Home insurance
Encyclopedia
Home insurance, also commonly called hazard insurance or homeowner's insurance (often abbreviated in the real estate industry as HOI), is the type of property insurance
Property insurance
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance or boiler insurance. Property is insured in two main...

 that covers private homes. It is an insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

 policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of its use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...

 insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory. It requires that at least one of the named insureds occupies the home. The dwelling policy (DP) is similar, but used for residences which don't qualify for various reasons, such as vacancy/non-occupancy, seasonal/secondary residence, or age.

It is a multiple-line insurance, meaning that it includes both property
Property insurance
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance or boiler insurance. Property is insured in two main...

 and liability
Liability insurance
Liability insurance is a part of the general insurance system of risk financing to protect the purchaser from the risks of liabilities imposed by lawsuits and similar claims. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy...

 coverage, with an indivisible premium, meaning that a single premium is paid for all risks. Standard forms divide coverage into several categories, and the coverage provided is typically a percentage of Coverage A, which is coverage for the main dwelling.

The cost of homeowner's insurance often depends on what it would cost to replace the house and which additional riders—additional items to be insured—are attached to the policy. The insurance policy itself is a lengthy contract, and names what will and what will not be paid in the case of various events. Typically, claims due to floods or war (whose definition typically includes a nuclear explosion
Nuclear exclusion clause
The nuclear exclusion clause is a clause which excludes damage caused by nuclear and radiation accidents from regular insurance policies of, for example, home owners....

 from any source), amongst other standard exclusions (like termites), are excluded. Special insurance can be purchased for these possibilities, including flood insurance
Flood insurance
Flood insurance denotes the specific insurance coverage against property loss from flooding. To determine risk factors for specific properties, insurers will often refer to topographical maps that denote lowlands, floodplains and floodways that are susceptible to flooding.-Hidden floods:Nationwide,...

. Insurance should be adjusted to reflect replacement cost, usually upon application of an inflation factor or a cost index.

The home insurance policy is usually a term contract—a contract that is in effect for a fixed period of time. The payment the insured makes to the insurer is called the premium. The insured must pay the insurer the premium each term. Most insurers charge a lower premium if it appears less likely the home will be damaged or destroyed: for example, if the house is situated next to a fire station
Fire apparatus
A fire apparatus, fire engine, fire truck, or fire appliance is a vehicle designed to assist in fighting fires by transporting firefighters to the scene and providing them with access to the fire, along with water or other equipment...

; if the house is equipped with fire sprinklers and fire alarms; or if the house exhibits wind mitigation measures, such as hurricane shutters. Perpetual insurance
Perpetual Insurance
Perpetual insurance is a type of homeowners insurance policy written to have no term, or date, when the policy expires. From the effective start date, the coverage exists for perpetuity. The insured deposits money, called a deposit premium, with the insurer for insurance for the life of the risk...

, which is a type of home insurance without a fixed term, can also be obtained in certain areas.

In the United States

In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, most home buyers borrow money in the form of a mortgage loan
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

, and the mortgage lender always requires that the buyer purchase homeowner's insurance as a condition of the loan, in order to protect the bank if the home were to be 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 homeowner's insurance if the value of the land exceeds the amount of the mortgage balance. In a case like this 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
Subsidence
Subsidence is the motion of a surface as it shifts downward relative to a datum such as sea-level. The opposite of subsidence is uplift, which results in an increase in elevation...

 and subsequent foundation failure is usually covered under an insurance policy. Reportedly, United States insurance companies used to offer foundation insurance, which was reduced to coverage for damage due to leaks, and finally eliminated altogether.

History

The first homeowners policy per se in the United States was introduced in September 1950, but similar policies had existed in Great Britain and certain areas of the United States. In the late forties US insurance law
Insurance law
Insurance law is the name given to practices of law surrounding insurance, including insurance policies and claims. It can be broadly broken into three categories - regulation of the business of insurance; regulation of the content of insurance policies, especially with regard to consumer...

 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
New Jersey
New Jersey is a state in the Northeastern and Middle Atlantic regions of the United States. , its population was 8,791,894. It is bordered on the north and east by the state of New York, on the southeast and south by the Atlantic Ocean, on the west by Pennsylvania and on the southwest by Delaware...

, Insurance Services Office
Insurance Services Office
Insurance Services Office, Inc. , a subsidiary of Verisk Analytics, is a provider of data, underwriting, risk management and legal/regulatory services to property-casualty insurers and other clients...

, also known as the ISO, was formed in 1971 to provide risk information and issued a simplified homeowners policy for resell to insurance companies. These policies have been amended over the years.

Types of policies

Currently, the ISO has seven standardized homeowners insurance forms in general use:
HO1 – Basic Form Homeowner Policy
A basic policy form that provides coverage on a home against 11 listed perils; contents are generally included in this type of coverage, but must be explicitly enumerated. The perils include fire or lightning, windstorm or hail, vandalism or malicious mischief, theft, damage from vehicles and aircraft, explosion riot or civil commotion, glass breakage, smoke, volcanic eruption, and personal liability. Exceptions include floods, earthquakes.

HO2 – Broad Form Homeowner Policy
A more advanced form that provides coverage on a home against 17 listed perils (including all 11 on the HO1). The coverage is usually a "named perils" policy, which lists the events that would be covered.

HO3 – Special Form Homeowner Policy
The typical, most comprehensive form used for single-family homes. The policy provides "all risk" coverage on the home with some perils excluded, such as earthquake and flood. Contents are covered on a named peril basis. (Note: "All Risk" is poorly termed as it is essentially named exclusions (ie, if it is not specifically excluded, it is covered))

HO4 – Renter's Insurance
The "Tenants" form is for renters. It covers personal property against the same perils as the contents portion of the HO2 or HO3. An HO4 generally also includes liability cover for personal injury or property damage inflicted on others.

HO5 - Premier Homeowner Policy
Covers the same as HO3 plus more. On this policy the contents are covered on an open peril basis, therefore as long as the cause of loss is not specifically excluded in the policy it will be covered for that cause of loss. (can also be achieved by endorsing an HO15 to the HO3)

HO6 – Condominium Policy
The form for condominium owners.

HO8 – Older Houses
The "Modified Coverage" form is for the owner-occupied older home whose replacement cost far exceeds the property's market value.

Coverage rates

According a 1998 NAIC report, 83% of homes were covered by owner-occupied homeowners policies. Of these, 87% had the HO3 Special and 9% had the more expensive HO5 Comprehensive. Both of these policies are "all risks" or "open perils," meaning that they cover all perils except those specifically excluded. 3% were the HO2 Broad, which covers only specific named perils. Others include the HO1 Basic and the HO8 Modified, which is the most limited in its coverage. HO8, also known as older home insurance, is likely to pay only actual cash value for damages rather than replacement.

The remaining 13% of home insurance policies were covered by renter's or condominium insurance. Two-thirds of these had the HO-4 Contents Broad form, also known as renters insurance, which covers the contents of an apartment not specifically covered in the blanket policy
Blanket policy
Blanket policy is a policy which behaves similarly to a variety of things. Based on Webster's Dictionary it "covers a group or class of things or properties instead of one or more things mentioned individually, as where a mortgage secures various debts as a group, or subjects a group or class of...

 written for the complex. This policy can also cover liability arising from injury to guests as well as negligence of the renter within the coverage territory. Common coverage areas are events such as lightning, riot, aircraft, explosion, vandalism, smoke, theft, windstorm or hail, falling objects, volcanic eruption, snow, sleet, and weight of ice. The remainder had the HO-6 Unit-Owners policy, also known as a condominium insurance, which is designed for the owners of condos and includes coverage for the part of the building owned by the insured and for the property housed therein. Designed to span the gap between the coverage provided by the blanket policy written for the entire neighborhood or building and the personal property inside the home. The Association's by-laws may determine the total amount of insurance necessary. In Florida, the scope of coverage is prescribed by statute - 718.111(11)(f) .

In addition, about 2.4% of homes were covered by a dwelling fire policy (the term dwelling fire comes from the fact that, orgininally, these home owner's policies only covered fires)which covers property damage to a structure and is typically sold to noncommercial owners of rented houses. It may also cover the owner's personal property (such as appliances and furnishings). The owner's liability may be extended from their own primary home insurance and, thus, may not comprise part of the Dwelling Fire policy.

Typically consumers can save money by purchasing their insurance directly from a company rather than through an agent, but there are not many companies which sell home insurance directly. However, an experienced agent can provide expertise (especially expertise with the local insurance environment) that a company may lack.

Classes of coverage

For each policy, there are typically 5 classifications of coverage. These are based on standard Insurance Services Office
Insurance Services Office
Insurance Services Office, Inc. , a subsidiary of Verisk Analytics, is a provider of data, underwriting, risk management and legal/regulatory services to property-casualty insurers and other clients...

 or American Association of Insurance Services forms.

Section I — Property Coverages

Coverage A – Dwelling: Covers the value of the dwelling itself (not including the land). Typically, a coinsurance
Coinsurance
Co-insurance is an insurance-related term that describes a splitting or spreading of risk among multiple parties.-In the United States:In the US insurance market, coinsurance is the joint assumption of risk between the insurer and the insured...

clause states that as long as the dwelling is insured to 80% of actual value, losses will be adjusted at replacement cost, up to the policy limits. This is in place to give a buffer against inflation. HO-4 (renter's insurance) typically has no Coverage A, although it has additional coverages for improvements.

Coverage B – Other Structures: Covers other structure around the property which are not used for business, except as a private garage. Typically limited at 10% to 20% of the Coverage A, with additional amounts available by endorsement.

Coverage C – Personal Property: Covers personal property, with limits for the theft and loss of particular classes of items (e.g., $200 for money, banknotes, bullion, coins, medals, etc.). Typically 50 to 70% of coverage A is required for contents, which means that consumers may pay for much more insurance than necessary. This has led to some calls for more choice.

Coverage D – Loss of Use/Additional Living Expenses: Covers expenses associated with additional living expenses (i.e. rental expenses) and fair rental value, if part of the residence was rented, however only the rental income for the actual rent of the space not services provided such as utilities.

Additional Coverages: Covers a variety of expenses such as debris removal, reasonable repairs, damage to trees and shrubs for certain named perils (excluding the most common causes of damage, wind and ice), fire department changes, removal of property, credit card / identity theft charges, loss assessment, collapse, landlord's furnishing, and some building additions. These vary depending upon the form.

Exclusions: In an open perils policy, specific exclusions will be stated in this section. These generally include earth movement, water damage, power failure, neglect, war, nuclear hazard, intentional loss, and concurrent causation (for HO-3).

In the United Kingdom

As in the US, mortgage lenders within the UK require the rebuild value (the actual cost of rebuilding a property to its current state should it be damaged or destroyed) of a property to be covered as a condition of the loan. However, it should be noted that the rebuild cost is often lower than the market value of the property, as the market value often reflects the property as a going-concern, as opposed to just the value of the bricks and mortar.

A number of factors, such as an increase in fraud and increasingly unpredictable weather, have seen home insurance premiums continue to rise in the UK. For this reason, there has been a shift in how home insurance is bought in the UK - as customers become a lot more price sensitive, there has been a large increase in the amount of policies sold through price comparison sites.
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