Angie Watts is a licensed real estate agent with Florida Executive Realty in the increasingly popular Tampa Bay area. Specializing in residential properties since 2015, Angie is a real estate blogger who published an ebook educating homeowners on how to make the most money when they sell their homes. Her goal is to educate and empower both home buyers and sellers so they can be stress-free duri...

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Written by Angie Watts
Licensed Real Estate Agent Angie Watts

Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Jun 28, 2022

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Insurance Q&A: “How are homeowner’s insurance rates determined?”

One would likely guess would be that the answer is similar to how car insurance rates are determined.

And you’d be partially correct.  Homeowner’s insurance rates, similar to auto insurance rates, are now subject to our individual insurance scores (for most insurance companies).

But don’t fret; if your credit is less than perfect, there are still many insurers that don’t use your financial responsibility score as part of their rating structure.

Personal information aside, the home itself (like the car) determines most of what you will pay in the way of an insurance premium.

At the end of the day, the insurance company’s aim is to offer the lowest premium possible, to stay competitive in the marketplace, charge enough money to pay all of the claims and operations expenses, and still have profit left over.

The higher the odds you will have a claim, the more you should expect to pay.

These odds are calculated using prior loss data comparable to your characteristics, focusing on claim frequency (how often a claim is subject to occur) and severity (how much the insurance company ultimately pays for the loss).

The insurance industry uses a simple acronym that can be used to describe the basic rating factors for a home (or building).

The acronym is C.O.P.E. and it stands for Construction, Occupancy, Protection, and Exposure.

Take note, these are just the basic factors. If you have purchased a homeowner’s insurance policy, you likely remember answering over a dozen very specific questions that apply to each factor.

Let’s explore each section in a little more detail:

How does construction affect the cost of homeowners insurance?

This describes the materials used to construct your home, including framing, support, and interior finishing.

If your house is wood frame with wood siding, for example, you will likely have a higher premium than a wood-frame home with brick walls. Why?

Brick doesn’t burn as fast as wood. If a fire starts in your home, the 15 minutes the fire department takes to respond could result in much more damage if your home is a tinder box!

The best construction materials are fire-resistive. You can expect deep discounts for homes constructed with fire-resistive materials.

“Construction” also takes into account the heating and cooling systems of a home.

For example, if your home has a fireplace or wood-burning stove (for primary or secondary heating), the odds of fire are increased, and therefore you can expect to pay a little more money to insure the property.

Also, central heating and cooling systems are usually rated lower than individual units.

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How does occupancy affect homeowners insurance rates?

While this piece of the acronym lends itself more readily to commercial buildings (and takes into account aspects not likely included in a residential home), it can also be applied to personal homes in a different manner.

If your home is a primary residence, it will likely be well protected, as, under normal circumstances, there will typically always be somebody there.

However, an identically built “second home” may cost quite a bit more to insure from a property standpoint, as there may not be someone there to look after it.

A second home, not occupied year-round, might be a better target for vandals and thieves, which would result in more claims and a higher premium).

Conversely, the liability portion of the premium for a second home may be lower than a primary residence because the less it is occupied, the lower the odds someone may be injured on the premises and file a claim for damages.

If your home is a rental property, you may have a lower premium because you do not insure the contents of the property (if you do not furnish them to the renter).

However, rental homes are often not “kept up” as well by tenants because there may be no pride of ownership, which can result in an increased chance, due to morale (not moral) hazards, of suffering a loss.

What do homeowners insurance companies consider to be “protection”?

The protection portion of C.O.P.E. deals with public and private protection from fires.

Basically, there are discounts built into homeowner insurance policy programs for various safety features.

What are the insurance carriers looking for in private fire protection?

– Smoke detectors
– Fire extinguishers
– Fire alarms
– Sprinkler systems

When it comes to public fire protection services, there is really only one comprehensive source the insurance companies use.

The Insurance Services Organization, known as ISO, developed a rating system for “protection class” graded from 1-10. A score of “1” is the best and a 10 is the worst (and most expensive).

Many “standard” companies won’t insure homes in PC 9 or higher.

Ultimately, your address is assigned a class code based on its proximity to a fire station and water source.

If your home is out in “the boonies” with no fire station in the vicinity, you can expect your premium to reflect that risk!

You should also make sure to keep up with basic home maintenance.

How does exposure affect the cost of homeowners insurance?

An example of an undesirable exposure for a home may be its proximity to a coastline in an area subject to hurricanes.

Property on the Florida coast and on the entire Gulf of Mexico is substantially more costly to insure than homes further inland.

Insurance companies use a “tier” system to determine a home’s risk for damage from water and wind damage as a result of hurricanes.

The “tiers” are measured in distance from a coastline, with the cost and acceptability ranging vastly from one to the next.

For example, many insurers will simply not insure homes located in the first two “tiers” of the eastern coast of Texas.

Exposure is also more acquainted with commercial buildings with regard to premium costs, but worth a brief discussion.

It is calculated by a building’s proximity to other hazardous buildings or structures.

An example would be a commercial building (or home) located next to a fireworks factory in a city. You would expect your homeowners insurance costs to be higher than if you were next door to a fire station.

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What types of coverage are included in a homeowners insurance policy?

The exact makeup of your homeowners policy will depend on the insurance provider you choose and the specifications you ask for. However, standard home insurance policies include the following:

  • Dwelling coverage
  • Personal property coverage
  • Personal liability coverage
  • Other structures coverage

The most important thing to look at in your homeowners policy is the exclusions. This will tell you what is and is not a covered peril. Many standard homeowners insurance policies do not come with coverage for floods and other natural disasters, meaning you would have to purchase a separate policy if you want flood insurance.

It is critical to know what is and is not covered by your policy long before you actually have to file an insurance claim.

Additional coverage options are available from most insurers, though they vary from company to company. Most offer additional living expenses coverage, for instance, which pays for a hotel room and other necessities if your home is uninhabitable for some reason. Optional coverages will increase your monthly premium, but you’ll get a greater level of protection.

Many homeowners insurance companies offer insurance discounts to policyholders who bundle their homeowners policy with an auto insurance policy, so make sure to ask about this option. Bundling can significantly lower your insurance costs.

What’s the bottom line?

It helps to know how to read a homeowner’s insurance policy to fully understand premium determination.

Basically, there is a premium amount paid for the dwelling, other structures, your contents, liability, medical payments, and loss of use.

Most of the determination of a homeowner’s insurance premium can be calculated using common sense.

For insurance companies, however, there is too much (money) on the line to make generalizations.

[Average cost of homeowner’s insurance.]

If their insurance is too cheap, they will not make money after paying for losses. If too high, nobody will purchase their policy, likely opting for a cheaper policy from a competitor.

Getting quotes from an independent insurance agent (not a captive agent) is the best way to ensure you get the coverage you need at the price you want.

If you’ve been insured with the same homeowners insurance company for more than three years, you are likely paying too much for your insurance. Period. Shop around and save. Get homeowners insurance quotes from multiple companies and compare them.

Read more: How much homeowner’s insurance do I need?