Homeowners insurance policies are long, complex, and generally not fit for leisurely reading material. But knowing what your policy includes and how it works is important.
how does homeowners insurance work?
A homeowners insurance policy provides a financial safety net in the event your home or belongings are damaged. It usually covers other structures on your property (tool sheds, garages, gazebos), as well as medical or legal expenses if you or someone on your policy (a family member, for instance) is held legally responsible for an injury sustained on your property. Additionally, most mortgage lenders require you to have homeowners insurance.
There are several types of homeowners insurance — from a basic policy, to those that provide a wider spectrum of coverages — and some (like water backup coverage) may vary from state to state.
By and large, home insurance works by guarding your home and possessions against everything from hurricanes and tornadoes, to theft and even civil upheavals. However, most standard policies don't cover damage caused by earthquakes or floods, or issues that arise from poor maintenance and general wear and tear.
homeowners insurance policy outline
It can be intimidating having to read a homeowners insurance policy for the first time. With the nuances of exclusions, conditions, and all the legalese involved, even quickly thumbing through it may grow wearisome.
Nevertheless, many insurance policies share common attributes and follow a discernible pattern, and once you become familiar with the lay of the land, you'll be able to navigate provisions and pinpoint pertinent information as needed.
There are essentially 9 different types of policy forms (HO-0 through HO-8), and each are unique in regards to the extent of property coverage offered and the type of home that's under protection (i.e. a house versus an apartment, a condo versus a co-op).
Though your homeowners insurance policy is likely much more detailed, it will probably, more or less, follow a general layout.
The declarations page
The declarations page of your homeowners policy is a vital component of your insurance contract. The declarations page sketches an overview of the coverage, and "declares" the contract's key points.
By understanding this section, you'll have better footing to tailor your policy in a way that best suits your specific needs. You'll also have better understanding of your out-of-pocket-expenses in the event you need to file a claim.
When reading through the declarations page, here is some general information you'll probably come across:
- Your policy number
- Location of the property
- Premium amount
While the declarations page is an important place to start, it's imperative that you read the policy in its entirety to comprehend the details of your coverage.
The definitions section
As you may have already guessed, the definitions section of your policy defines important terms and explains crucial concepts within your contract, so really take your time to mull them over. You may be surprised at how broad some of the terms turn out to be (and in some cases more restrictive). Also, pay close attention to how the insured and insured location is defined in the policy.
Section I (property coverage)
The property coverage section of your homeowners insurance policy explains what is and isn't covered by your company. It outlines the types of property coverages, the kinds of incidents that you're protected against (i.e. hail damage, fire, explosions), and lists any coverage exclusions. In addition, your policy will likely elaborate on the conditions you must meet in order for your coverage to kick in.
Property coverage is essentially broken down into 5 parts:
- Dwelling protection: This details the amount your insurance company will pay to repair damages to the house itself. It's important to note that the amount doesn't reflect the market value or the purchase price of the home. Instead, your coverage should reflect the replacement cost value — the amount needed to rebuild your house from a total loss. The replacement cost can be calculated by your agent or a home appraiser.
- Other structures protection: These are the structures that are not attached to your house (or are only connected by a fence or wire). Other structures generally include fences, tool sheds, and detached garages.
- Personal property protection: The stuff you have in your home, like furniture, clothes, the refrigerator, or exercise equipment, are considered your personal property. This coverage could also apply to personal belongings that are away from your premises.
- Additional living expenses: This coverage reflects the maximum amount your homeowners insurance company will pay to cover additional living expenses due to a covered incident. If your kitchen catches fire, for instance, and you have to relocate for a little while, your additional living expense coverage could pay for your temporary stay.
- Deductibles: Your deductible denotes how much you'd pay out-of-pocket before your coverage kicks in. Generally speaking, if you opt for a higher deductible, your premium will probably be lower (and vice versa). Consider speaking with your insurer to help gauge a comfortable deductible amount.
Section II (liability coverage)
Much like property coverage, your liability protection outlines types of coverages, exclusions, and any conditions that must be met. The focus of Section II is mainly personal liability and medical coverage for guests on your property. For example, if the kid next door is bitten by your dog, or the postman slips and falls on your icy walkway, your home insurance company could pay for their medical expenses.
If you're sued for bodily injury or property damage, your homeowners insurance may help cover the legal costs. Liability limits usually start at around $100,000, but it may be wise to increase your coverage so that it sufficiently reflects what your assets are worth. In doing so, you can ensure your savings and property aren't at risk in the event of a lawsuit.
Also, be sure that you understand the exclusions in your liability coverage — usually, insurance companies don't cover claims that stem from an in-home business or involve intentional damages, for example.
Section III (optional coverage)
Some companies — like Esurance — offer a range of additional coverages that you can add to your policy for extra peace of mind. Some examples of optional coverages include the following:
- Building codes coverage
- Fire department coverage
- Increased building structure coverage
- Identity theft coverage
Read your homeowners insurance policy carefully and ask questions
Remember, it won't do you any good to simply stow your policy away in a filing cabinet, only to be forgotten until you need it again. It's always helpful to understand how your home insurance works before an incident happens.
If something doesn't make sense to you, you should speak with your insurer as soon as possible. Esurance policyholders can give us a call at 1-800-ESURANCE (1-800-378-7262). Our representatives are available at these times to address any of your home insurance queries.
And if you're not a member of the Esurance family yet? Be sure to get a quick, free homeowners insurance quote online, where you can see all the perks we have to offer.
How much homeowners insurance do I need?
Here are some ways to determine the amount of coverage you may want to consider carrying on your homeowners policy.
How is my premium decided?
Learn about what your homeowners insurance company factors in to determine your premium.
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