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Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), is the type of property insurance that covers private homes. It is an insurance 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 insurance for accidents that may happen at the home. It requires that at least one of the named insured 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 and liability 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.^[1]

The cost of homeowners 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 from any source) are excluded. Special insurance can be purchased for these possibilities, including flood insurance. Insurance must be updated to the present and existing value at whatever inflation up or down, and an appraisal paid by the insurance company will be added on to the policy premium. Fire insurance requires a special premium charge, plus the addition of smoke detectors and on-site fire suppression systems in order to qualify.

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, if the house is equipped with fire sprinklers and fire alarms. Perpetual insurance, 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, most home buyers borrow money in the form of a mortgage loan, and the mortgage lender always requires that the buyer purchase homeowners 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. The insurance crisis in Florida^{[citation needed]} has meant that some waterfront property owners in that state have had to make that decision due to the high cost of premiums. See Citizens insurance.

Home insurance in the United States may differ from other countries; for example, in Britain, subsidence and subsequent foundation failure is usually covered under an insurance policy.^[2] Reportedly, United States insurance companies used to offer foundation insurance, which was reduced to coverage for damage due to leaks, and finally eliminated altogether.^[3]

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 was reformed and during this process multiple line statutes were written, allowing homeowners policies to become legal.^[4]

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.^[5]

The need for standardization grew so great that a private company based in Jersey City, New Jersey, Insurance Services Office, 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 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 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 – All Risk 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.

HO4 – Renter's Insurance

The “Tenants” form is for renters. It covers personal property against the same perils as the HO2. [1]

HO5 - Premier Homeowner Policy

Covers the same as HO3 plus more

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.^[6]

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 written for the complex. This policy can also cover liabilities arising from accidents and intentional injuries for guests as well as passers-by up to 150' of the domicile. 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 liability coverage may cover incidents up to 150 feet from the insured property, all valuables within the home from theft, fire or water damage or other forms of loss. The Associations Bylaws determine the total amount of insurance necessary.

In addition, about 2.4% of homes were covered by a dwelling fire policy^[6] 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 is generally extended from their own primary home insurance, and does 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.^[7]

Classes of coverage

For each policy, there are typically six classifications of coverage. These are based on standard Insurance Services Office 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 clause states that as long as the dwelling is insured to 80% of actual value, it will be replaced. 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% of the Coverage A.

Coverage C – Personal Property

Covers personal property, with limits for the theft and loss of particular classes of items (eg, $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.^[8]

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).^[9]

References

Connelly, Joseph (March 3, 2008). "Homeowner's Insurance & the Claims Process - Radio Interview March 3, 2008". WPBR - The Justice Hour with Lisa Macci. http://www.lisamacci.com/thejusticehour/archives.html. Retrieved 2008-06-27. 

- Review of basic and standard property insurance coverages "Home Insurance Coverage Guide". http://homeinsurance.com/home-insurance-101/what-does-my-home-insurance-cover.php - Review of basic and standard property insurance coverages.