Home insurance, also commonly called homeowners 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.
Additionally, homeowners insurance provides financial protection against disasters. A standard home insurance policy covers the home and the belongings inside it.
Overview Homeowners 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. This means that it covers damage to one's property and liability for any injuries and property damage caused by the owner or members of his/her family to other people. It may also include damage caused by household pets. 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.Nance CP. (2003). Modern Real Estate Practice in Texas p. 39.
The cost of homeowners 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 their state before 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, including flood insurance, can be purchased for these possibilities. Insurance is adjusted to reflect the replacement cost, usually upon applying 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").
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. In some cases, estimates can be too low because of "demand surge" after a catastrophe. As a safeguard against a wrong estimate, some insurers offer "guaranteed replacement cost (GRC)", and "extended replacement cost" add-ons ("endorsements") which provide extra coverage if the limit is reached.
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 expressly excluded from the policy.
For insurance policies that cover specific named perils, the insurer frequently offers a choice between one policy covering a basic set of specific perils and another covering the same basic set plus several additional perils, as discussed below. Together with an open peril, a.k.a. "special form" policy, these two groupings of named perils allow the insurer to offer a choice among three types of policy, with three levels of coverage, which can be priced in a fair and accurate manner and appeal to a variety of resident homeowners as well as owners of apartment buildings and condominium associations.
Basic "named perils" – this is the least comprehensive of the three coverage options. It provides protection against perils most likely to result in a total loss. It is not covered if something happens to the home that's not on the list below. 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
Broad "named perils" – 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" – special-form coverage is the most inclusive of the three options. The difference with "special form" policies is that they cover all losses unless specifically excluded. Unlike the prior forms, all unlisted perils are covered perils. However, if something happens to the 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 purchase homeowners 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 homeowners 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. United States insurance companies used to offer foundation insurance, which was reduced to coverage for damage due to leaks, and finally eliminated altogether. The insurance is often misunderstood by its purchasers; for example, many believe that mold is covered when it is not a standard coverage.Homeowners Confused About Insurance Coverage: Survey. InsuranceJournal.com Further complicating matters is that the homeowners insurance industry is largely regulated at the state level rather than nationwide. Paper copy consulted.
History Modern home insurance is a 20th-century phenomenon, but insurance against damage to one’s home is centuries old. The first predecessors of modern home insurance were fire insurance policies, which protected against what was then the most common peril to befall buildings. Fire insurance was created by Nicholas Barbon, who opened an insurance firm in London in 1681, in the aftermath of the Great Fire of London of 1666, which had made property owners acutely aware of the risk of fire, initially insuring 5,000 homes. In the wake of his success, many other insurance firms, such as the Hand in Hand Fire and Life Insurance Society (founded 1696), were created. The Sun Fire Office, created in 1710, is the oldest still existing insurance company in the world.
The first homeowners 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 homeowners policies to become legal.
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.
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 homeowners 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.Covered by homeowners insurance? Don't be so sure. CNN Money. . In particular, rising premiums has led to many homeowners significantly under-insuring their properties. Homeowners insurance has been relatively unprofitable, due in part to catastrophes such as hurricanes as well as regulators' reluctance to authorize price increases. Coverages have been reduced instead and companies have diverged from the former standardized model ISO forms. Water damage due to burst pipes in particular has been restricted or in some cases entirely eliminated. Other restrictions included time limits, complex replacement cost calculations (which may not reflect the true cost to replace), and reductions in wind damage coverage.
Types of homeowners insurance policies
According to a 2018 National Association of Insurance Commissioners (NAIC) report on data from 2016, 73.8% of homes were covered by owner-occupied homeowners policies. Of these, 79.52% had an HO-3 Special policy, and 13.35% had the more expensive HO-5 Comprehensive. Both of these policies are "all risks" or "open perils", meaning that they cover all perils except those specifically excluded. Homes covered by an HO-2 Broad policy accounted for 5.15%, which covers only specific named perils. The remaining 2% includes the HO-1 Basic and the HO-8 Modified policies, which are the most limited in the coverage offered. HO-8, also known as older home insurance, is likely to pay only actual cash value for damages rather than replacement.