Home insurance

Home insurance, also commonly called homeowner's insurance (often abbreviated in the US real estate industry as HOI), is a type of property insurance that covers a private residence. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.

Overview

Homeowner's policy is a multiple-line insurance policy, meaning that it includes both property insurance and liability coverage, with an indivisible premium, meaning that a single premium is paid for all risks. The U.S. uses standardized policy forms that divide coverage into several categories. Coverage limits are typically provided as a percentage of the primary Coverage A, which is coverage for the main dwelling.^[1]

The cost of homeowner's insurance often depends on what it would cost to replace the house and which additional endorsements or riders are attached to the policy. The insurance policy is a legal contract between the insurance carrier (insurance company) and the named insured(s). It is a contract of indemnity and will put the insured back to the state he/she was in prior to the loss. Typically, claims due to floods or war (whose definition typically includes a nuclear explosion from any source) are excluded from coverage, amongst other standard exclusions (like termites). Special insurance can be purchased for these possibilities, including flood insurance. Insurance is adjusted to reflect the cost of replacement, usually upon application of an inflation factor or a cost index.

Pricing

Major factors in price estimation include location, coverage, and the amount of insurance, which is based on the estimated cost to rebuild the home ("replacement cost").^[2]

If insufficient coverage is purchased to rebuild the home, the claim's payout may be subject to a co-insurance penalty. In this scenario, the insured will be subject to an out of pocket fee as a penalty. Insurers use vendors to estimate the costs, including CoreLogic subsidiary Marshall Swift-Boeckh, Verisk PropertyProfile, and E2Value, but leave the responsibility ultimately up to the consumer. In 2013, a survey found that about 60% of homes are undervalued by an estimated 17 percent.^[3] In some cases, estimates can be too low because of "demand surge" after a catastrophe.^[2] As a safeguard against a wrong estimate, some insurers offer "extended replacement cost" add-ons ("endorsements") which provide extra coverage if the limit is reached.^[2]

Prices may be lower if the house is situated next to a fire station or is equipped with fire sprinklers and fire alarms; if the house exhibits wind mitigation measures, such as hurricane shutters; or if the house has a security system and has insurer-approved locks installed.

Typically payment is made annually. Perpetual insurance which continues indefinitely can also be obtained in certain areas.

Covered perils

Home insurance offers coverage on a "named perils" and "open perils" basis. A "named perils" policy is one that provides coverage for a loss specifically listed on the policy; if it's not listed, then it's not covered. An "open perils" policy is broader in the sense that it will provide coverage for all losses except those specifically excluded on your policy.

Basic "named perils"^[4] – this is the least comprehensive of the three coverage options. It provides protection against perils most likely to result in a total loss. If something happens to your home that's not on the list below, you are not covered. This type of policy is most common in countries with developing insurance markets and as protection for vacant or unoccupied buildings.

Basic-form covered perils:

• Fire
• Lightning
• Windstorm or hail
• Explosion
• Smoke
• Vandalism
• Aircraft or vehicle collision
• Riot or civil commotion
• Sinkhole collapse
• Volcanic activity

Broad "named perils"^[5] – this form expands on the "basic form" by adding 6 more covered perils. Again, this is a "named perils" policy. The loss must specifically be listed to receive coverage. Fortunately, the "broad form" is designed to cover the most common forms of property damage.

Broad-form covered perils:

• All basic-form perils
• Burglary, break-in damage
• Falling objects (e.g. tree limbs)
• Weight of ice and snow
• Freezing of plumbing
• Accidental water damage
• Artificially generated electricity

Special "all risk"^[6] – special-form coverage is the most inclusive of the three options. The difference with "special form" policies is that they provide coverage to all losses unless specifically excluded. Unlike the prior forms, all unlisted perils are covered perils. However, if something happens to your home, and the event is on the exclusions list, the policy will not provide coverage.

Special-form excluded perils:

• Ordinance of law
• Earthquake
• Flood
• Power failure
• Neglect
• War
• Nuclear hazard
• Intentional acts

In the United States

In the United States, most home buyers borrow money in the form of a mortgage loan, and the mortgage lender often requires that the buyer purchases homeowner's insurance as a condition of the loan, in order to protect the bank if the home is destroyed. Anyone with an insurable interest in the property should be listed on the policy. In some cases the mortgagee will waive the need for the mortgagor to carry homeowner's insurance if the value of the land exceeds the amount of the mortgage balance. In such a case even the total destruction of any buildings would not affect the ability of the lender to be able to foreclose and recover the full amount of the loan.

Home insurance in the United States may differ from other countries; for example, in Britain, subsidence and subsequent foundation failure is usually covered under an insurance policy.^[7] United States insurance companies used to offer foundation insurance, which was reduced to coverage for damage due to leaks, and finally eliminated altogether.^[8] The insurance is often misunderstood by its purchasers; for example, many believe that mold is covered when it is not a standard coverage.^[9]

History

The first homeowner's policy per se in the United States was introduced in September 1950, but similar policies had already existed in Great Britain and certain areas of the United States. In the late 1940s, US insurance law was reformed and during this process multiple line statutes were written, allowing homeowner's policies to become legal.^[10]

Prior to the 1950s there were separate policies for the various perils that could affect a home. A homeowner would have had to purchase separate policies covering fire losses, theft, personal property, and the like. During the 1950s policy forms were developed allowing the homeowner to purchase all the insurance they needed on one complete policy. However, these policies varied by insurance company, and were difficult to comprehend.^[11]

The need for standardization grew so great that a private company based in Jersey City, New Jersey, Insurance Services Office, also known as the ISO, was formed in 1971 to provide risk information and it issued simplified homeowner's policy forms for reselling to insurance companies. These policies have been amended over the years.

Modern developments have changed the insurance coverage terms, availability, and pricing.^[2] Homeowner's insurance has been relatively unprofitable, due in part to catastrophes such as hurricanes as well as regulators' reluctance to authorize price increases.^[2] Coverages have been reduced instead and companies have diverged from the former standardized model ISO forms.^[2] Water damage due to burst pipes in particular has been restricted or in some cases entirely eliminated.^[2] Other restrictions included time limits, complex replacement cost calculations (which may not reflect the true cost to replace), and reductions in wind damage coverage.^[2]

Policies

Homeowner’s insurance was first introduced in the 1950s. Today, most homeowners’ insurance policies are based on forms developed by the Insurance Services Office (ISO) and the American Association of Insurance Services (AAIS).^[12]

Policy Form	Structural Coverage[13]	Property Coverage[13]
HO1 – Basic	Minimal	Minimal
HO2 – Broad	Broad "named perils"	Broad "named perils"
HO3 – Special	Special "open risks"	Broad "named perils"
HO4 – Tenants	No coverage	Broad "named perils"
HO6 – Condominium	Varies	Broad "named perils"

HO0 – Dwelling Fire Form

A form that provides coverage on a home against fire, smoke, windstorm, hail, lightning, explosion, vehicles, and civil unrest. It does not cover the assured's personal property, personal liability, or medical expenses. It is the type of policy a mortgage lender will buy for a borrower if the latter's homeowner policy lapses.

HO1 – Basic Form

A basic policy form that provides coverage on a home against 11 listed perils; contents are generally included in this type of coverage, but must be explicitly enumerated. The perils include fire or lightning, windstorm or hail, vandalism or malicious mischief, theft, damage from vehicles and aircraft, explosion, riot or civil commotion, glass breakage, smoke, volcanic eruption, and personal liability. Exceptions include floods, earthquakes. Most states no longer offer this type of coverage.

HO2 – Broad Form

A more advanced form that provides coverage on a home against 16 listed perils (including all 11 on the HO1). The coverage is usually a "named perils" policy, which lists the events that would be covered.

HO3 – Special Form

The typical, most comprehensive form used for single-family homes. The policy provides "all risk" coverage on the home with some perils excluded, such as earthquake and flood. Contents are covered on a named-peril basis. (Note: "all risk" is poorly termed as it is essentially named exclusions (i.e., if it is not specifically excluded, it is covered).)

HO4 – Contents Broad Form

The Contents Broad, or Tenants, form is for renters. It covers personal property against the same perils as the contents portion of the HO2 or HO3.^[14] An HO4 generally also includes liability coverage for personal injury or property damage inflicted on others.

HO5 – Comprehensive Form

Covers the same as HO3 plus more. On this policy the contents are covered on an open peril basis, therefore as long as the cause of loss is not specifically excluded in the policy it will be covered for that cause of loss.

HO6 – Unit-Owners Form

The form for condominium owners. It insures personal property, walls, floors and ceiling against all of the perils in the Broad Form. The rest of the condo is covered by a separate policy purchased by the association.

HO8 – Modified Coverage Form

The form is for the owner-occupied older home whose replacement cost far exceeds the property's market value.

Coverage rates

According to a 2015 National Association of Insurance Commissioners (NAIC) report on data from 2012, 76.8% of homes were covered by owner-occupied homeowners' policies. Of these, 62.9% had the HO3 Special, and 9.4% had the more expensive HO5 Comprehensive. Both of these policies are "all risks" or "open perils", meaning that they cover all perils except those specifically excluded. 2.7% were the HO2 Broad, which covers only specific named perils. Others, at about 1% each, include the HO1 Basic and the HO8 Modified, which is the most limited in its coverage. HO8, also known as older home insurance, is likely to pay only actual cash value for damages rather than replacement.^[15]

The remaining 21.3% of home insurance policies were covered by renter's or condominium insurance. 14.8% of these had the HO-4 Contents Broad form, also known as renters' insurance, which covers the contents of an apartment not specifically covered in the blanket policy written for the complex.^[15] This policy can also cover liability arising from injury to guests as well as negligence of the renter within the coverage territory. Common coverage areas are events such as lightning, riot, aircraft, explosion, vandalism, smoke, theft, windstorm or hail, falling objects, volcanic eruption, snow, sleet, and weight of ice. The remainder had the HO-6 Unit-Owners policy, also known as a condominium insurance, which is designed for the owners of condos and includes coverage for the part of the building owned by the insured and for the property housed therein. Designed to span the gap between the coverage provided by the blanket policy written for the entire neighborhood or building and the personal property inside the home. The condominium association's by-laws may determine the total amount of insurance necessary. E.g., in Florida, the scope of coverage is prescribed by statute – 718.111(11)(f).^[16]

In addition, about 1.9% of homes were covered by a dwelling fire policy^[15] (the term dwelling fire comes from the fact that, originally, these home owner's policies only covered fires) which covers property damage to a structure and is typically sold to noncommercial owners of rented houses. It may also cover the owner's personal property (such as appliances and furnishings). The owner's liability may be extended from their own primary home insurance and, thus, may not comprise part of the Dwelling Fire policy.

It should be noted that not all states allow the ISO forms to be utilized or may require that additional clauses are included to meet state insurance regulations.

Typically consumers can save money by purchasing their insurance directly from a company rather than through an agent, but there are not many companies selling home insurance directly.^[17] However, an experienced agent can provide expertise (especially expertise with the local insurance environment) that a company may lack.^[18]

Coverage classifications

While coverage limits can vary, there are 6 core coverage components make up a standard policy in the United States. These are based on standard Insurance Services Office or American Association of Insurance Services forms.

Coverage Component[19]	Typical Limit of Coverage[19]
Coverage A – Dwelling	Policyholder chooses
Coverage B – Other structures	10% of Dwelling coverage limit
Coverage C – Personal property	50% of Dwelling coverage limit
Coverage D – Loss of use	20% of Dwelling coverage limit
Coverage E – Personal liability	Policyholder chooses
Coverage F – Medical payments	Policyholder chooses

Section I — Property Coverage

Coverage A – Dwelling

Covers the value of the dwelling itself (not including the land). Typically, a coinsurance clause states that as long as the dwelling is insured to 80% of actual value, losses will be adjusted at replacement cost, up to the policy limits. This is in place to give a buffer against inflation. HO-4 (renter's insurance) typically has no Coverage A, although it has additional coverages for improvements.

Coverage B – Other Structures

Covers other structures around the property that are not used for business, except as a private garage. Typically limited at 10% to 20% of the Coverage A, with additional amounts available by endorsement.

Coverage C – Personal Property

Covers personal property, with limits for the theft and loss of particular classes of items (e.g., $200 for money, banknotes, bullion, coins, medals, etc.). Typically 50- 70% of Coverage A is required for contents, which means that consumers may pay for much more insurance than necessary. This has led to some calls for more choice.^[20] There are two types of policies for personal property: cash value policy and replacement cost policy. Cash value policy will pay the cost to replace belongings, minus deprecation. Replacement cost policy will reimburse the assured for the full, current cost of replacing belongings.^[21]

Coverage D – Loss of Use/Additional Living Expenses

Covers expenses associated with additional living expenses (i.e. rental expenses) and fair rental value, if part of the residence was rented, however only the rental income for the actual rent of the space not services provided such as utilities.

Section II — Liability Coverage

Coverage E – Personal Liability

Covers damages which the insured is legally liable for and provides a legal defense at the insurer's own expense. About a third of the losses for this coverage are from dog bites.^[22]

Coverage F – Medical Payments

Designed to pay for medical expenses to others who are accidentally injured on an insured location or by the activities of an insured, resident employee, or an animal owned by or in the care of an insured. These payments are not based on the law of negligence; that is, no negligence on the part of the insured has to be proven for payment to be made.^[23]

Section III — Additional Coverage Options

Flood Insurance

Flood damage is typically excluded under standard homeowners' and renters' insurance policies. Flood coverage, however, is available in the form of a separate policy both from the National Flood Insurance Program (NFIP) and from a few private insurers.^[24]

Earthquake Coverage

Earth movement is a common exclusion for home insurance policies around the world. A separate policy, rider, or endorsement must usually be purchased in order for this peril to be covered. Because of the catastrophic nature of this risk, earthquake related coverage is typically back by some form of government organization or specialized organization to assist with claims payout and regulation.^[25]

Additional Coverages

Includes a variety of expenses such as debris removal, reasonable repairs, damage to trees and shrubs for certain named perils (excluding the most common causes of damage, wind and ice), fire department charges, removal of property, credit card / identity theft charges, loss assessment, collapse, landlord's furnishing, and some building additions. These vary depending upon the form.

Section IIII — Exclusions

In an open perils policy, specific exclusions will be stated in this section. These generally include earth movement, water damage, power failure, neglect, war, nuclear hazard, septic tank back-up expenses, intentional loss, and concurrent causation (for HO3).^[26] The concurrent causation exclusion excludes losses where both a covered and an excluded loss occur. In addition, the exclusion for building ordinance can mean that increased expenses due to local ordinances may not be covered.^[27] A 2013 survey of Americans found that 41% believed mold was covered, although it is typically not covered if the water damage occurs over a period of time, such as through a leaky pipe.^[28]

Causes of loss

According to the 2008 Insurance Information Institute factbook, for every $100 of premium, in 2005 on average $16 went to fire and lightning, $30 to wind and hail, $11 to water damage and freezing, $4 for other causes, and $2 for theft. An additional $3 went to liability and medical payments and $9 for claims settlement expenses, and the remaining $25 was allocated to insurer expenses.^[29] One study of fires found that most were caused by heating incidents, although smoking was a risk factor for fatal fires.^[30]

Claims process

After a loss, the insured is expected to take steps to mitigate the loss. Insurance policies typically require that the insurer be notified within a reasonable time period. After that, a claims adjuster will investigate the claim and the insured may be required to provide various information.

Filing a claim may result in an increase in rates, or in nonrenewal or cancellation. In addition, insurers may share the claim data in an industry database (the two major ones are CLUE and A-PLUS^[31]), with Claim Loss Underwriting Exchange (CLUE) by Choicepoint receiving data from 98% of U.S. insurers.^[32]

In the United Kingdom

As in the US, mortgage lenders within the United Kingdom (UK) require the rebuild value (the actual cost of rebuilding a property to its current state should it be damaged or destroyed) of a property to be covered as a condition of the loan. However, the rebuild cost is often lower than the market value of the property, as the market value often reflects the property as a going concern, as opposed to just the value of the bricks and mortar.

A number of factors, such as an increase in fraud and increasingly unpredictable weather, have seen home insurance premiums continue to rise in the UK.^[33] For this reason, there has been a shift in how home insurance is bought in the UK—as customers become a lot more price-sensitive, there has been a large increase in the amount of policies sold through price comparison sites.

In addition to standard home insurance, some 8 million households in the UK are categorized as being a "non standard" risk. These households would require a Specialist or Non Standard insurer that would cover home insurance needs for people that have criminal convictions and/or where the property suffers subsidence or has previously been underpinned.

Around the world

Premium volume by country (2013)

World rank[34]	Country	Region	Premium volume (2013, USD Mil):[34]
1	United States	Americas	1,259,255
2	Japan	Asia	531,506
3	United Kingdom	Europe	329,643
4	China	Asia	277,965
5	France	Europe	254,754
6	Germany	Europe	247,162
7	Italy	Europe	168,544
8	South Korea	Asia	145,427
9	Canada	Americas	125,344
10	Netherlands	Europe	101,140

Building and contents coverage

Countries such as China, Australia, and England use a more straight forward approach to home insurance, called "building and contents coverage" commonly referred to as "home and contents insurance". Relative to the insurance policies of the United States, building and contents coverage offers a very basic level of coverage. Most standard policies only cover the most basic perils listed below:

• Storm or flood
• Fire
• Lightning or explosion
• Falling trees or branches
• Subsidence, drag or landslip
• Breakage of glass or sanitary fittings
• Damage from escaped water or oil
• Shock caused to the house by animals, vehicles or aircraft

Building coverage

Building covers both the primary structure as well as detached structures such as garages, sheds, and back houses that are on property. However, different insurers may not cover things like boundary walls, fences, gates, paths, drives or swimming pools, so it is important to check the specific policy language.^[35] This is an equivalent of both Coverage A and B in homeowners insurance policies in the United States.

Contents coverage

Contents insurance covers just about everything that would fall out of your home if you turned it upside down. This include your furniture, clothes, electronics, jewelry, etc. Most polices limit the individual amount of money paid out for each category of items.^[36] Individual polices can vary in the amount of coverage they provide. The option to schedule your personal property is readily available.

Liability coverage

Liability is typically bundled together with building and contents coverage. Injuries and damage on premises would be covered by building coverage liability while any offsite occurrences would be covered under contents coverage.^[35]

Common exclusions

As with most insurance policies, there are always exclusions. The most common are:^[35]

• General wear and tear maintenance
• Faulty workmanship
• Mechanical or electrical breakdown
• Any amount over the limits shown on your policy schedule or in your policy
• Restricted cover when the home is empty or is let to tenants

See also

• Mortgage insurance
• Home equity protection
• Property insurance
• Renters insurance

References

External links