Homeowners Insurance Basics
Homeowners insurance provides financial protection against disasters. It is a package policy, which means that it covers both damage to property and liability, or legal responsibility, for any injuries and property damage policyholders or their families cause to other people. This includes damage caused by household pets. Damage caused by most disasters is covered but there are exceptions.
Standard homeowners policies do not cover flooding, earthquakes or poor maintenance. Flood coverage, however, is available in the form of a separate policy both from the National Flood Insurance Program (NFIP) and from a few private insurers. Earthquake coverage is available either in the form of an endorsement or as a separate policy. Most maintenance-related problems are the homeowners’ responsibility.
A standard homeowners insurance policy includes four essential types of coverage. They include:
1. Coverage for the Structure of the Home
This part of a policy pays to repair or rebuild a home if it is damaged or destroyed by fire, hurricane, hail, lightning or other disaster listed in the policy. It will not pay for damage caused by a flood, earthquake or routine wear and tear. Most standard policies also cover structures that are not attached to a house such as a garage, tool shed or gazebo. Generally, these structures are covered for about 10 percent of the total amount of insurance on the structure of the home.
2. Coverage for Personal Belongings
Furniture, clothes, sports equipment and other personal items are covered if they are stolen or destroyed by fire, hurricane or other insured disaster. Most companies provide coverage for 50 to 70 percent of the amount of insurance on the structure of a home. This part of the policy includes off-premises coverage. This means that belongings are covered anywhere in the world, unless the policyholder has decided against off-premises coverage.
Expensive items like jewelry, furs and silverware are covered, but there are usually dollar limits if they are stolen. To insure these items to their full value, individuals can purchase a special personal property endorsement or floater and insure the item for its appraised value. Trees, plants and shrubs are also covered under standard homeowners insurance—generally up to about $500 per item. Perils covered are theft, fire, lightning, explosion, vandalism, riot and even falling aircraft. They are not covered for damage by wind or disease.
3. Liability Protection
Liability coverage protects against the cost of lawsuits for bodily injury or property damage that policyholders or family members cause to other people. It also pays for damage caused by pets. The liability portion of the policy pays for both the cost of defending the policyholder in court and any court awards—up to the limit of the policy. Coverage is not just in the home but extends to anywhere in the world. Liability limits generally start at about $100,000. However, experts recommend that homeowners purchase at least $300,000 worth of protection. An umbrella or excess liability policy, which provides broader coverage, including claims for libel and slander, as well as higher liability limits, can be added to the policy. Generally, umbrella policies cost between $200 to $350 for $1 million of additional liability protection. Homeowners policies also provide no-fault medical coverage. In the event that someone is injured in a policyholder’s home, the injured person can simply submit medical bills to the policyholder’s insurance company. In this way expenses are paid without a liability claim being filed. This coverage, however, does not pay the medical bills for the policyholder’s own family or pets.
4. Additional Living Expenses
This pays the additional costs of living away from home if a house is inhabitable due to damage from a fire, storm or other insured disaster. It covers hotel bills, restaurant meals and other extra living expenses incurred while the home is being rebuilt. Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20 percent of the insurance on a house. The coverage can be increased for an additional premium. Some companies sell a policy that provides an unlimited amount of loss-of-use coverage, but for a limited amount of time. Additional living expense coverage also reimburses homeowners who rent out part of their home for the rent that would have been collected from a tenant if the home had not been destroyed.