What homeowners insurance covers and what it excludes

Homeowners insurance protects one of the largest assets most people will ever own, yet many homeowners have never read their policy closely. If you have a mortgage, your lender almost certainly requires coverage, and the premium may be collected through an escrow account alongside your monthly payment. Knowing what that coverage typically includes, and where it usually stops, can help you ask better questions of an insurance agent before a loss rather than after one.

The usual parts of a policy

Policies differ by insurer and by state, but a standard homeowners policy is commonly organised into several coverage sections:

• Dwelling coverage, which applies to the structure of the home itself, including attached structures such as a garage.
• Other structures coverage, for detached buildings such as a shed or fence.
• Personal property coverage, for belongings such as furniture, clothing and electronics, whether at home or, in many cases, elsewhere.
• Loss of use coverage, sometimes called additional living expenses, which may help pay for temporary housing if a covered loss makes the home uninhabitable.
• Personal liability coverage, which may help if someone is injured on your property or you accidentally damage someone else's property.
• Medical payments to others, which may cover minor injuries to guests regardless of fault.

Each section has its own limit, which is the most the insurer will pay for that category. Your declarations page, usually at the front of the policy, lists these limits along with your deductibles.

Named perils and open perils

Policies describe coverage in different ways. A named-perils policy covers only the specific causes of loss listed, such as fire, windstorm, hail or theft. An open-perils policy, sometimes called all-risk, covers any cause of loss that is not specifically excluded. Many standard homeowners policies cover the dwelling on an open-perils basis and personal property on a named-perils basis, but this varies, so it is worth checking how your own policy is written.

Replacement cost and actual cash value

How a claim is valued matters as much as whether it is covered. Replacement cost coverage generally pays what it would cost to repair or replace damaged property with similar materials at current prices. Actual cash value coverage generally pays replacement cost minus depreciation, which can be considerably less for older items. Some policies apply replacement cost to the dwelling and actual cash value to belongings unless you add an endorsement.

It is also worth asking whether your dwelling limit reflects current rebuilding costs. Construction costs change, and a limit that was adequate when the policy began may not keep pace. Some insurers offer extended or guaranteed replacement cost options that provide additional room above the stated limit.

Exclusions that often surprise people

Exclusions are where many homeowners find gaps they did not expect. Common examples include:

• Flood. Standard homeowners policies typically exclude flood damage. Flood coverage is usually purchased separately, through the National Flood Insurance Program or a private insurer.
• Earth movement. Earthquakes, landslides and sinkholes are often excluded and may require a separate policy or endorsement, depending on the state.
• Wear, tear and maintenance. Gradual deterioration, neglect and lack of maintenance are generally not covered.
• Water backup. Damage from sewer or drain backup is often excluded unless you add a specific endorsement.
• Mould, pests and vermin. Coverage is frequently limited or excluded, particularly when the damage develops over time.
• High-value items. Jewellery, art, collectibles and similar items may be subject to low sub-limits unless they are scheduled separately.

Deductibles and special deductibles

The deductible is the portion of a covered loss you pay before the insurer pays. A higher deductible typically lowers the premium but increases what you would pay out of pocket after a loss. In some regions, particularly coastal areas, policies may carry a separate wind or hurricane deductible, often expressed as a percentage of the dwelling limit rather than a fixed amount. That can produce a much larger out-of-pocket cost than many homeowners expect, so it is worth confirming how yours is calculated.

Reading your policy with fresh eyes

A periodic review, perhaps at renewal, can reveal gaps before they matter. Questions worth asking your agent include:

• Does my dwelling limit reflect what it would cost to rebuild today?
• Are my belongings covered at replacement cost or actual cash value?
• Do I need separate flood or earthquake coverage where I live?
• Is water backup covered, and if not, what would an endorsement involve?
• Do I have a separate wind or hurricane deductible, and how is it calculated?
• Does my policy include ordinance or law coverage, which may help pay for upgrades required by current building codes after a loss?

Keeping a home inventory, with photographs or video of your rooms and belongings, can make the claims process smoother if you ever need it. Store a copy somewhere other than the home itself.