Different types of homeowners insurance policies
There are many types of homeowner’s insurance, also known as “policy forms”. Some provide greater coverage than others so it is worth knowing the differences. These policies may be called different things by different insurance companies.
Most popular: HO-3 Insurance
The most popular insurance policy is the HO-3, also known as “special form”. Your lender will likely require that you have at least this coverage if you have a mortgage.
The majority of HO-3 policies cover damage to your home caused by any cause, except for those specifically excluded by the policy (e.g. flood or earthquake). When it comes to your belongings, however, HO-3 insurance usually covers damage only from the perils specified in your policy.
Broadest coverage: HO-5 insurance
The most comprehensive homeowners coverage is provided by an HO-5 policy. This policy covers damage to your home or belongings, regardless of the reason. It is usually only available to well-maintained homes in low risk areas. Not all insurance companies offer it.
Limited coverage: HO-1 & HO-2 insurance
The HO-1 and the HO-2 homeowners policies are less well-known. They only cover damage that is caused by events specified in the policy.
Other types of policies include HO-4 for renters, condo owners, and HO-6 for mobile homes. HO-8 is a rare type that offers limited coverage for older houses.
How homeowners insurance works
Your homeowners insurance company won’t just write you a check for what your policy covers if your home is damaged. You will first need to file a claim detailing the damage. Your coverage and deductible options will affect the amount of your payout.
Actual cash value vs. replacement cost
Your coverage’s ability to pay for the cost of rebuilding your home is a key component in your payout. For example, construction costs in your area have increased while your coverage limits haven’t changed. This could lead to a situation where you are not covered. Here are some options that you might encounter.
Actual cash value coverage covers the actual cost of repairing or replacing your damaged property, less a deduction for depreciation. This method is not used by most policies for houses, but it is common for personal property. This means that you will likely get a fraction of the cost to replace items older than a few years.
Functional replacement value coverage covers the cost of replacing your home with similar, but cheaper materials. Your contractor might replace plaster walls that are damaged with cheaper drywall.
The replacement cost value coverage covers the cost of repairing your home with materials that are “like type and quality.” This means plaster walls can be replaced by plaster. The payout will not exceed the dwelling coverage limits of your policy.
Some policies provide replacement cost value coverage for personal property. The insurer would pay for the replacement of your personal belongings, without any deduction for depreciation. This feature may be important to you. Make sure you read the policy details before buying. This is a popular option, but it usually means you will have to pay more.
If you need to repair your home, extended replacement cost value coverage will pay more that the face value. Limits can be either a dollar amount, or a percentage such as 25% above your coverage. If rebuilding proves more costly than expected, this will give you some cushion.
Guaranteed replacement value coverage covers the entire cost of replacing or repairing your home following a covered loss. This includes any excesses to your policy limits. This level of coverage is not offered by all insurance companies.
Homeowners insurance deductibles
A deductible is the amount that you are required to pay before your insurance company begins paying. A deductible could be:
- Flat dollar amounts, such as $500 and $1,000
- A percentage of the insured home’s value, such as 1% and 2%.
Your insurer will subtract your deductible amount from the claim check you receive. Let’s say you have a $1,000deductible and your insurance approves a claim for $10,000 worth of repairs. You would be responsible to pay $1,000 and the insurer would pay $9,000