Home Insurance

No Home Insurance! What’s the worst that can happen? Is it worth the risk?

Home InsuranceBuying a home is a long-term investment and a costly commitment at that.  For most Americans this is perhaps the modus operandi to build long-term wealth through forced savings.  Another way of seeing it is that it provides people a place to live in.  But whether owing a home is a good investment or not depends on a lot of factors and is really a matter of choice and personal preference.

Besides the obvious benefits that home ownership offers there are risks and exposures from natural as well as man-made disasters that could disrupt even the most well-meaning plans and thought-out investment strategies. 

In an era where the climate crisis has brought about an increase in the frequency of climatic disasters. And where the severity of extreme weather events causes catastrophic damage and destruction of real estate assets year-on year, and this not only in hazard prone areas but across the length and breadth of the country, property owners have a lot to worry about!

The financial stress brought on by these trying times are compounded by the fact that home owners have other financial obligations to meet that include and are not limited to payment of property taxes, general maintenance and the odd major repair.

Are you in a position to assume the risks that happens to or on your property?  Failing to get homeowner’s insurance could expose you and probably the largest asset you own to multiple risks, additional expenses and inevitable loss.

Important statistics at a glance

  • Although it is not required by law, statistics show that 85% of home owners in the United States have Homeowners Insurance. 
  • Natural disasters in the United States racked up $165 billion in damage in 2022 and forced nearly 3.4 million people to leave their homes.
  • By 2040, the cost of property lost to natural catastrophes, like wildfires, floods, and hurricanes, could increase by over 60% in the U.S. as a result of climate change, according to Swiss Re.

  

What is Home Insurance?

Home Insurance or Homeowners Insurance (HOI) is a type of property insurance that also includes liability protection.

Quite simply put it, this policy will protect your financial interest in the property by providing:

  • Coverage to repair or rebuild your home in case a disaster or an unexpected event destroys or damages your home or your personal belongings.
  • Liability protection when someone is injured or suffers property damage on your property, for which you are held responsible.

Who is it for?

Owners of single-family dwellings, multi-family dwellings up to 4 units, condo unit owners and renters.

What does a typical or standard Homeowners policy cover?

A typical policy should cover:

  • Your actual dwelling place - both exterior and interior and include anything that is built into the home itself, like floors, walls, roof, HVAC, electrical and plumbing systems as well as appliances.  It may also include coverage for detached structures like fences, garages, sheds, patios and decks.
  • Damage or theft of personal property and personal belongings such as furniture, electronics and clothing.
  • Legal costs should you or a family member get sued for accidently hurting a visitor or damaging their property while they are on your premises.
  • Medical expenses in the event a visitor is injured at your home – irrespective of who is at fault.

Categories covered under Homeowners Insurance

A standard policy is usually made up of six different coverages:

Dwelling

Dwelling protection is perhaps the most basic coverage found in all home insurance policies.  It covers damage to your home’s structure such as foundation, frame, walls, floor and roof, installed fixtures and permanently attached appliances.

While most policies limit the hazards covered under ‘named perils’ only, others may offer coverage to cover damages under an open-peril policy or an all-risk policy.

However, even the best Home Insurance policies specifically exclude certain causes of loss, such as flooding, earthquakes, sewer backups etc.,

For added protection you could either take out a separate insurance policy or even add-on extra coverage to your standard policy.

Other Structures

Other structures in a home insurance policy refers to any other structure on your property that is not physically connected to the main dwelling or could be connected to the dwelling by a fence, utility line or related connection.

  • Examples could include fences, detached garage, gazebos, decks, in-ground swimming pool, sheds and barns.
  • These structures are generally covered up to 10 percent of the dwellings coverage amount listed in your home insurance policy.

Personal Property

Personal belongings such as furniture, clothes, appliances and computers are usually covered against damage or loss up to a specified dollar amount.

For items such as expensive jewelry, fine art, collectables and antique collections, whose value far exceeds special limits, it may be possible to:

  • Schedule each item and purchase additional coverage to cover these items of high value
  • Increase limits of existing coverage

Loss of Use

Sometimes a home could get badly damaged in an accident making it unsafe or uninhabitable for its residents.

Loss of use coverage sometimes known as Additional Living Expenses (ALE) Insurance helps cover costs when displaced residents are forced to take up temporary residence in a hotel, motel, rental or apartment.

This part of Homeowners Insurance pays for basic temporary housing, food and transportation expenses while your home is being repaired or rebuilt.

Personal Liability

It does not matter if you own or rent the property, it is your responsibility to keep your property relatively safe.  So, if a visitor or even a trespasser is injured while on your property and you are found liable due to negligence or a hazardous condition on the premises, it’s quite possible that you could face a personal injury lawsuit. 

Personal liability coverage in home insurance not only covers medical expenses but also legal costs of defending you and for any damages or settlements that the court rules that you must pay.

Medical Payments

Surprising but true; The home is the most common location for an accident to happen!  The good thing about this part of home insurance coverage is that it covers medical costs related to injuries a guest might sustain in or on your property, regardless of who is at fault!

How Home Insurance claims work?

When an insured home and personal belongings in it are damaged in a covered incident, payout on claims will depend on the level of homeowners insurance in place.

The different levels of coverage are:

Actual Cash Value

This is the cheapest level of coverage that pays out on claims for loss of property and personal stuff after factoring in depreciation.

Replacement Cost

Replacement value policies cover the actual value of your home or possessions without deducting for depreciation.

Extended Replacement Cost/Value

Going beyond standard replacement insurance, this policy bumps up coverage to cover costs to repair or rebuild your home – even if expenses exceed your policy limit.  In other words, this is an inflation- buffer policy that increases your policy limits by 20% to 50%.

Guaranteed Replacement Cost

This is the most expensive level of coverage as it guarantees payout to cover whatever it costs to rebuild your home.

Different types of Home Insurance

There is no-one-size-fits-all approach when it comes to purchasing home insurance.

With several types of home insurance coverages available, deciding on how much insurance is needed and the level of coverage can be a stressful and formidable task.  It is recommended that you go through the list below to see what works best in your situation to avoid being over- or under-insured.

There are eight different types of home insurance:

Basic Form – HO1

This is the simplest form of home insurance. Offering protection from a specified list of perils only, this policy will cover your home and sometimes personal belongings at their actual cash value.  Since this policy does not offer protection from flood, earthquake and falling objects, it is an unpopular choice for single-family home owners.

Broad Form - HO2

As in the case of a HO-1 policy, this policy also provides limited coverage on a named perils basis. Commonly referred to as a ‘broad form’ policy, the benefits include:

  • Coverage for the structure of the home at its replacement cost value
  • Coverage for personal property at actual cash value
  • Expanded risk coverage that includes six named perils in addition to those stated in a HO-1 policy

Special Form Policy - HO3

This is the most common type of policy and obviously the popular choice of single-family home owners as it is an ‘open perils’ policy.

Sometimes referred to as a ‘special form’ policy, it offers more comprehensive coverage than a HO-1 or a HO-2 policy.  Coverage highlights include:

  • Coverage for the structure of the home at its replacement cost value on open perils basis
  • Coverage for personal property at actual cash value on named perils basis
  • Liability coverage
  • Loss-of-use coverage
  • Medical payments

Comprehensive Form Policy - HO5

This is perhaps the most comprehensive policy available to owners of newer single-family homes.

  • It is specifically designed for high-net-worth properties and/or those located in high-risk areas.
  • It offers broader protection with higher coverage limits.
  • It provides protection to both your dwelling and personal belongings under open perils coverage and loss or damage is repaid on a replacement cost basis.

Homeowners modified Form – HO8

Owners of older homes, probably 40 years or more may have no other option but to settle with HO8 protection.

  • This form is specially designed for owner-occupied older homes that do not qualify for homeowner’s insurance policies listed above.
  • Quite like a basic H01 policy, this policy too is a ‘named perils’ policy and reimbursement for loss or damage to the dwelling is determined on actual cash value rather than replacement cost.

Tenants Policy Form – H04

Commonly referred to as Renters Insurance, this policy is purchased by a tenant who rents an apartment, condominium or a home.

  • While HO1, HO2 and HO3 policies protect property owners or landlords, a HO4 policy protects a tenant’s personal belongings from loss or damage from 16 named perils and that includes theft and vandalism.
  • A HO4 policy could benefit a landlord as it reduces the amount of legal liability that could fall on property owners should they be held responsible for injuries to a guest on the property.

A typical HO4 policy will include three types of coverage:

Additional Living Expenses

Should your dwelling become uninhabitable or unlivable after a covered peril, then H04 insurance will pay for temporary housing while your home is being repaired.

Personal Liability

This part of the coverage pays for medical expenses when someone other than a family member gets injured on the premises.  It also covers legal expenses if they decide to sue you.

Personal Property

Is the part of your HO4 coverage that will reimburse you for personal belongings stolen, lost, damaged or destroyed in a covered peril.

A special feature of this insurance policy is that it could protect your belongings outside of your home as well.  Reimbursement is usually made on replacement cost basis depending on your coverage limits.  Your policy may place specific coverage limits for certain types of items.

Condominium Form – H06

Unit owners within a condo community, a co-op or even townhouse owners require a special type of insurance that a standard homeowner’s policy can’t provide.

This is because the condo association or HOA master policy already provides liability and property coverage for common elements that includes exterior damage to common areas and individual units.

What is needed is insurance protection for:

  • Damage to the interior of individual units that include ceiling, floors and walls.
  • Personal liability & medical payments coverage should a guest sustain an injury in your condo.

Mobile/Manufactured Home Form – H07

A HO7 policy is designed specifically for owners of mobile or manufactured homes that includes trailers, RVs and modular homes.

Like a HO3, this policy:

  • Offers broad ‘all-risk’ or open-peril coverage that safeguards your home and detached structures.
  • Damage to personal property is covered on a named-perils basis.
  • It also provides coverage for personal liability, medical payments and loss-of-use.

It is important to note that climate change has increased flood risk around the country.  A typical homeowners insurance policy does not cover flood damage.

Homeowners should consider investing in flood insurance even if they don’t own property located in FEMA flood zones.     

In conclusion, investing in a comprehensive home insurance policy can provide homeowners with peace of mind and protection against unforeseen events that could otherwise cause significant financial hardship.

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