A Beginner’s Guide to Understanding Homeowners Insurance

While buying your first home is exciting, buying your first homeowners insurance policy isn’t nearly as much fun. New homeowners have all kinds of questions about what homeowners insurance covers and what it doesn’t, and understandably so. When shopping around for a policy to protect the biggest financial investment of your life, you want to feel confident that you’ll walk away with enough coverage.

Fortunately, with just a bit of a debriefing on homeowners insurance, those shopping for their first policy can feel empowered and knowledgeable even before meeting with an insurance agent. Here’s a quick breakdown of the finer nuances of homeowners insurance coverage, including how much you need to protect your home and belongings.

What Homeowners Insurance Covers

When buying an insurance policy, it’s important to know what it’s going to do for you as far as offering protection for your home and belongings. Since a home is made up of much more than just four walls and a roof, homeowners insurance includes coverage for all related aspects — not just the building itself. Coverage also aims to protect a home’s contents, including the family and their guests, against potential disasters within or surrounding the house.

Standard homeowners insurance policies have four main coverage categories:

• Damage to the home’s structure: The first category of property damage concerns the actual dwelling or the structure of the house itself. Your homeowners policy protects the home’s structure from damage or destruction due to covered perils, which we’ll explore further in the next section. Detached structures, such as sheds, are often covered as well.
• Damage to your personal property: This second aspect of property damage covers your personal belongings (e.g., furniture, electronics, clothing, artwork, decorations, etc.) stored within the home or in places such as storage units, to an extent. Damage, destruction, or loss of your personal property due to a covered peril is all protected under your insurance policy.
• Liability: Homeowners policies include liability coverage for both bodily injury and property damage to a third party. Coverage extends to all members of your family living in the home, including pets. Liability coverage protects you against legal claims by reimbursing you for attorney and court fees, including any settlements you’re ordered to pay if the case rules against you. Your homeowners policy even protects against incidents in which you are sued away from home.
• Additional living expenses: If your home gets badly damaged or destroyed and you’re forced to live elsewhere while repairs are done, your insurance will reimburse you for the additional expenses such as hotel rooms, eating out, extra gas mileage, etc., within reason.

From structural damage to the accidental injury of a guest, you’re likely to be covered by a homeowners insurance policy. For a claim to be successful, the cause of the issue needs to be due to a covered peril.

Covered Perils Under Homeowners Insurance

While it would be nice if homeowners insurance covered your home and belongings from absolutely all potential hazards, in reality, there isn’t any insurance policy that comes without a set of defined covered perils and a list of specific exclusions. First, we’ll start with the positives.

Commonly covered perils under standard homeowners policies include the following:

• Theft
• Vandalism
• Explosion
• Fire and smoke
• Water damage
• Aircraft or vehicle damage
• Riots
• Falling objects (and trees)
• Roof collapse (due to weight of ice/snow)
• Certain natural disasters (i.e., windstorms, hail, lightning, and blizzards)

Notice that only some, not all, natural disasters are covered by homeowners insurance. That being said, it’s time for the flipside of the coin.

What Homeowners Insurance Doesn’t Cover

Perhaps even more important than knowing what your homeowners policy covers is understanding what it doesn’t. This can save you the hassle of filing a claim that’s bound to get denied or counting on a reimbursement that’s not going to happen.

Standard homeowners policies typically do NOT cover the following perils:

• Certain natural disasters (i.e., floods, earthquakes, and mudslides)
• Maintenance-related losses
• Wear and tear damage (i.e., failure of the homeowner to maintain upkeep of the home)
• Insect damage or infestations
• Damage from war or nuclear fallout
• Business-related liability

If you run a business out of your home, homeowners insurance typically won’t cover liability for related mishaps. Homeowners policies also tend to limit liability coverage for certain types of vehicles, including aircraft, ATVs and boats and have very specific exceptions for certain powered vehicles, such as ride-on lawnmowers. You’ll need to check the policy to be sure of coverage for special vehicles.

Knowing How Much Coverage You Need to Purchase for Your Home

Once you understand what homeowners insurance does and doesn’t cover, you’ll need to figure out how much coverage you need. When insuring the home itself, consider how much it would cost to rebuild if a disaster caused destruction. Several things influence rebuilding costs for a home, including location, the type and age of construction, surface area, amenities, built-in plumbing and heating systems, and various features. Additionally, any measures taken to make a home nicer may increase its value and make it more expensive to rebuild.

Depending on the specific home’s value, rebuilding costs may run somewhere between $80-$150 per square foot. Plenty of online tools are available to help calculate the estimated cost to rebuild your home. Insurance agents are also equipped with professional tools for accurate estimates to help get you set up with the right amount of coverage for your home. It’s better to err on the side of purchasing too much coverage for your home’s structure, should you ever need to rebuild following a disaster.

Knowing How Much Coverage You Need to Purchase for Your Belongings

When it comes to insuring your personal belongings, homeowners policies typically limit replacement coverage for your personal property to 60% of your home’s total insured value. For example, if you purchase $200,000 worth of insurance on your home, $120,000 of coverage would apply to your belongings. Of course, you can always add more coverage. Should disaster strike, it’s a good idea to have a record of your belongings in photo or video format to help receive the reimbursement you’re entitled to.

If you have expensive or valuable items like furnishings, artwork, jewelry, or electronics, you might want to purchase extra coverage for your property. Special endorsements or riders are available for specific types of property that may be on the pricier side, such as jewelry and electronics. Purchasing endorsements or riders can help ensure your items are covered for their replacement costs and won’t exceed your policy’s coverage limit if they are lost, damaged, or destroyed.

Now that you have a deeper understanding of homeowners insurance coverage and how much is needed, you can begin your hunt for the right policy with a sense of empowerment and confidence. Don’t hesitate to ask your independent insurance agent for further clarification on any gray areas. Good luck.

Paul Martin, CPCU, is an insurance professional for Trusted Choice with over 30 years’ experience in the field. Throughout his career, his mission has been to advance the insurance industry through education to be better equipped to serve the public.