How Does Homeowners Insurance Work?

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  • How Does Homeowners Insurance Work?

If you own a house and live in it, you need to purchase a homeowners insurance policy. No ifs, ands or buts about it. If you own it but don’t live in it, you’re probably looking for a landlord insurance policy. But listen carefully because the fundamentals of how each work remain eerily similar. Let’s take a look.

How Does Homeowners Insurance Work?

Homeowners insurance works to protect you financially if your home, belongings or property sustain damage due to a covered peril, like a fire, hurricane or theft. In exchange for your monthly premiums, your insurer provides you with maximum coverage amounts under six areas. Those determine the maximum amount you can be paid out if a covered peril is determined to be the culprit of the claim.

If you do sustain damage, you must first file a homeowners insurance claim. After that, your insurer will send an insurance claims adjuster to your home to survey the damage. The adjuster is trained to spot and assess all types of damage, and they’re given the authority to determine how much the insurer will pay or reimburse you for the claim.

Depending on the type of house you live in, you may have the option to select one of six different types of homeowners insurance policies. The policy you select will determine what’s covered and set the table for your maximum coverage amounts.

What to Look For in Homeowners Insurance

The core facets of your policy include coverage for your house’s structure, unattached structures located on the property, your personal belongings, additional living expenses when necessary, some injuries that occur on your property and some damage you may accidentally cause to others property.

Let’s dive deeper into how those coverages work and what to look for in a homeowners insurance policy.

Dwelling Coverage

Dwelling coverage pays to repair or rebuild the physical structure of your home if it’s damaged or destroyed by a covered peril. It covers parts of your home like the roof, walls, windows, floors, garage and other things that are attached to it.

This coverage also extends to vital parts of built-in facets of your home, like the HVAC, electrical and plumbing systems. But it only covers vital pieces that are built into your house, so things like antennas or satellite dishes aren’t covered.

Let’s look at an example. Let’s say a heavy windstorm blew over a tree onto your house, damaging the roof and siding. Your policy’s dwelling coverage would be responsible for paying to repair that immediate damage.

If that part of your roof was over your kitchen, dwelling coverage could also pay to repair the ceiling, floor, cabinets and any other built-in portion of your home that was damaged. In your policy, you’ll have either replacement cost or market value coverage.

Replacement Cost vs. Market Value

Within your dwelling coverage, you either have replacement cost coverage (RC) or market value coverage (MV) as a reimbursement method after filing a claim. RC simply repairs your home to a similar level before the damage. AV incorporates inflation or depreciation into the valuation.

So a homeowner whose kitchen was damaged and has RC would likely get their entire kitchen replaced. But a homeowner with MV may get reimbursed a percentage of any kitchen upgrades because the materials or items may be outdated and heavily used.

  • Coverage Needed: As much as your house’s value (a $400,000 house needs at least $400,000 in coverage)

Other Structures Coverage

Other structures coverage pays to repair or rebuild structures on your property that aren’t attached to your house if they’re damaged or destroyed by a covered peril. These are things like fences, sheds, detached garages and carports. It can also protect things like an RV or a boat stored in one of these.

This coverage maximum is typically assigned at 10% of your policy’s dwelling coverage. So that same homeowner with $400,000 worth of coverage would also have $40,000 in other structures coverage. While you may be able to increase or decrease this amount, it won’t have much of an impact on your premiums.

  • Coverage Needed: 10% of your policy’s dwelling coverage (or more if you have highly valued other structures)

Personal Property Coverage

Personal Property coverage pays to repair or replace any personal belongings you keep inside your home or on your property if they’re damaged or destroyed by a covered peril. These are items like furniture, clothes, electronics, sports equipment and tools.

You get to choose how much personal property coverage you need. The easiest way to identify those needs is to create an inventory of the things you own with their values. But not everything is covered to its full value off the bat.

High-value items like jewelry, collectibles and china have a limit, requiring you to purchase more coverage via an endorsement or schedule each piece of property. You’ll also need to decide whether to opt for replacement cost or actual value coverage.

Replacement Cost vs. Actual Cash Value

If your belongings are damaged or destroyed by a covered peril, you’ll be reimbursed for their replacement cost or actual cash value. Replacement cost (RC) simply reimburses what you paid for the item — no matter how old or how much use you got out of it. Actual cash value (ACV) takes depreciation into account.

So a $3,000 couch purchased five years ago that was destroyed by that same tree incident from earlier would get two different payouts. Under RC coverage, you’d get reimbursed the full $3,000. Under ACV, your insurer may determine the lifespan of couches is 10 years, thus reimbursing you $1,500 because it has depreciated by half.

  • Coverage Needed: The combined value of all your belongings (a homeowner with $30,000 worth of possessions should have at least $30,000 in coverage)

Loss of Use Coverage

Loss of use coverage reimburses you for additional living expenses if a covered peril damages or destroys your home so badly that you must temporarily move out while it’s being repaired or rebuilt. This includes things like a hotel or rental home of equivalent value, moving expenses, temporary storage fees and pet boarding.

Your coverage maximum per claim is typically set at 20% of your policy’s dwelling coverage. So the homeowner from before with $400,000 worth of dwelling coverage would have $80,000 worth of loss of use coverage.

Loss of use usually also has a time limit attached to it. Minor updates may mean your coverage expires after six months and major updates may still provide coverage for a year — even if you haven’t reached your policy’s maximum. It’s based on the average time it should take to repair or rebuild your home.

  • Coverage Needed: Policies come standard with coverage equivalent to 20% of your dwelling maximum

Liability Coverage

Liability coverage pays for medical bills and legal fees if someone is injured on your property and you’re found liable or if your dog bites someone. It can also pay for the repairs to someone else’s property if you accidentally damage it. However, it will never pay for medical bills or legal fees associated with anyone who lives on the property and may not cover those related to you.

Homeowners insurance policies typically come standard with $100,000 worth of coverage per incident. But that may not be enough for many homeowners. Those with pools, trampolines or other attractive nuisances on their property are encouraged to increase their coverage to at least $500,000.

  • Coverage Needed: Policies come standard with $100,000 worth of coverage, but some homeowners may need more

Medical Payments Coverage

Medical payments coverage pays for minor medical bills to those injured on your property, whether the injury was your fault or not. These are things like X-rays, ambulance rides, physical therapy visits and medication.

This coverage is usually only up to $5,000 per claim and can be used in conjunction with the injured party’s health insurance. Similar to liability coverage, those living in your home, on the policy or related to you are usually excluded from receiving coverage.

  • Coverage Needed: Policies come standard with up to $5,000 worth of coverage per claim

How to Get Homeowners Insurance

Getting a homeowners insurance policy is quick and easy with Clovered. Simply use our online quoting tool, fill in a few details about your home, and we’ll provide you with a policy that fits your needs and budget.

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We partner with the nation's top homeowners insurance companies so you can get a custom policy at an affordable price.

The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.

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