Homeowners Insurance: What It Covers and What

Understanding Homeowners Insurance: What It Covers and What It Does Not

Your mortgage lender requires homeowners insurance. But beyond satisfying a lending requirement, this policy is what stands between you and financial catastrophe if something goes wrong with your home. Understanding what is covered -- and more importantly, what is not -- helps you make informed decisions about your coverage.

What a Standard Policy Covers

A standard homeowners insurance policy, typically an HO-3 policy, covers four main areas:

Dwelling coverage. This covers the structure of your home -- walls, roof, foundation, built-in appliances, and attached structures like a garage. If a fire, windstorm, hail, lightning, or other covered event damages your house, dwelling coverage pays to repair or rebuild it. Your dwelling coverage limit should reflect the cost to rebuild your home, not its market value.

Other structures coverage. Detached structures on your property -- fences, sheds, detached garages, guest houses -- are covered separately, typically at 10% of your dwelling coverage amount.

Personal property coverage. Your belongings inside the home: furniture, clothing, electronics, appliances. Standard policies cover personal property at 50% to 70% of your dwelling coverage. If your dwelling is insured for $400,000, you might have $200,000 to $280,000 in personal property coverage.

Important detail: standard policies cover personal property at actual cash value, meaning they account for depreciation. Your five-year-old laptop is not covered at the price you paid for it. You can upgrade to replacement cost coverage for an additional premium, which pays to replace items at current prices. It is almost always worth the extra cost.

Liability coverage. If someone is injured on your property and sues you, liability coverage pays for their medical bills and your legal defense. Standard limits are $100,000 to $300,000. If you have significant assets to protect, consider increasing this or adding an umbrella policy.

Additional living expenses (ALE). If your home is uninhabitable due to a covered event, ALE pays for temporary housing, meals, and other increased living costs while repairs are made. This is typically capped at 20% of your dwelling coverage or a time limit of 12 to 24 months.

Common Covered Events

A standard HO-3 policy covers your dwelling against all perils except those specifically excluded. For personal property, it covers only named perils, which typically include:

• Fire and smoke damage
• Wind and hail
• Lightning strikes
• Theft and vandalism
• Falling objects
• Weight of ice, snow, or sleet
• Water damage from plumbing failures (sudden and accidental)
• Explosions
• Damage from vehicles or aircraft
• Volcanic eruption

What Is NOT Covered

This is where surprises happen. Standard homeowners policies exclude several significant risks:

Flooding. This is the exclusion that catches the most homeowners off guard. Standard policies do not cover flood damage from any source -- rising rivers, storm surge, heavy rain overwhelming drainage systems, or snowmelt. Flood insurance is a separate policy, available through the National Flood Insurance Program (NFIP) or private insurers. If you are in a FEMA-designated flood zone, your lender will require it. Even if you are not in a flood zone, consider it -- roughly 25% of flood claims come from outside high-risk zones.

Earthquakes. Standard policies exclude earthquake damage. If you live in a seismically active area, you need a separate earthquake policy or endorsement.

Gradual damage and maintenance issues. Your policy covers sudden and accidental events. It does not cover damage from deferred maintenance, gradual wear and tear, mold caused by ongoing moisture problems, or pest infestations like termites. If your roof leaks because it is old and worn, that is not covered. If a tree falls through your roof during a storm, it is.

Sewer and drain backup. Water damage from a backed-up sewer or drain is excluded from most standard policies. You can typically add this coverage as an endorsement for a modest additional premium. It is worth having.

High-value items above limits. Standard policies cap coverage for certain categories of personal property. Jewelry is often limited to $1,500 to $2,500, regardless of actual value. Electronics, art, firearms, and collectibles may also have sub-limits. If you own valuable items, you need a scheduled personal property endorsement or a separate valuable items policy.

Home business equipment and liability. If you run a business from home, your homeowners policy may not cover business equipment or provide liability coverage for business activities. You may need a separate business policy or endorsement.

Deductibles: How They Work

Your deductible is the amount you pay out of pocket before insurance kicks in. Standard deductibles range from $500 to $2,500. Higher deductibles mean lower premiums, but more out-of-pocket cost when you file a claim.

Some policies have separate deductibles for specific perils. Wind and hail deductibles in hurricane-prone areas are often percentage-based (1% to 5% of the dwelling coverage), which can mean thousands of dollars.

How Much Coverage Do You Need?

Your lender requires enough dwelling coverage to protect their investment -- at minimum, the loan amount. But you should insure for the full replacement cost of your home. This is what it would cost to rebuild your home from scratch at current construction prices, not what you paid for it and not its market value.

Your insurance agent can help you estimate replacement cost based on your home's square footage, construction materials, and local building costs. Review this number every few years, especially after renovations or during periods of construction cost inflation.

Ways to Lower Your Premium

• Increase your deductible from $1,000 to $2,500
• Bundle your homeowners and auto insurance with the same carrier
• Install security systems, smoke detectors, and deadbolts
• Maintain good credit -- insurers use credit-based insurance scores in most states
• Ask about discounts for new homes, claims-free history, or loyalty
• Shop around every 2 to 3 years -- loyalty does not always equal the best rate

Filing a Claim: What to Know

Document everything with photos and video before damage occurs. Keep an inventory of your belongings with estimated values. After a covered event, contact your insurer promptly, document the damage thoroughly, and keep receipts for any temporary repairs or additional living expenses.

Be aware that filing multiple claims can increase your premiums or even result in non-renewal. For minor damage close to your deductible, weigh the cost of the repair against the potential premium increase before filing.

SOMA can help you understand how homeowners insurance fits into your total monthly housing cost. Start a conversation to get a complete picture of your mortgage payment, including insurance and escrow.