What is homeowners insurance?

How does homeowners insurance work?

You need home insurance for two primary reasons: protecting your assets and satisfying your mortgage lender. Standard coverage includes damage to the home, other structures and personal belongings. It also covers financial liability due to injury or property damage caused by residents of the home.

For example, practically all home insurance policies cover fire and smoke damage. If there’s a fire, you can file a claim. Then the insurance company investigates and offers compensation within the policy’s limits.

» MORE: What does homeowners insurance cover?

During the claims process, the insurer’s adjuster assesses the damage caused by the incident and provides a preliminary estimate of the total cost for cleanup, repairs and restoration. Most adjusters work for private insurance companies, but you can also hire a public insurance adjuster to conduct a separate appraisal, which may result in a higher loss estimate.

Policies can have exclusions, and you might be required to get an additional endorsement to cover damage from floods or earthquakes or to insure high-value possessions.

Homeowners insurance premiums can be paid directly to an insurer either monthly, quarterly, biannually or annually. But most mortgage lenders bundle home insurance premiums with monthly mortgage payments and keep the money in an escrow account to cover the cost of the policy. Nearly all policies also require a deductible, which is the amount you have to pay for an insured loss before your insurance company covers the rest.

» CALCULATE: How much does homeowners insurance cost?

Types of homeowners insurance policies

The most common type of homeowners insurance policy for single-family homes is an HO-3 policy, but there are several insurance policy forms for different levels of coverage and types of homes. For example, HO-6 is specifically for condos, and HO-7 is designed for mobile homes.

HO-1: basic form

HO-1 forms are rarely used these days and have been discontinued in most states. This basic form of homeowners insurance provides coverage against 10 named perils that cause direct damage to the insured dwelling itself. Those perils are:

• Fire or lightning
• Smoke
• Hail or windstorms
• Explosions
• Riots or civil commotion
• Damage caused by aircraft
• Damage caused by vehicles
• Vandalism or malicious mischief
• Theft
• Volcanic eruptions

HO-2: broad form

HO-2 policies provide coverage for the 10 named perils included in a basic form plus six more:

• Falling objects
• Weight of ice, snow or sleet
• Accidental discharge of water or steam
• Sudden and accidental damage to some household systems
• Freezing of household systems
• Sudden and accidental damage from electrical currents

HO-2s typically include coverage for personal property and liability, but they exclude coverage for floods and earthquakes.

HO-3: special form

This is the most common type of home insurance policy because it covers:

• Your dwelling
• Other structures on the property
• Personal belongings
• Additional living expenses from loss of use
• Personal liability
• Medical fees

With an HO-3 form, personal property is covered by named perils, and your house is covered by open perils. Open-peril policies provide coverage for damage caused by any source not specifically excluded in the policy. A named-peril policy only offers reimbursement for the destruction caused by a specific peril named in the policy, such as a fire or vandalism.

HO-4: contents broad form

Also called renters insurance, these policies are specifically designed to protect renters’ personal property. An HO-4 works similarly to an HO-2 and covers the same 16 perils. The main difference is that renters insurance only covers personal belongings, given that the property owner is the one who insures the dwelling. Most HO-4 policies also cover your liability and additional living expenses if your rented dwelling is temporarily uninhabitable.

HO-5: comprehensive form

This is an open-peril policy for both your dwelling and personal property. That differs from an HO-3, which provides open coverage for your dwelling and named coverage for your personal property. Some exclusions usually apply, so additional riders may be needed to cover damage from earth movements, floods, pets, mold, war and normal deterioration.

Not every home is eligible for HO-5 insurance, and not every insurance provider offers it. Homeowners might upgrade to an HO-5 from an HO-3 if they’ve acquired valuable new belongings that aren’t covered under a named-perils policy.

HO-6: unit-owners form

Otherwise known as condo insurance, this type of policy typically covers your personal property, liability, loss of use and parts of a condo’s structure. Condo insurance may offer coverage for the same 16 perils covered in HO-2 policies. If you buy a condo, you'll likely be required to carry an individual condo insurance policy, even if your condo association has its own coverage.

HO-7: mobile home form

This insurance is similar to an HO-3, but it’s for owners of manufactured or mobile homes, including single- and double-wide manufactured homes, RVs and modular homes. HO-7 policies offer open-peril coverage for perils affecting the home while it's stationary; an additional policy will be needed to cover a mobile home in transit.

HO-8: modified coverage form

An HO-8 policy is similar to an HO-1 in that it provides coverage for named perils. Modified coverage forms are most often used for older or historic homes. With this type of policy, coverage is available even if the cost of repairs or replacements outweighs the home’s actual market value.

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