How does home insurance work?

Coverage protects your home in everyday incidents and disasters alike

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Home insurance is a contractual agreement between you and your insurance provider.

In exchange for monthly or yearly payments, called premiums, the company provides financial protection for your home and belongings. This means the insurance provider will cover the costs of repairing or replacing them in the event of damage or loss during a “covered peril,” such as a natural fire, vandalism or theft.

However, the insurance doesn’t just cover disasters — it can also pay for legal and medical bills if you’re found liable for someone injured on your property.


Key insights

Home insurance provides financial protection in the form of dwelling, personal property and liability coverage.

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There are several types of home insurance policies and different levels of coverage from which to choose.

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If something happens that’s covered by your insurance, like a fire, contact your provider promptly to file a claim, and then request repair estimates from multiple contractors.

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Basics of home insurance coverage

Most standard home insurance policies include a few specific types of coverage, one of the most important being dwelling coverage.

Christopher Naghibi, the chief operating officer at First Foundation Bank, told ConsumerAffairs that dwelling coverage “constitutes the central part of the homeowners insurance policy that describes coverage for the main structure of the house, including all walls, its roof system, floors, ceilings, fixtures, built-in appliances, plumbing and electrical systems.”

Personal property coverage is another essential part of your policy, protecting your belongings. Under this coverage, if your possessions, like furniture and clothing, are damaged or lost in a “covered peril,” your provider may help pay for repairing or replacing them. (Note that “covered perils” are events covered by insurance. These include theft, fire, vandalism and wind or hail damage.)

Reviewing your policy thoroughly to ensure you have enough insurance coverage to completely replace your home and possessions in the event of a “covered peril” is crucial. You may also want to consider additional protection for events that may not be covered, like floods, earthquakes or water backup — or to insure high-value items like jewelry or collectibles.

While this is not an exhaustive list, home insurance generally covers events like lightning strikes, fire, theft, vandalism and hail or wind damage. It generally doesn’t cover termites, insect damage, rust, mold and basic wear and tear.

Through its liability component, homeowners insurance covers personal injury claims on your property.

“Little fun fact that so many people don’t know: Liability coverage can also extend outside your premises … like a dog biting someone or a defamation suit,” Naghibi said.

What is a home insurance deductible?

A deductible is the amount of money you have to pay out of pocket when you make a claim with your home insurance provider. It’s typically found on your home insurance declaration page; it could be a fixed dollar amount or a percentage of your policy's total coverage. Usually, the higher the deductible you agree to, the lower the premium you’ll have.

Types of home insurance policies

When shopping for home insurance, knowing which type of policy you need is important. There are eight types to consider:

  • HO-1: These policies offer basic coverage against 11 named perils, including windstorms, hail, lightning and fire. However, you won't receive personal property or liability coverage.
  • HO-2: These policies cover more perils than HO-1s but still only protect against specific events and circumstances. Coverage also includes personal property and sometimes liability coverage.
  • HO-3: The most common policy type, an HO-3 covers repairs to your home's structure unless they’re from a peril excluded from your policy. It also provides liability protection and covers belongings that are lost or destroyed in a named peril.
  • HO-4: This type of policy is for renters. It covers personal property, liability and living expenses if the rental property becomes uninhabitable.
  • HO-5: HO-5s are the most comprehensive type of home insurance policy. These offer more protection for your belongings than HO-3 policies because they cover damage from any peril that’s not expressly excluded from your policy.
  • HO-6: This type of policy provides insurance coverage for condominium or co-op units. You receive dwelling, personal property and additional living expenses coverage.
  • HO-7: These policies cover manufactured and mobile homes — modular homes, trailers or RVs. They protect the home and external structures and provide liability coverage.
  • HO-8: If you have an older home, you may want to consider an HO-8 policy. It includes the same protection as a standard policy but has additional coverage for problems associated with aging homes.

Understanding policy types and add-ons

HO-1 through HO-8 policies may use different valuation methods when calculating how much the provider will reimburse you for losses. Here are the primary levels of coverage:

  • Actual cash value: Actual cash value (ACV) factors depreciation into the replacement value of your home and belongings.
  • Replacement cost value: Unlike ACV, replacement cost value reimburses you for the cost of replacing your home and belongings without deducting depreciation.
  • Guaranteed replacement cost: This coverage is the most comprehensive. It covers the cost to repair or replace your home and possessions even if it exceeds the policy limit.

Depending on your circumstances, you may need additional insurance beyond a standard policy. You can customize your policy with endorsements (riders) to add more coverage to your policy. Some common endorsements include coverage for:

  • Identity theft
  • Earthquakes
  • Floods
  • Water backup
  • High-value items like jewelry

How does the home insurance claims process work?

Here is the typical process you would go through when filing a home insurance claim:

  1. Report the claim: Contact your insurance provider as soon as possible to report the event. Make sure to have your policy number and details about the damage handy.
  2. Coordinate with your insurance adjustor: Your provider will assign a claims adjuster to oversee your case. This person will likely need to visit your home to document and evaluate the damage. Make sure to respond to communications promptly and send any additional required information or documents.
  3. Request quotes from multiple contractors: Research reputable contractors in your area and request a few repair estimates in writing. Your insurance provider may also have some recommendations. Save the quotes in case you need to negotiate your settlement.
  4. Wait for claim resolution: After the insurance adjuster assesses the damage, they will determine if your policy covers it. If so, they will let you know the settlement amount and when you can expect to receive the funds. Your insurer may require your deductible first, or they may subtract it from your settlement check.
  5. Start repairs: The insurance company may write the settlement check to both you and your mortgage servicer. Your servicer may hold some of the funds until after you hire a contractor and work begins. They may wait to release the full amount until the contractor finishes the repairs and they pass inspections.

Home insurance policy renewal and modifications

When renewing your home insurance, you should review your policy to determine if it still offers adequate coverage for your home, possessions and liabilities. Consider any recent renovations, property value changes, additions to your belongings or new liability risks.

Pay attention to any exclusions, which are events not covered under your policy. Coverage limitations, like jewelry or electronics limits, may also need further scrutiny.

Don’t hesitate to reach out to your provider for clarification if you have any questions about your coverage. When it's time to renew, you can also shop around and request quotes from various providers to find the best homeowners insurance companies.

FAQ

How does the claims process differ for property damage versus liability claims?

Property damage is when your home or belongings must be repaired or replaced. Liability claims, on the other hand, are when someone takes legal action against you.

Can home insurance cover damages caused by natural disasters?

Home insurance covers damage caused by many natural disasters, often including tornados, hail and hurricanes. However, standard policies may exclude floods, earthquakes and tsunamis.

Is it possible to switch home insurance providers midpolicy?

Yes, you can switch home insurance providers midpolicy, but there may be a cancellation fee. However, it’s crucial to ensure there isn’t a lapse in coverage.

What happens if I miss a premium payment for my home insurance?

Missing a premium payment may prompt the home insurance provider to cancel your policy, resulting in a lapse of coverage.

Bottom line

Home insurance offers financial protection if your home or belongings are lost or damaged in a covered event. It may also provide help with specific legal troubles.

With various policy types and coverage levels available, selecting the right one for your needs is essential.

If you need to make a claim, promptly notify your insurance provider and obtain repair estimates from several contractors to ensure you receive a fair settlement.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Consumer Financial Protection Bureau, “How do home insurance companies pay out claims?” Accessed Sept. 13, 2024.
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