What Does Homeowners Insurance Cover?

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Buying homeowners insurance is a crucial step in the home buying process for new homeowners, but most people neglect to take a good look at their policy until something happens. It's important to understand that while a standard homeowners insurance policy may provide some coverage, it may not be enough to meet all your needs. Most policies exclude certain natural disasters and perils. As a result, you may need to purchase additional protection depending on where you live.

Most people neglect to take a good look at their home insurance policy until something devastating happens.

Perhaps you live in the northeast and are no stranger to the occasional blizzard or two. But did you know that a standard homeowners policy will not cover damage to your garage if it caves in with snow? Or, if you live in the South, along the coast, you may be familiar with tornados. Did you know that you may have a separate windstorm insurance deductible on your policy to cover repairs after the wind takes your roof off?

Events like natural disasters can lead to costly repairs and replacements. So, it's vital that you know what a basic homeowners insurance policy looks like, what it covers and what it doesn't.

What Is Homeowners Insurance?

Homeowners insurance provides financial protection in the case of damage or destruction to your home. In addition to insuring the structure of your home, a policy can extend to your personal belongings. It also covers personal liability. Liability applies to legal costs if someone gets hurt at your home or experiences property damage.

Your homeowners insurance policy, however, does not apply to natural wear and tear or normal repairs. It was designed to help you recover after a significant loss, such as a wildfire or windstorm. When a covered event occurs, you make a claim reporting the incident. Then you pay a deductible, a pre-negotiated amount of money, for the repair or replacement of your home and items. After that, your insurance kicks in, and your provider starts paying.

Policyholders can purchase additional coverage or raise their limits if they need greater protection.

Every policy comes with its limits, though. Some events are not covered, and you only pay for coverage up to a certain limit on covered perils. Policyholders can purchase additional coverage or raise their limits if they need greater protection. This may be necessary for homeowners who live in high-risk or natural disaster-prone areas.

What Is Covered by Homeowners Insurance?

While shopping for homeowners insurance, you'll find policies offer a wide range of coverages. Here are some basic ones to know.

Dwelling Coverage

Dwelling coverage covers the house itself and any structures attached to it. That also includes damage to attached structures, such as your garage, in the case of a covered perils like fire. It also includes damage to certain fixtures, like electrical wiring, plumbing and heating.

Some homeowners insurance coverage may need other structures coverage added on to pay for detached structures like fences, sheds and guest houses.

You can insure your dwelling for the actual cash value or the replacement cost. The replacement cost pays for your home at market value, whereas the actual cash value takes the replacement cost and subtracts age and wear and tear. Regardless, many financial experts recommend you insure your home for a minimum of 80% of its replacement value.

Personal Property Coverage

Personal property coverage compensates you for damage to your personal belongings. It covers theft as well. And it can extend to cover belongings not physically located on your property.

While everyone wants to protect their important possessions, this coverage may be even more vital for homeowners who own valuables, such as electronics, jewelry, fine art, etc. If inadequate, you can add a rider for especially pricey items.

Typically, your insurer provides personal property coverage at a percentage of your dwelling coverage limit. You can opt for the replacement cost value or the actual cash value, too. Although, there may be stricter limitations on certain types of property like antiques or art.

Personal Liability Coverage

Personal liability coverage comes in handy if someone gets injured on your property or if you're responsible for damage to someone else's property. For example, if your neighbor slips on your icy front step or the dead tree in your front yard falls on the house next door, liability insurance can pay for medical expenses, property repair, or legal costs resulting from a lawsuit.

This protection also covers relatives or residents in your household under 21 years old if they're responsible for injury or property damage. It can even extend to full-time students under the age of 24.

You can choose your liability protection amount, but most policies offer around $10,000 in coverage.

Loss of Use Coverage

A situation may arise that leads you to leaving your home for a while. For instance, a tornado may blow through, making your house unlivable. In that case, you'll need to stay elsewhere for some time. Loss of use coverage gives you funds to pay for additional living expenses while the home receives repairs. So, it covers things like hotel stays and food expenses.

Loss of use coverage typically covers 20% of the home's dwelling coverage limit.

What Is Not Covered by Homeowners Insurance?

Homeowners coverage protects your home against numerous disasters, but not every single one. Here are some coverages insurance companies may exclude from your policy.

Flood and Earthquake Insurance

Floods and earthquakes can be very common natural disasters in certain areas. Specifically, you may be familiar with them if you live near a coastline or fault line. Storm-prone locations also often lead to severe flooding after an event.

But although these perils are normal, standard homeowners policies don't typically include flood and earthquake insurance.

Wear and Tear

As mentioned above, a homeowners insurance policy is designed for significant repairs or rebuilding. While falling behind on home maintenance can contribute to accidents or damage, it doesn't fall under your policy. Upkeep is the homeowners' responsibility, for the most part.

Other Exclusions

Damage from nuclear hazard or war do not fall under perils listed in your homeowners insurance policy. In addition, your insurance carrier will probably not cover most damages resulting from identity theft. You can buy identity fraud protection as an add-on to your homeowners policy.

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Forms of Homeowners Insurance Policies

You know now that homeowners insurance policies come with various protections. But some policies are designed for specific types of structures or policyholders. Policies also vary in the perils they cover, whether they only include named disasters or everything but those specifically excluded.

The different versions of homeowners insurance are called "forms." You can determine which one is best for you by talking to your agent:

  • HO-1 (Basic Form): A policy that covers 10 perils, meaning it's limited compared to other forms.

  • HO-2 (Broad Form): Broad form policies also provide a limited amount of coverage, but slightly more than the HO-1 type.

  • HO-3 (Special Form): The most common type. This policy generally covers damage to your property except those specifically excluded, like floods or earthquakes. This usually amounts to 16 "named perils."

  • HO-5 (Comprehensive Form): This policy type sets itself apart for providing the most comprehensive range of coverage. It protects the home and personal belongings against all perils except those specifically excluded.

  • HO-6 (Condo Insurance Form): Also called "walls-in" coverage, it covers the unit's floors, walls, and ceilings against the 16 perils. It helps protect a condo owner's personal possessions. However, the condo association may have a unique policy to protect the overall structure and common areas.

  • HO-7 (Mobile Home Form): Policyholders with mobile homes purchase HO-7 policies to protect the structure and their personal belongings. It's a modified version of the HO-2 policy, but may cover different perils.

  • HO-8 (Modified Coverage Form): This type typically covers older homes and protects against up to 10 perils. But reimbursement comes in the form of actual cash value rather than replacement cost.

How Much Homeowners Insurance do I Need?

Most homeowners follow a basic rule of thumb: buy enough to repair or replace your home with everything inside after a complete loss.

You can estimate the cost of rebuilding the property by multiplying two factors: your home's square footage and the local cost of construction per square foot. If you have trouble, your insurer can likely help you come up with the replacement cost. This will give you a more accurate number than using your mortgage amount, property tax assessment or selling price.

You can estimate the cost of rebuilding your home by multiplying your home’s square footage and the local cost of construction per square foot.

You also want to ensure you account for the value of your stuff. Generally, homeowners should purchase enough personal property insurance to meet 50% of your dwelling coverage's amount. Some insurers offer this at a minimum, but it varies. You can lower or raise this limit as needed, too. Logging an inventory of the items you own will help you find the right coverage amount. Be sure to back up or save the inventory in multiple places so you can file claims easily.

Remember to take your lifestyle into account as well. Certain individuals may be more at risk for loss or legal consequences. For example, if you have a pool, it can lead to a guest's injury, and they may sue.

The more coverage you purchase, the higher your rates will likely be, though.


You may feel like a standard policy does not meet your needs. In that case, you can add endorsements for extra coverage at an additional cost. In particular, you may find yourself purchasing an endorsement to enhance your HO-3 insurance policy. Some of the most common add-ons include:

  • Water backup coverage pays for damages from backed-up drains, sump pumps, and sewer lines

  • Scheduled personal property coverage that applies to a specific valuable possession, like a ring, and may require appraisal

  • Equipment breakdown coverage pays for repairs or replacements of HVAC systems and large home appliances if they break down outside of regular wear and tear

  • Ordinance or law coverage helps you bring your home up to modern building codes during rebuilding or repair

  • Service line protection pays for repairs after damage caused by utility lines you're responsible for, such as water or electric

  • Identity fraud coverage provides compensation if you experience identity theft, paying for things like legal fees and lost wages

Do I Have To Buy Homeowners Insurance?

There is no state or federal law that requires homeowners to purchase homeowners insurance. However, that doesn't mean you don't have to buy it.

Most mortgage lenders make homeowners insurance a requirement to borrow from them. That's because your lender has a financial stake in your home. If it gets damaged or destroyed, their investment into your property results in a loss. So, they want to protect the money they put into it.

Once you completely pay off your mortgage, though, it's up to you. You can cancel your policy. However, it's not recommended that you go without home insurance in case something devastating happens to your home.

Getting the Homeowners Coverage You Need

Buying homeowners insurance is vital for protecting yourself in case of unforeseen and costly disasters. A standard homeowners insurance policy will cover many things but not everything. For instance, an HO-3 policy, which is the most commonly purchased type of homeowners insurance, doesn't cover earthquakes, floods and other types of natural disasters which may be common where you live. It may not cover especially pricey items or equipment in the home. However, there are several add-on coverages that can complete your policy according to what you need.

It's important to understand your homeowners coverages and have the right limits in place to protect your home, belongings and personal liability. Finding the right price is also important so start comparing rates, using Smart Financial's free quote comparison tool. Simply enter your zip code, answer a few questions and compare homeowners insurance rates to lock down on your perfect policy.

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