are protected. Let’s take a look at some of the most common insurance coverage gaps in more detail.
Modifications and Renovations
When you sign up for homeowners insurance, you will select the coverage limits to rebuild the home in the event of a total loss. But, if any modifications for aging in-place, such as a stair lift, wheelchair ramp or other change is made, you must inform your insurer. The costs of such modifications may need to be factored into your homeowner policy coverage limits.
This is the case with other major home renovations too, including solar panels, externally solar water heater tanks and more. These innovations will increase the replacement costs of building the home if a total loss occurs. This can be true even if no major improvements have been made due to increases in construction costs, inflation, supply chain issues and more. These factors can all contribute to higher rebuilding costs which need to be factored into your homeowners insurance policy. Check with your insurance provider on a semi-regular basis to see if you need more coverage for your property.
Injuries to Workers
If you employ a house cleaner, gardener, caretaker, caregiver or some other person to work at or in your home, there is a risk of injury on your property. The worker may not have compensation from their employers or they could be self-employed with inadequate insurance coverage. This puts you, the homeowner, at risk for their medical bills if there’s an accident on your property.
Earthquakes and Floods
Although standard home insurance will cover certain severe weather events, such as fires, lightning, windstorms and blizzards, it will not cover earthquakes or floods. Many homeowners assume that flooding is only a risk for properties located near water. But, according to FEMA over 25% of flood claims are made outside areas considered to be a high risk for flooding.
Even a single inch of water may cause up to $25,000 in damage to your home. Flood and earthquake insurance can be purchased through the federal National Flood Insurance Program (NFIP) or a private insurer. There’s usually a 30-day waiting period which means that you can’t purchase insurance just because a hurricane is on the way.
Pest and Mold Damage
A homeowner insurance policy is unlikely to pay for the removal of common pests, such as termites, bees, rodents and others. Any minor damage caused by these critters will be an out of pocket expense unless the infestation is likely to cause severe damage. This would need to be something extreme like a potential home collapse caused by termites. If mold appears due to poor maintenance it will not be covered, but sudden problems like a burst pipe are likely to be covered up to the insurance policy limit.
Valuable Personal Items
The basic homeowner insurance will pay for the replacement of personal items that are lost, stolen or destroyed. This is only up to a specific amount and the coverage may be insufficient for those that have high-value items, such as artwork, antiques, jewelry, wine collections and more. Purchasing specialized insurance for adequate coverage will cost 1-2% of the item value per year.
Dog Insurance
Most homeowner policies will not cover an injury to visitors caused by certain dangerous dog breeds, such as Rottweilers, Pit Bulls, Doberman Pinschers, German Shepherds and others. For these breeds, you may need to seek dog liability insurance coverage from specialized providers. The annual premium will vary depending on the specific dog breed and your desired coverage limit.
Exterior Damage
Damage to buried utility lines that serve the home, including water pipes, sewer lines, power lines and more, are not covered by basic homeowners insurance. If the sewer line is clogged and a back up into the home occurs, this is not covered. For this specific risk, you will need a specific additional endorsement such as water backup coverage. These are usually available from an insurance provider at an additional cost.
What are Homeowner Insurance Add-Ons?
Now that you understand what basic homeowner insurance doesn’t cover, it’s easier to accept that insurance add-ons are the best way to fully protect your home and belongings.
| Exclusion | Why It’s Not Covered | How to Fill the Gap |
|---|---|---|
| Flood Damage | Standard home insurance excludes flooding from natural disasters. | Purchase separate flood insurance through FEMA or private insurers. Use the flood map provided by FEMA to assess your flood risk. |
| Earthquake Damage | Home policies do not typically include earthquakes. | Get an earthquake insurance endorsement or separate policy. Usually more common in earthquake prone regions, like California. |
| Sinkhole Damage | Most policies don’t cover damage from sinkholes. | Buy sinkhole insurance or an endorsement in high-risk areas. |
| Sewer Backup | Water damage from sewer backups is not included. | Add a sewer backup rider to your policy. |
| Wear and Tear | Normal aging and maintenance issues are not covered. | Set aside a home maintenance fund and schedule regular inspections. |
| Termite and Pest Damage | Considered preventable with maintenance. | Hire pest control services and maintain a termite bond. |
| Mold Damage | Coverage is limited unless caused by a covered event. | Improve ventilation, fix leaks promptly, and consider a mold rider. |
| High-Value Belongings | Jewelry, art, and collectibles may have low coverage limits. | Purchase additional coverage for valuable items (e.g., scheduled personal property coverage). |
| Home-Based Business Losses | Standard policies don’t cover business equipment or liability. | Get business insurance or an endorsement for home-based businesses. |
| Identity Theft | Financial losses from cybercrimes aren’t covered. | Consider adding identity theft protection to your policy. |
| Acts of War or Nuclear Hazards | Insurance doesn’t cover war-related damage. | No private insurance covers this; federal programs may assist in extreme cases. |
How Can I Save Money on Homeowners Insurance?
The cost of home insurance has jumped in recent years, with the average falling somewhere around $2,100 a year (or roughly $170 a month). We live in trying economic times, but skimping on insurance companies can have catastrophic implications for our finances. Let’s take a look at some of the best ways to save money on homeowners insurance:
Research
The quotes provided by insurers change regularly and it’s important to research them every couple of years and shop around for better deals. Compare the quotes using insurance brokers, company websites, agents and online insurance marketplaces.
Discounts
Some insurance companies offer a discount for certain organization members. Buying multiple insurance policies is known as “bundling” and this can earn significant discounts too. If the annual premium is paid in full or set up with an auto payment option this can lower the costs of insurance. If you take the time to compare different insurance policies and their discounts, you can identify even more potential savings.
Home Improvements
If you make improvements to your home that can reduce risks you can lower the insurance premiums. Some typical projects include burglar alarms, smoke detectors, upgraded plumbing, heating and electrical systems and fences erected around pools.
Credit Score Improvements
Most insurance companies will check credit-based insurance scores and charge premiums in line with those scores. The credit-based insurance score and consumer credit score are distinct, but both are derived from the credit report. So, if you can improve your credit score you can raise both and reap the rewards.
Raise the Deductible
The deductible is the amount subtracted from what the insurer would pay when a claim is made. When the deductible is increased this will lower the premiums, but you need to have those funds in-place if you make a claim.
FAQs
Can You Explain the 80% Rule?
When it comes to insurance, the providers typically follow the “80% rule”. This states that the homeowner should purchase insurance coverage for at least 80% of the replacement value. Failure to do this will ensure that full coverage is not realistic. When there is insufficient coverage, only a proportionate amount of the costs will be reimbursed.
Which Factors are Used to Determine the Value of a Home?
The insurance provider will determine the value of your home using several key factors, they are: location, age, size, condition and the values of recently sold nearby properties.
What is Basic Home Insurance Coverage?
The HO-1 policy is the most basic home insurance coverage type. This usually includes dwelling coverage only and it offers protection against specific listed perils. Most insurance providers don’t offer the HO-1 policy because it’s not profitable and it’s too basic to meet the needs of customers. But, for those that can only afford very basic home insurance the HO-1 policy is better than nothing.
Can You Explain the Insurance Deductible?
This is money that must be paid out of your own pocket if you make an insurance claim. As we stated earlier, you can lower the annual insurance premium if you raise the deductible. But, the higher deductible means that you will pay more if an event covered by your insurance policy requires you to make a claim.
For example, with a $10,000 deductible on an event that would cost less than $10,000 to repair you would pay 100% of the costs.
Most mortgage providers will insist that the homeowner carries at least a minimum amount of insurance on the property and the deductible must be below a specified limit. Always check with the mortgage provider before you choose a homeowners insurance policy with a high deductible and low monthly premium.
