Homeowner's insurance is a common expense associated with owning your own home, but not all new homeowners know what this insurance covers. Perhaps more important, many homeowners don't know the limitations of their policies and find themselves without the coverage they thought they had when they need it the most. Knowing the purpose of homeowners insurance and what it does or doesn't cover can help you make important decisions about protecting your property and cutting unnecessary expenses.
Homeowner's insurance is designed to offer you protection in case of loss or damage to your home and property. A typical homeowner's insurance policy includes protection for both the house and the property that it sits on, as well as other buildings or structures on that property. Most homeowner's insurance policies also provide protection for any items within the house or other structures. In the event of damage or theft, you are reimbursed for the cost of repairs or replacement as well as the time you must spend away from home while repairs are being done.
Most homeowners insurance policies comprise a specific set of basic insurance components, commonly known as a "HO-3" policy. HO-3 coverage includes protection from weather phenomena such as wind, lighting, ice, and snow, plus fire, smoke and explosion protection. As long as your home remains occupied and doesn't sit empty for 30 days or longer, you also have protection against theft and vandalism. Structures and personal property are insured against damage incurred by falling trees and similar objects, and internal systems such as plumbing and heating systems are also insured against damage.
Homeowners insurance typically provides liability coverage for your property as well. Your policy will likely cover the costs associated with accidents on your property, including medical treatment if a visitor falls on your steps or is bitten by your dog. This coverage also protects against damage caused by your property, such as a tree in your yard losing a limb that falls and damages a neighbor's house. The amount of liability coverage depends on the terms of the policy itself.
Not all natural disasters or damage types are covered by homeowner's insurance. Floods and earthquakes are typically excluded from coverage, as are acts of war and nuclear accidents. Damage to vehicles isn't covered, though vehicles typically have their own insurance. Sewer backups that cause overflow damage aren't covered, and damage to the land beneath your house is typically excluded. Weather damage to exposed wood such as fences and patios isn't covered, nor is cracked pavement. Theft from construction areas isn't covered, and damage caused by frozen pipes in construction areas is typically excluded as well. If renters are living in your home, your insurance won't cover their personal property.
You can purchase add-on coverage policies known as "riders" to provide additional protection that isn't offered by your core policy. Common riders include flood insurance, earthquake insurance and insurance for homes or other buildings that are still under construction. If you use a portion of your house as a home office, you may need a rider to ensure protection of your business equipment and the portion of the house that is used exclusively for business purposes.
Do You Need Coverage?
In most circumstances, homeowners insurance is not required by law. If your home is under a mortgage, you might have to maintain a policy as a term of the loan agreement, especially if you had a relatively small down payment and borrowed most of your home's value. Canceling homeowner's insurance reduces your monthly bills, though you will have to pay the full cost of recovering from any theft or damage that occurs at your property. Should you decide to purchase homeowners insurance after not having coverage, you may have to pay additional deposits.
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