What is Homeowner's Insurance? Why is Homeowner's Insurance Required?
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Homeowner’s insurance pays for losses and damage to your property if something unexpected happens, like a fire or burglary. When you have a mortgage, your lender wants to make sure your property is protected by insurance. That’s why lenders generally require proof that you have homeowner’s insurance.
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Standard homeowner’s insurance doesn’t cover damage from earthquakes or floods, but it may be possible to add this coverage. Homeowner's insurance is also sometimes referred to as "hazard insurance".
Many homeowners pay for their homeowner’s insurance through an escrow account as part of their monthly mortgage payment. You make the payments to the lender, and the lender holds the part of the payment that is for insurance in an escrow account. Then, when the bill for the insurance is due, the lender pays it from the escrow account.
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If you don’t have insurance, your lender is allowed to buy it for you and charge you for it—but your lender must give you advance notice. If your lender buys insurance on your home because you did not keep up your homeowner’s insurance, that insurance may only cover the lender, and not you. It also may be more expensive than what you could buy on your own.
Homeowner’s insurance protects your property. Homeowner’s insurance is not the same as mortgage insurance. Homeowners insurance is perhaps the most essential form of financial and personal property coverage on the market. There’s a good reason for this, as most of your assets and wealth are tied up in your home — both the property itself and personal belongings in the household. Homeowners insurance is also required for most homeowners with a mortgage, and lenders will often specify a minimum insurance policy or named hazards that must be met with the policy.
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So what exactly does homeowners insurance cover, and what doesn’t it cover? The most common perils associated with homeowners insurance coverage are fire, weather, and theft, but not all weather damage is covered, and while theft is covered by typical insurance policies, there are limits on how much they’ll pay out to cover certain types of personal property.
Damage to your home is insured against everything except what’s explicitly excluded in the policy (open perils coverage) and damage to your belongings is insured against everything listed in your policy (named perils).
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Home insurance covers not only your house but other structures on your property, liability exposure, and additional living expenses if you need to leave your home.
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Some disasters, like floods and earthquakes, require additional separate policies.
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Homeowners Insurance Myths
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Before looking into what homeowners insurance covers and what it doesn’t cover, it’s worth dispelling some broad assertions and myths associated with the industry.
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All of my personal belongings are covered by homeowners insurance: In a perfect world, yes, but this unfortunately isn’t the world in which we live. Luckily, standard homeowners insurance policies still cover a lot of your personal property, but will only cover it up to a specified limit, and sublimits won’t cover certain luxury items such as jewelry or certain collectors items. For these items, you may need to add coverage to your policy.
Homeowners insurance only covers my house, nothing else: Thankfully, this is not the case. While, yes, homeowners insurance does provide coverage to your house under the dwelling coverage provision, it covers far more than just that, and there are other key components to homeowners insurance that are worth understanding.
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Other Structures
Did a storm roll through and flatten that gardening shed you built with your bare hands? It depends on the policy, but typically driveways, fences, and other structures would be covered.
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Liability Coverage
Your friend’s friend who thought it’d be a good idea to do a quadruple backflip off your diving board, resulting in a serious medical and legal expenses for you, the homeowner? Again, it depends on the policy, but pool liability is typically covered up to a certain amount.
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Loss-of-Use Coverage
That large tree in your backyard suddenly falls through your roof and makes your house uninhabitable? Covered, and the insurance policy will also cover additional expenses as a result of this misfortune, such as hotel expenses and increased food costs from eating out.
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What Does Homeowners Insurance Cover?
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There are two basic types of homeowners insurance that indicate whether your personal property and belongings are covered or not, or whether you’re entitled to liability or loss-of-use coverage or not. These policy-types are called named peril policies(covers only types of disasters that are named in the policy) and open peril policies(covers everything except perils not explicitly named in the policy).
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Covered perils: You’ll be insured against these perils on just about every homeowners insurance policy.
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Fire
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Smoke
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Windstorms
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Lightning strikes
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Hail
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Explosions
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Vandalism
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Theft
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Vehicle collision
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Broader named-peril insurance policies may also add coverage for:
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Accidental water damage
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Weight of snow or ice
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Freezing of plumbing
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Falling objects
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What Does Homeowners Insurance Not Cover?
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The most common exclusions that no homeowners insurance company will cover unless under the most generous of circumstances are:
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Earthquakes
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Floods
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Power failures
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Neglect
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Ordinance of law
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Mischievous acts
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Bed bugs
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Termites
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Mold
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Sinkholes
Homeowners Insurance Coverage Variations
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There are certain kinds of personal property and hazards whose coverage status varies depending on the type of policy or insurer you have, what state you live in, and generally require more nuance when discussing when they’re covered and when they’re excluded from a policy. It's important to really read the fine print or talk to your insurance agent directly about these gray areas.
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To give you a better idea of what we’re talking about, we put together a list of property-types and hazardous instances that are sometimes covered, sometimes not covered, and sometimes covered but only if certain conditions are met.
Aluminum Wiring
Most homeowners insurance companies won’t cover damage or losses if aluminum wiring is either the direct or indirect cause of a fire or fire-related hazard, but there are special exceptions, like if certain safety modifications are made to the wiring by a licensed electrician. If there is still a wiring hazard after the insurer-requested modifications are made, the losses and damage are covered.
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Otherwise, the insurance company will either list aluminum wiring as an exclusion, or they’ll flat out refuse to insure a home with aluminum wiring altogether.
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Pool
Property damage to a pool is typically covered if it’s damaged by one of the covered perils in a named or open peril policy; an in-ground pool is covered by personal property coverage, while an above-grounder is typically covered by other structures coverage.
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Liability coverage is where owning a pool gets a little tricky. Most homeowners insurance plans have a base liability coverage amount of $100,000. If you have a pool, the Insurance Information Institute suggests adding a personal umbrella policy to increase your liability coverage above the limits of your homeowners insurance policy.
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Pets
Dog bites are typically covered under standard homeowners insurance policies, but its common for insurers to exclude certain breeds or turn you down entirely because of your dog’s breed.
Trampolines
Varies by the state and type of policy. Trampolines are generally covered by personal property coverage and liability coverage unless they’re specifically excluded.
Insurance companies may also require safety precautions like protective netting around the trampoline exterior as a condition for coverage.
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Air Conditioning Units
Covered under the same risk-events as the rest of your home, unless specifically excluded in an open peril policy. Damage done to your A/C as a result of use or wear and tear isn’t covered by homeowners insurance.
Fences
Fences are usually covered by the other structures provision of a homeowners insurance policy as long as the perils that caused its damage are part of your policy’s accepted risk events, such as fallen trees or storms.
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Common exclusions to fence damage coverage are damage as a result of neglect or lack of maintenance, fence mold, or fence termites. The policy may also have a cap on other structure repairs, commonly $20,000, so if your fence damage is above that limit, you may have to pay out-of-pocket expenses.
Foundation Repair
Damage to your housing foundation is covered by homeowners insurance unless specifically excluded in a policy. Similar to A/C units and fencing, foundation repairs are covered by accepted risk-events in a standard policy.
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Plumbing
Plumbing issues are covered by standard homeowners insurance policies, but typically only if the damage was sudden or abrupt. If there was a leak that accumulated over a number of years and eventually the pipe burst and ruined all your stuff, the plumbing might not be covered and unfortunately, the same goes for your personal belongings. Make sure to check with your insurance agent about the types of plumbing-related hazards that are covered.
Roof Damage
In most cases, roof damage is considered structural damage and covered by dwelling coverage. If your tool shed or detached garage incurs roof damage, it would be covered under other structure coverage. Homeowners insurance may also cover roof leaks if they’re caused by a covered peril. If the roof is old and you never took steps to repair it and it fell through, that counts as neglect and won’t be covered.
Keep in mind that roof damage can be expensive, so depending on the size of your house, you’ll want to carefully select a deductible and coverage limit that covers potentially pricey repairs.
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Tree Removal
Tree removal is covered by most policies if the following conditions are met:
If the tree originated in your neighbor’s yard and fell on your house or lawn, your insurance company will cover it, but they may try and recoup the losses through your neighbor’s homeowners insurance company. Your policy may also include a limit on how much your insurance company is willing to pay in tree-removal expenses, usually about 5% of your dwelling coverage. If your dwelling coverage is $200,000, that leaves you about $10,000 in coverage for tree removal. Furthermore, there’s a limit on how much your insurer will pay to have individual trees removed — $500 in most cases, and ostensibly enough cash to remove a single tree.
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