What’s Really Covered by Homeowners Insurance

The Basics of Homeowners Insurance
According to the Insurance Information Institute (III): “The typical homeowners policy has two main sections: Section I covers your property, and Section II provides personal liability coverage (to cover you in case of lawsuits arising from things that happen on your property). Almost anyone who owns or leases property should have this type of insurance. Often, homeowners insurance is required by lenders as a requirement to obtain a mortgage.” Basically, Section I covers injuries that happen to your home (and property), while Section II covers things that happen to visitors while in your home or on your property (i.e. slip and fall or victim of dog bite).

So your home and property are covered, but what about your possessions? Standard homeowners polices automatically cover your household contents, but only at about 40% of the amount your home is insured for. For example, if you ensure your home for $200,000, its contents are insured for up to $80,000. If you want extra coverage for certain items (such as jewelry, electronic equipment, fine art, collections, etc.), you can purchase what are called endorsements (or riders), which increase the coverage on these items. Your possessions are also usually covered outside your home at around 10% of the amount your home is insured for; meaning if your stereo is stolen from your child’s dorm room, or your golf clubs are stolen from the trunk of your car, these will most likely be covered (at actual cash value, unless your policy specifies otherwise; see below).

You should also understand the difference between replacement cost and actual cost value. Your home itself is usually insured (for a specified amount) at replacement cost, meaning you are reimbursed the amount it costs to replace your property with something of a similar type and quality at current prices. Most of your possessions are covered at actual cost value, which means you are entitled to the depreciated value of the damaged property – so the older the item is, the less money you may receive for it. Again, the home itself is insured for replacement cost (up to your policy limits), while its contents are insured for actual cash value unless you buy additional replacement cost coverage.

Lastly, you have to decide on your deductible, as in how much you will pay out of pocket in the event of a covered loss before your insurance company pays the rest (up to your policy limits). So, if you have a $250 deductible, that’s what you will pay before your insurance company pays the remainder. You can often save a significant amount of money by raising your deductibles; for example, if you raise your deductible amount from $250 to $1,000, you might be able to save up to 25% off your premium.

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