What Is an HO-2 Insurance Policy? Broad Coverage Explained
An HO-2 insurance policy is a named-peril policy that protects your home against 16 perils. Also called "broad form coverage," an HO-2 policy offers a wider range of coverage, including personal property and personal liability, than an HO-1 policy. However, an HO-2 policy does not provide the level of protection a standard HO-3 policy does.
Fewer insurance companies now offer HO-2 policies for purchase. Today's homeowners commonly opt for an HO-3 policy with its more comprehensive coverage.
What Is an HO-2 Policy?
An HO-2 policy (commonly called a broad form policy) is a type of home insurance that exceeds the basic coverage of an HO-1 policy but offers less protection than the more commonly purchased HO-3 policy.
HO-2 policies are named-peril policies, offering dwelling coverage at replacement cost value or actual cash value against all 16 named perils. Loss of use and personal liability is included, and medical payments coverage is also available to be purchased separately.
An HO-2 policy is one of eight types of homeowners policies — each has its own coverage levels and target customer:
Named-peril policy with the most limited coverage (protects against 10 out of 16 perils, no liability, no personal property).
Named-peril policy with more coverage than an HO-1 policy (all 16 named perils plus liability and personal property)
Open-peril policy with more coverage than an HO-2 policy.
Insurance policy for renters
Most comprehensive form of insurance coverage. Includes open-peril policy for personal property.
Insurance policy for condo owners.
Insurance policy for mobile homeowners.
Insurance policy for older properties.
What Does an HO-2 Policy Cover?
An HO-2 policy offers coverage against 16 types of perils:
In addition to coverage for your dwelling and other physical structures (e.g., fences, sheds), an HO-2 policy also provides the following protections:
Personal liability: Pays for legal costs that arise when somebody sues you for property damages or injuries incurred while on your property.
Loss-of-use: Also called additional living expenses coverage, this coverage kicks in to pay for living expenses, including hotel bills, when your home is inaccessible (e.g., your home is undergoing repairs after a windstorm).
Personal property: Pays to repair or replace your possessions if they are damaged or stolen.
How Much Does an HO-2 Policy Cost?
HO-2 policies cost, on average, $1,156 per year, in 2019 according to the National Association of Insurance Commissioners. The cost for HO-2 insurance is just slightly less than standard home insurance (HO-3). HO-3 policies cost $1,272 per year, on average.
The underwriting for both types of policies are generally the same and will consider the same factors, such as your property details, claims history and more. However, HO-2 policies are generally cheaper than HO-3 policies because the coverage is much more limited in scope.
What Isn't Covered in an HO-2 Policy?
Since an HO-2 policy is a named-peril policy you're covered only for specifically named perils on your policy. Open-peril policies, like the HO-3 policy, offer coverage for all events except those marked for exclusion. The coverage is typically more comprehensive than a named-peril policy.
Some events and natural disasters that insurance companies would NOT cover under a standard HO-2 policy include:
Damages to vacant properties
Wear and tear
Upgrades of building codes
What's the Difference Between HO-1 And HO-2 Policy
The primary differences between an HO-1 policy and HO-2 policy is the comprehensiveness in coverage and cost.
Differences in Covered Perils
HO-2 policies protect your home against more perils than an HO-1 policy. HO-1 coverage extends to only 10 of 16 perils, while HO-2 policies cover all 16 perils. Below are the perils that are covered in HO-2 insurance but excluded in HO-1 insurance:
Weight of ice, sleet, snow
Sudden/accidental discharge or overflow of water/steam from appliances, heating or air conditioning systems
Sudden/accidental tears, bulges, cracks and burns of HVAC or hot water systems or water heating appliances
Freezing of plumbing, heating, air conditioning and fire sprinkler systems
Sudden/accidental damage from power surges
Differences in Cost
Interestingly, the average annual cost of an HO-2 policy ($1,156 per year) is 30% less than an HO-1 policy ($1,655), despite HO2 policies offering broader coverage.
We suspect the difference in cost is due to the property's risk level. If a homeowner has an HO-1 policy, they probably did not qualify for standard home insurance (HO-3) or an HO-2 policy. Typically, an insurer would deny broader coverage if the property is too high-risk — it has a high vulnerability to certain perils or it is an older home with outdated construction materials, for instance. Otherwise, the homeowner would purchase an HO-2 or HO-3 policy, which offers more coverage at a lower cost.
While HO-2 policies have wider coverage than HO-1 policies, both types of policies have less coverage than standard HO-3 insurance. HO-2 and HO-1 policies are named peril policies, which protect your home from only the perils listed in your policy. HO-3 insurance is a type of open peril coverage, which protects your home from all perils except those excluded in your policy. Open peril policies offer a broader range of coverage than named peril policies.
HO-2 Policy vs. HO-3 Policy
HO-2 policies and HO-3 policies may have the same types of coverage but each functions differently. The first is a named-peril policy and the latter is an open-peril policy. This chart outlines the differences and similarities between the two insurance policies:
Named peril-policy provides coverage for ONLY perils listed on the policy.
Open-peril policy provides coverage for all perils EXCEPT for those specifically excluded on the policy.
Example: Robert's HO-2 policy protects against 16 perils. His insurance provider would pay for damages caused by lightning (a named peril) but NOT mold (not named).
Example: Sarah's HO-3 policy protects against all perils EXCEPT those which are excluded. Her insurance provider would pay only $1,500 for a stolen diamond ring but NOT the remaining $18,500 because she didn't buy a rider for valuables.
Named peril policy on personal belongings (both)
Additional living expenses coverage (both)
Personal liability coverage (both)
Medical expenses coverage (both; optional)
Who Typically Needs an HO-2 Insurance Policy?
HO-2 insurance isn't necessarily "needed" — most homeowners with a mortgage loan will need to secure an HO-3 insurance policy, which offers wider coverage. However, some mortgage lenders may accept HO-2 insurance. Generally, HO-2 policies are purchased by homeowners that want to pay less for home insurance at the cost of reducing their coverage (from an open peril basis to a named peril basis).
HO-2 (and HO-1) policies, however, are becoming much more limited in availability. These policies combined represented under 8% of policies written in 2018, according to The National Association of Insurance Commissioners. Unless you own your home free and clear from the mortgage lender, you are more likely to carry HO-3 insurance than an HO-2 policy.
Is an HO-2 Policy Enough for My Home?
If you're financing your home through a mortgage lender, an HO-2 policy would likely satisfy the requirements for proof of insurance since you have coverage for 16 perils but some mortgage lenders may require an HO-3 policy.
If you own your home free and clear, then the question boils down to your comfort level in taking a potentially expensive risk and where you live. If you live in a generally low-risk area, then the savings of reduced coverage may be worth it.
However, if your level of coverage is a concern, then you will want to to consider HO-3 or HO-5 insurance or a separate policy to address a specific peril.
Choose HO-3 Insurance for Standard Coverage
HO-3 insurance is considered standard coverage and will fulfill the home insurance requirement for most home mortgage lenders. HO-3 policies are also the most common type of insurance purchased, accounting for over 75% of the home insurance policies written in 2019.
The key benefit of an HO-3 policy is that it upgrades your coverage from a named peril basis to an open peril basis. With an open peril policy, homeowners enjoy a wider scope of protections, gaining coverage in more types of perils. However, many of the same peril exclusions apply, such as earthquakes and floods.
Choose HO-5 Insurance for Better Coverage
If you want more comprehensive coverage than HO-3 insurance, then you might want to consider an HO-5 policy. HO-5 insurance offers the same types of coverage as an HO-3 policy, except your personal property coverage operates on an open peril basis and you have replacement cost value coverage.
HO-5 insurance covers your personal belongings on an open peril basis. HO-2 and HO-3 policies have open peril coverage for your dwelling (the structure you live in) but only named coverage on your personal belongings (e.g., furniture, clothes, electronics). Unless you have HO-5 insurance, then your personal property is covered only for the named perils listed in your policy.
HO-5 will also reimburse you at replacement cost value (RCV). HO-2 and HO-3 insurance offers coverage only at actual cash value (ACV) — the value of an item, minus depreciation. ACV is typically less than what you bought the item for and you will likely need to pay some money out-of-pocket if you were to replace the item after a covered loss. RCV coverage will reimburse you for the full amount it costs to buy the item off the shield today.
More coverage comes at a higher cost, so HO-5 insurance is more suited for homeowners that need the extra coverage for their personal belongings, want RCV coverage and have the budget to accommodate the increased premium.
Insure Against Specific Perils
If you want coverage against specific perils, like floods or earthquakes, then you may want to supplement your coverage with a peril-specific policy. Instead of upgrading to HO-3 or HO-5 insurance, some homeowners may be fine with the level of coverage an HO-2 policy offers but want to plug specific holes that are left exposed.
The type of peril-specific insurance needed generally depends on your home's location. If you live in a coastal state, for example, then you may want to buy flood insurance — some mortgage lenders may even require you to buy flood insurance if you live in a high-flood-risk zone. Earthquake insurance would be recommended in states with a higher vulnerability to earthquakes, like California, which sits on a fault line.
Get the Right Homeowners Insurance Coverage for Your Budget
An HO-2 policy covers more perils than an HO-1 policy but it still lacks some coverage. The most common type of homeowners insurance is an HO-3 policy. If you want even greater coverage, an HO-5 policy is the most comprehensive type of policy you can buy.
No matter what type of policy you need, SmartFinancial can help you find the best prices from the top insurance companies. Comparing policies from 200+ insurance partners, they're bound to find you the right coverage. Just enter your zip code below and answer a few questions for a free quote.
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