What is Homeowner’s Insurance & What Does It Cover?

Many people spend months or even years shopping for a home, yet leave the decision about the homeowners’ insurance that would help protect their investment until just before the closing.

One word about that: Don’t.

Homeowner’s insurance policies may have certain standard inclusions, but they’re not some generic thing. The time to find out you’re not covered — or not covered enough — is not after a fire or theft or other wrenching (and expensive) experience.

You should talk to multiple agents, says David Thompson, an instructor with the Florida Association of Insurance Agents in Tallahassee. Thompson, a longtime agent before becoming an industry educator, says the biggest mistake consumers make is buying a homeowner’s policy solely because it has the lowest annual premium. 

“If a company is telling you that ‘insurance is insurance,’ it’s not,” he says. “I may go to the grocery store and there are five brands of milk I can buy,” he said. “To me, skim milk is skim milk. But insurance is not like that.”

Some considerations in insuring your new home:

Know What is Covered

If your home and its contents were damaged or destroyed, generally your policy would cover “replacement cost” — an estimate of what it would take to repair or rebuild it and to replace your possessions. 

“It has nothing to do with the purchase price or the appraised value or the assessed tax value,” Thompson says. “It’s what it would cost to rebuild it today.”

Replacement cost usually is calculated from insurance companies’ formulas and they have a number of ways of arriving at those formulas, he said. The homeowner will supply basic information — bedrooms, baths, etc. — and the insurers will add in other current cost data. 

In addition to the structure and contents, insurance generally offers a certain amount of liability protection if, say, someone is hurt in a slip-and-fall accident in your home; it also should cover living expenses if you’re unable to live in the home because of fire, etc. 

Standard policies generally spell out the various calamities that are covered — fire, theft, hail, lightning, etc.

Know What is Not Covered

Usually, policies don’t cover damage from floods, sewer backups, earthquakes and a few other horrible circumstances. You may want to get separate coverage for such events, particularly if you live in a flood-prone or earthquake-prone zone; your mortgage lender may insist upon it. 

Hurricanes are a special category unto themselves and the deductible (the amount the policyholder pays out-of-pocket before the coverage kicks in) is not usually a set amount (more about that later); typically, it’s based on a percentage of the insured value, up to 5 percent — so after a calamitous storm, the homeowner may be on the hook for a sizable amount. 

If you’re planning to operate a business from your home, your business equipment probably wouldn’t be covered in a homeowners’ claim. 

In covering your possessions, insurers suggest that the best thing you can do for yourself is to take an inventory of what you own and update it regularly. In addition, standard policies have limits on how much they may pay for the contents, so if you have particularly valuable items such as furs, jewelry, precious antique, etc., you may want to purchase a “floater” or “rider,” which is separate coverage for those items’ full value. (For more on inventories and additional coverage, see our accompanying story, Home Insurance: Beyond the Basics.) 

Some factors particular to your home may affect the cost of your policy.

The National Association of Insurance Commissioners says a couple of major concerns are the type of construction (frame houses usually cost more to insure than brick) and your local fire protection — this may include how far the house is from a fire hydrant and the quality of local fire department and the house’s distance from it.

The association also says that newly constructed homes may qualify for discounts because their newer materials are likely to be sturdier.

“There have been great advances in roof shingles, in the wind speeds that (window) glass may withstand, and other building code advances” that a newly built home may benefit from, says Michael Barry, vice president for media relations for the Insurance Information Institute (III), a not-for-profit educational service funded by the insurance industry. 

Other things that might affect your coverage: some insurers won’t cover homeowners who have certain breeds of pet dogs because of statistically high levels of bite claims associated with them; your rate may be affected by having a wood furnace or wood stove (fire concerns) or by having a swimming pool or trampoline that might result in liabilities, according to the insurance commissioners’ group. 

There are discounts out there. An insurer may quote you a better price if the residence has smoke detectors, a burglar alarm, a fire-sprinkler system, deadbolt locks or window security devices, according to the insurance commissioners. You might score a discount if you bundle the homeowners’ insurance with your auto or other coverage. 

Consider Your Deductible

Policies usually have a “deductible” amount — that is, if a loss occurs, it’s a sum the policyholder would pay before the insurance coverage kicks in. Often, deductibles are $500 or $1,000, but they can vary. Basically, the higher the deductible amount, the lower the premiums will be.

In the industry, those are called “dollar deductibles.” Some policies may have a “percentage deductible.” If your house is insured for $100,000 and you have a 2 percent deductible, then $2,000 would be deducted from the amount of your claim if the house is a total loss, according to the III. 

Buying a Condo?

In addition to your personal coverage, you should make sure the condo association’s coverage for the building’s common areas and for liability issues is up-to-date. 

In any case, expect a potential insurer — a reputable one — to ask a lot of questions, Thompson says. 

“A good agent uses a checklist and asks a lot of questions,” he says. And there needn’t be surprises, he says — the Internet abounds in sample checklists so that a homeowner knows what might be expected. 

Finally, don’t buy insurance and just presume that the coverage you need today will be the same you’ll need in a few years. Home values change, and your acquisition of possessions over time might surprise you. Take cover(age).