If you’ve purchased homeowner’s insurance, do you know what type of policy you have? Contrary to popular belief, not all policies offer the same types of coverage—and, if you haven’t carefully reviewed your policy, you may not have the level of protection you think.
All homeowner’s policies include liability coverage. This covers compensation for legal claims and medical bills for people who’ve been unintentionally injured by you or on your property—for instance, if a visitor slips on your icy steps, breaks her leg, and sends you the medical bill.
However, different types of policies include different levels of coverage for other types of damage, so you should make sure you know what’s included when purchasing a policy.
Whether it’s time to review your existing policy, or you’re considering purchasing homeowner’s insurance for the first time, it’s important to learn the potential advantages and disadvantages of each available type of policy.
Here’s a quick review of your 3 primary homeowner’s insurance options.
Basic homeowner’s policy (HO-1)
The HO-1 policy is generally the cheapest on the market, and is considered a “bare bones” policy. In contrast to most other home insurance policies, it offers coverage for only a specific set of 10 named “perils.” These perils are:
- Fire or lightning.
- Windstorm or hail.
- Riot or civil commotion.
- Damage caused by an aircraft.
- Damage caused by vehicles.
- Vandalism or malicious mischief.
- Volcanic eruption.
Today, very few insurers sell this type of insurance. According to a 2008 survey by the National Association of Insurance Commissioners, the HO-1 policy accounts for just 4.6 percent of all policies sold in the United States.
Broad Homeowner’s Policy (HO-2)
The HO-2 named-perils policy includes coverage for everything included in the HO-1 policy, as well as several additional perils, including:
- Falling objects.
- The weight of ice, snow, or sleet.
- Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning, or automatic fire-protective sprinkler system, or from a household appliance.
- Freezing of a plumbing, heating, air conditioning or automatic fire-protective sprinkler system, or of a household appliance.
This policy includes more protection against damage caused by malfunctions from your appliances or heating or cooling systems.
However, it’s still important to read the fine print on protection from these kinds of perils. In some cases, if there is evidence that an appliance or system was leaking or malfunctioning over a long period of time and you didn’t repair it, your insurance company won’t pay a claim if the malfunction damages your home.
The HO-2 policy is occasionally offered by insurance companies, but has also become less common due to gaps in coverage—just 3.6 percent of homeowners in the NAIC survey have HO-2 insurance policies.
Special Homeowner’s Policy (HO-3)
The HO-3 policy is the most popular home insurance policy on offer today, and will be offered to you as the default option by many insurers. More than 80 percent of homeowners in the NAIC survey had HO-3 policies. The policy provides coverage for all of the named perils available in HO-1 and HO-2 policies; however, it also provides coverage for other unforeseen causes of damage except for named exclusions.
These exclusions vary somewhat from policy to policy, but these perils are typical exclusions in most HO-3 policies:
- Ordinance or law, such as demolition or construction required to bring your house up to code.
- Earth movement, such as earthquakes, shockwaves, sinkholes, landslides and mudflows.
- Water damage, such as floods, sewer back-ups and water that seeps through the foundation.
- Power failure.
- Neglect, meaning you failed to take reasonable means to save your property during or after a loss.
- Intentional loss, meaning something you did on purpose with the intent to cause a loss.
- Loss to property, resulting from faulty zoning, bad repair or workmanship, faulty construction materials and defective maintenance.
The HO-3 policy is quite comprehensive, but if you’re concerned about damage from one of the excluded perils, you should consider purchasing specific insurance for those situations, such as flood insurance and earthquake insurance.
As you will generally be comparing HO-3 policies to other HO-3 policies, it’s important to pay close attention to the list of excluded perils to find out which policy provides the best value. Ask your insurance agent specific questions about “what-if” scenarios.
Amy Bach, executive director of the consumer advocacy group United Policyholders, suggests asking specifically what would be covered if your pipe bursts and damages your furniture, so that you can evaluate various policies’ handling of the scenario.
Other policy types
While these are the primary policy options available to homeowners, renters are eligible for a different type of policy, known as HO-4. This policy is similar in scope to the HO-2 homeowner’s policy, with the exception that it only provides coverage for the home or apartment’s contents and not the physical structure itself.
If you own a condominium, you only own a portion of the physical structure, so you will need to purchase a policy that reflects that. In this case, you are eligible for a HO-6 policy, which provides coverage against the 16 named perils in the HO-2 policy to protect your possessions and the structural parts of the building that you own.
Actual Cash Value v. Replacement Cost Value
No matter which type of insurance you purchase, you can generally choose to have your property and personal possessions insured for either Actual Cash Value (ACV) or Replacement Cost Value (RCV). What’s the difference?
Actual Cash Value refers to the amount an item is worth in its current state, which may be considerably less than what you paid for it. For instance, if you paid $2,000 for a laptop computer four years ago, and your computer was stolen, you would likely receive considerably less from an insurance claim. Instead of paying enough for you to buy a brand new computer, your insurer would research the current market value of a used computer of the same make and model, and reimburse you that amount.
Replacement Cost Value, in contrast, refers to the amount you would pay to purchase the item new, regardless of the depreciation it has faced. With the previous example, you would receive a check for $2,000 to purchase the same computer. Purchasing a RCV insurance policy generally costs anywhere from 10 to 20 percent more in premiums each year, so make sure to weigh up the costs of replacing your items against the increased premiums when deciding which option to choose.
Keep in mind that your benefits will only come into play after you’ve paid your deductible—so if you’ve set a high deductible, such as $10,000, you may not be eligible for either an ACV or a RCV payment unless your losses are significant.