One of the easiest and most effective ways to protect your home against damage or loss is with a home insurance policy. While there are many different types of home insurance policies, two forms of coverage – the HO-3 and HO-5 – make up the majority of policies in the U.S. In this post, we will review what these policies cover and help you better understand how much home insurance is enough for you.
When you purchase an HO-3 or HO-5 insurance policy, your premiums are paying for an entire package of coverages, each of which protects you in a different way against potential losses. These include coverage for your:
Dwelling coverage is insurance that protects the primary structure of your home. You will see this coverage listed first on your policy, along with a deductible of your choosing. The deductible – usually between $500 and $2,000 – is the amount you agree to pay toward the cost of any personal loss claims you make against your policy.
On HO-3 and HO-5 policies, Dwelling coverage is very broad and covers damages caused by all risks apart from the ones your policy specifically excluded in writing. That is in stark contrast to simpler coverage forms, which limit coverage to damages caused only by specific named events.
Homeowners should carefully calculate their estimated coverage needs, preferably with the help of an agent here at Mayville Insurance. Coverage limits should equal the amount it would cost to clean up your property after a disaster, as well as the amount it would cost to rebuild a comparable home based on current local construction costs. The price you paid for your home and the value of your lot are not factors in your coverage needs.
If you underestimate your coverage needs, you could be subject to additional financial responsibility when you file a claim. Insurers sometimes enforce a Co-Insurance Rule, which states that an insurance company can underpay a partial damage claim if the homeowner has underinsured his or her structure based on what coverage is required. For example, if you incur $45,000 of damages in a kitchen fire, insurance may only pay $36,000 toward repairing your kitchen if you have under-insured your dwelling by 20 percent.
The next coverage listed on your policy is for ‘Other Structures.’ Homeowners often overlook these, but repairing or replacing them can cost thousands of dollars. Some insurance companies include coverage for other structures for no additional cost – usually at a default limit equal to 10 percent of the limits on your Dwelling coverage. However, we recommend evaluating your coverage needs, as some properties have high-value structures or multiple buildings that require additional coverage.
Personal Belongings coverage is protection for everything you own that is not part of your business and is not a permanent fixture in your home. This area of the policy differs between HO-3 and HO-5 policies. HO-3 home insurance provides coverage for personal belongings only when they are damaged, destroyed, or lost due to an event named within the policy. On the other hand, HO-5 home insurance covers home contents for all types of risks except those specifically excluded by the policy.
Although most insurance companies provide coverage for home contents at a default limit between 50 and 80 percent of the Dwelling limits, we still recommend calculating the actual value of your assets using a home inventory. There are several home inventory apps available that make it easy to keep track of your belongings and store that information safely in the cloud. Not to mention, having a home inventory can make declaring losses substantially easier if you ever need to file a claim.
Loss of Use
Losing your home means losing the place where you sleep, do laundry, prepare meals for your family, and more. You will need to find temporary housing while your home is rebuilt or repaired, as well as somewhere to do your laundry and a way to feed your family. Loss of Use coverage pays for excess living expenses you incur as a result of being displaced from your home. Most insurers will include this coverage by default with a limit of approximately 20 percent of your Dwelling coverage.
The next coverage on your home insurance policy is Coverage E – personal liability. Under this section, you are personally protected against the financial responsibility of a lawsuit if you are at-fault for injury to another person or damage to their property. This can include accidents that happen at your home or while you are traveling away from it. Outside of certain circumstances, such as boating and car accidents, personal liability coverage generally follows you and your household members wherever you may go.
We typically recommend a minimum of $100,000 to $300,000 of personal liability coverage since you are personally responsible for any damages that exceed the limits of your policy. Without adequate limits, any excess damages could threaten your personal savings, investments, and assets, as well as your future income and wages.
The Cost of a Lawsuit
As an independent insurance agency, our team knows firsthand the impact a personal liability lawsuit can have on a family. Often, damages reach tens or even hundreds of thousands of dollars to cover the cost of property replacement, medical bills, lost wages, emotional trauma, legal expenses, punitive damages, and more. For example, Wisconsin ranked eighth in the U.S. for dog-related injury claims during 2015. Nationally, the average cost per claim was more than $37,000, although it could cost you much more than that to compensate a victim for a severe injury.
Additional examples of personal liability damages include:
- Damages to a hotel room
- Injury due to a bicycle accident
- Slip-and-fall accidents on your property
The next section on your insurance policy covers medical payments for accidental injuries that happen on your property. This coverage would pay benefits even if you did not show negligence or have any fault in the incident. Limits are usually low – between $1,000 and $5,000. However, this is often enough to cover a health insurance deductible, stitches, some x-rays, or a doctor’s visit for minor injuries. Though you may still have liability for the accident, having this coverage could also help to deter a lawsuit.
Endorsements are add-ons to your home insurance policy that allow you to customize your coverage better to meet your needs. Endorsements can provide extra benefits for claims or extend coverage to include additional loss events not covered under a standard home insurance policy. We typically recommend adding only the endorsements that will help mitigate specific risks you may be vulnerable to.
For example, most homeowners can benefit from additional coverage for water backup and sewer. Likewise, many homeowners prefer to increase their coverage with inflation guard protection for their dwelling or a replacement cost endorsement for personal belongings. On the other hand, some endorsements are only suitable for specific needs. Examples include endorsements for home business coverage, as well as scheduled coverage for high-valued physical assets.
Beyond Home Insurance
Even with a well-tailored home insurance policy and high coverage limits, you may still need supplemental protection for extreme loss scenarios. We often recommend purchasing umbrella insurance to provide secondary protection against personal liability. With this coverage, your home insurance or other primary liability coverage pays for initial damages up to the limits of the policy. Any damages that remain are then covered by the umbrella policy, which usually carries a high coverage limit of $1 million or more.