Most homeowners don’t have a choice in whether to purchase this kind of insurance – it is usually required by the mortgage lender. But even if the mortgage is paid off, experts say homeowner’s insurance is a good buy. A decent homeowner’s policy not only protects the house, but all the possessions inside. Further, homeowner’s policies cover personal liability due to negligence, including damage to another person or their property, and will provide legal defense up to the policy limit. Note the policy only covers negligent behavior – if the prosecution proves intent, the insurer will not pay out. And if you have substantial assets, you should consider purchasing additional insurance, called “umbrella coverage”, to protect against liability.
There are six different types of homeowner’s insurance, the most popular of which is called HO-3. HO-4 and HO-6 are not traditional homeowner’s policies, they are renter’s and condominium/co-op owners insurance, respectively. The other homeowner’s policies (HO-1, HO-2, and HO-5) offer varying degrees of coverage — the smaller the number, the fewer types of damage the policy covers (and the lower the premium).
- HO-1 and HO-2 coverage do not insure the policy-owners’ personal belongings, and only protect against damages specifically listed on the policy.
- HO-3 coverage protects against all types of damage, except for those specifically excluded by the policy. HO-3 also protects personal belongings, but only for specific types of damage (typically at the HO-2 level).
- HO-5 offers the same coverage as HO-3, but extends full protection to all personal belongings. HO-5 is more expensive than HO-3, but experts recommend paying the higher premium. Some insurance companies do not offer HO-5, in which case riders can be added to the policy to provide greater protection of personal belongings.
- HO-4 and HO-6 only cover belongings, and only for the types of damage specifically listed on the policy. In a condo or co-op, the buildings will be covered by the insurance the board purchases for the entire complex.
Experts recommend that you purchase guaranteed replacement cost coverage, and insure 100% of the value of your home and contents. Guaranteed replacement cost coverage means the insurance company must pay the cost to replace the item or house as if it were new, ignoring any depreciation that occurred before the damage.
Experts also suggest that you get a professional to determine the value of your home. Make sure you highlight any special aspects of the house that increase its value, such as expensive materials or a custom architecture. Also keep meticulous records of the value of your personal belongings. Most homeowner’s policies exclude certain possessions from coverage, such as expensive jewelry – take note of these exclusions, and purchase riders (or another plan) to insure any of your belongings that aren’t covered.
One other important point: homeowner’s policies generally exclude earthquake and flood damage. Both of these catastrophes can easily wipe out an entire family’s material possessions; if you live in a high-risk area, you should seriously consider purchasing adequate separate insurance.
When you file a claim, your insurance company isn’t likely to go out of its way to pay you everything you’re due. You must keep careful records to prove that the insurance company owes what you’re claiming. Also, update your insurance any time you make significant improvements to your home.
Before satisfying your claim, the insurance company will send an adjuster to confirm the value of what was damaged or lost (and to confirm that it actually was damaged or lost). The adjuster will then offer a settlement of the claim. Some experts suggest getting multiple independent estimates of the cost prior to seeing the adjuster, so you can better negotiate.
You can also use a public adjuster to settle your claim. A public adjuster will walk you through the process, but will charge a fee, typically 5-15% of the settlement. Research public adjusters before working with one; you can check state records or with the National Association of Public Insurance Adjusters.