How to Read a Homeowners Insurance Policy
A basic homeowner's insurance policy for a 1-4 unit owner-occupied home consists of two sections, property and liability, which are broken down further into coverage categories. Please contact your insurance company or independent insurance agent to verify your coverage types and limits. It is generally recommended to have the most extensive coverage types and limits you can afford to avoid catastrophic personal losses.
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UPDATED: Sep 23, 2021
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Admit it. You’ve probably never read your homeowners insurance policy. It happens all the time. Homeowners assume their insurance agent has them covered. It’s their job to take care of you and make sure you have the right insurance. Unfortunately, many policies are designed with a template. So every insured gets the same basic policy which doesn’t always make sense. More importantly, it’s not uncommon for homeowners to choose policies based solely on something like price without understanding all the differences. So let’s take a minute or two to break it all down.
The basic “HO” policy for a 1-4 unit owner-occupied home consists of two sections, property and liability, which are broken down further into coverage categories.
There is, of course, much more detail in the “fine print,” but we are taking a 35,000-foot view here because it’s not exactly riveting stuff.
What property coverage is included in a homeowners policy?
This section will help you understand what property is and is not covered. As discussed above, the sections are broken down into easier to understand categories. There are separate categories because different coverage has varying basic limits for losses.
Coverage A- Dwelling – Coverage A- Dwelling – this section covers your home as the residence premises, and any attached structures, which may include your garage or a deck that is attached to the house. Your dwelling coverage is based on the estimated replacement cost for your home in the event of a total loss. It also sets the coverage amounts for coverage B and other policy limits. This is typically much lower with a condo because it does not have to cover external or shared features.
Coverage B – Other Structures – This coverage details the structures NOT attached to your home. This might be your shed or unattached garage. This is also where your pool is listed. As long as the “structure” is clearly separated from the home, it falls under this category. It could even include an accessory unit in the backyard. This part of the property damage coverage can be essential after a major disaster. If you live in a condo, you would not have coverage B as a condo would not have external structures.
Coverage C – Personal Property – This category details the basics of coverage for your “stuff.” This coverage is not limited to your property while it’s in your home.
Your property is covered anywhere in the world. If you have renters, keep in mind, this does not cover their belongings. They would need to have a separate renters policy. Some policies offer coverage C for invited guests. But you should always check on your policy before you make any assumptions. You may find out your homeowners coverage C goes much further than you thought. (Learn more about contents insurance).
Coverage D – Loss of Use – This coverage is a little different than the others. It doesn’t specifically cover a type of property, rather the expenses you incur as a result of damage to your property.
If your house burns down, you’ll need to stay somewhere while it’s being rebuilt. You’ll also be given some money for additional living expenses, such as the cost to eat out every night versus eating at home (the difference between the two, not the whole cost).
If you own a multi-unit home and one of the units you don’t reside in is damaged, you’re also reimbursed for the fair market rental value while not receiving income (less the absence of expenses while the unit isn’t being rented out, such as lawn care and paid utilities).
Additional Coverage – There are a host of possible additional coverage options available (types of homeowners insurance). Once you’ve made yourself comfortable with the basics listed above, you may want to take a look at what additional coverage you have, and what you think you may need.
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What liability coverage is included in a homeowners policy?.
This section of your HO policy covers damages to people versus property.
A good way to differentiate between the sections is to think of property insurance as insurance for the property of the person listed on the policy, while liability coverage is reserved for those not listed on the policy.
Liability coverage can also be referred to as your “slip and fall” coverage.
Coverage E – Personal Liability – This section explains circumstances in which your insurance company will defend you in court against claims and pay the claims of other people if you’re found to be liable (at fault) for their injury. Homeowners insurance companies may offer amounts ranging from $100,000 to $500,000 or $1,000,000 with some policies.
It’s important to note that anyone considered an insured for liability coverage on the policy is not entitled to money from this coverage. If you own a home with a pool, trampoline, etc., you might want to increase your personal liability coverage. Make sure these types of additions are not excluded by your policy. Similarly, if you have dogs, you should always make sure to have a policy that covers your dog liability in the event of a bite.
Coverage F – Medical Payments (to others) – This section describes the expenses covered for reasonable medical care to people who are not insured under the policy. Generally, it goes hand in hand with your personal liability. If your personal liability is $500,000, your coverage F would be $5,000. If your personal liability was $300,000, your medical payments to others would be $3000 with many home insurers.
Examples include, but are not limited to, ambulance, hospital, and surgical expenses.
The difference between Coverage E and Coverage F is that Coverage F can make payments to individuals when the insured is not necessarily “at fault” for the accident.
If your neighbor’s son breaks his leg while running down the stairs in your home, Coverage F would provide, up to the coverage limit, reimbursement for the medical expenses.
If your neighbor ended up suing you for $100,000, claiming your wood stairs were too slippery, we’d be dealing with Coverage E because the neighbor is claiming the accident was your fault.
Please note that there is a difference between Med Pay for an auto insurance policy and a homeowners policy.
In the auto policy, medical payments cover anyone in the car who is injured, including people insured on the policy or first party.
Conversely, medical payments on a homeowners policy only go towards people not insured on the policy, often referred to as third-party coverage.
As discussed previously in this article, not all homeowners policies are the same.
Remember that every policy is different and this information should only serve as a guide.
Please contact your insurance company or independent insurance agent to verify your coverage types and limits.
It is generally recommended to have the most extensive coverage types and limits you can afford to avoid catastrophic personal losses.