Homeowners Insurance: Will You Be Treated Fairly If You Have to Use It? (Part 2)

In my last blog, I explained that a homeowners insurance policy is a contract between you and the insurance company that covers a private residence.   It is a special type of contract under which you are expecting to be protected by the insurance company for certain damages to your property in exchange for paying the premiums. I discussed a few things that you should consider when you choose the company to provide that coverage. In this blog, I will explain the different types of homeowners policies that you can purchase.

Once you have decided on the insurance company, you will likely want to purchase your auto policy through them as well. This “bundling” of policies with one carrier should save you money on your premiums, possibly as much as 30%. Both homeowners and auto coverage are considered “term” contracts. This means that they are in effect for a fixed period of time. You must pay the insurer the premium each term to keep the policy in effect.

Most homeowners insurance carriers charge a lower premium if it appears that the home is less likely than average to be damaged or destroyed: for example, if your home is protected by a home security and fire alarm system, the premium will likely be less, as is the case if the house is situated next to a fire station. On the other hand, if you request additional coverage not generally included in a homeowners policy, such as flood insurance, or if you insure specific pieces of jewelry, your premium will be adjusted a bit higher.

The homeowners policy itself combines various personal insurance protections, which can include:

  • damages to your home itself,
  • damages to the contents of your home,
  • loss of use (commonly called additional living expenses for times when you cannot live in the home because of the damages to it),
  • additional coverage for debris removal, reasonable repairs, etc.
  • loss of other personal possessions,
  • liability insurance for accidents to other people that happen on your property or as a result of some act by you or a family member residing in your home.

Insurance companies protect you from certain “perils”. Before looking at what a policy does and does not cover, it’s important to understand insured perils. A peril is an event or disaster that causes damage to a home or property. Common perils are fire, tornado, and theft.

Next, you need to be aware that there are two types of basic homeowners policies. They differ in regard to the types of perils they cover.

The “basic policy form” (also referred to as a “named perils policy”) only provides coverage for perils that are specifically listed in the policy. If the source of the damage is not specifically listed, it is not covered. The perils typically listed 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, falling objects, damages to certain electrical appliances, failure of heating or plumbing systems, and personal liability. Damages resulting from kitchen and laundry appliances are generally not covered. Under a basic policy form, water infiltration or a slow water leak affecting the wooden structural members of a home would not be covered. Damage resulting from a ruptured washer hose would not qualify for coverage. Nor would there be coverage for floods or earthquakes. This is generally referred to as an HO2 policy.

The other type of policy is just the opposite from the named perils policy — it covers everything not specifically excluded. This is called an HO3 or an “open perils” policy. The perils that are specifically excluded from an open perils policy will be listed in the Exclusions section of the policy. Any event can be excluded, but the most common include events such as wars, nuclear hazards, intentional damage or destruction and earth movements. In recent years, many insurance companies have excluded coverage for mold damage, due to the number of mold claims they experienced a few years back. However, most policies now include a “mold endorsement” to the policy, which gives a limited amount of coverage for mold cleanup.

The HO3 (open perils) policy is the most typical form used for single family homes. Therefore, rather than naming exactly what will be covered and excluding the rest, this type of policy includes coverage for everything except for those items specifically excluded.   A HO3 policy covers much more than an HO2. Under a HO3 policy, also, water infiltration or backup from rain and snow that affected wooden structural elements of a home would be covered. A claim for floor repairs due to a leaking dishwasher would qualify for coverage.

Another important factor distinguishing HO3 from HO2 is that if you and the insurance carrier are not in agreement over whether the claim is covered, under the HO2 policy, you have the burden of proving that coverage exists, while under the HO3 policy, it is the insurance company’s burden to prove that it does not because of the exclusions. Not surprisingly, the premium is higher for an HO3 policy, but there is no contest that it provides the better insurance coverage.

We have now explored what you should look for in selecting an insurance company to carry your homeowners insurance, and what kind of policy you should get. In my next article, I will explore common problems that arise when a major peril occurs and you have a significant claim for that insurance.

About Barbara Horwitz

Barbara Horwitz is an experienced bankruptcy attorney helping people get past financial difficulties. She believes in creating a relationship with clients and is dedicated to making the bankruptcy process as easy and stress-free for clients.

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