Homeowners Insurance

Last Updated 10/02/17

Issue: Homes are frequently a consumer's largest asset. Homeowners insurance is important because it protects consumers' homes and personal property. In the event of a total loss, insurance can provide the primary source of rebuilding funds. It also provides liability coverage for legal actions from injuries or damage from another person on their property. Additionally, most mortgage lenders require homeowners coverage, with the homeowner listed as the mortgagee.

Overview:

Coverage Types
All homeowners insurance policies cover the structure of the home, including attached structures, fixtures and built-in appliances. Most also cover the contents in the home and personal liability from injuries or damage that occur from covered accidents. Policyholders often add additional coverages specific to their needs. The most common of these are unattached structures, personal property, medical payments, additional living expenses, sewer backup and umbrella liability. Separate polices for flood or earthquake coverage also may be purchased by those in areas prone to these perils. More on flood insurance and earthquake insurance can be found on their specific Center for Insurance Policy and Research (CIPR) topic pages.

A brief summary of common coverage types for homeowners policies follows: 

  • Dwelling: Pays for damage to the house and attached structures.
  • Other Structures: Pays for damage to structures not attached to the house (fences, sheds).
  • Personal Property: Pays the value of damaged or lost possessions (furniture, electronics, clothing).
  • Loss of Use: Pays some additional living expenses during home repair.
  • Personal Liability: Covers financial losses from property damage and personal injuries to others, if found legally responsible.
  • Medical Payments: Pays medical bills for people hurt on the homeowner's property or by the homeowner's pets.
  • Flood Insurance: Separate policy that pays for flood-related damages to the house and contents.
  • Earthquake Insurance: An add-on or separate policy that pays for damages to the house and other covered items caused by an earthquake.
  • Water Backup of Sewer: Pays for losses to the house from sewer or drain backup.
  • Personal Umbrella Liability: Pays for losses from bodily injury, property damage and personal injury to others beyond the policy limits.

How Coverage is Applied
Homeowners policies pay for damages caused by perils listed in the terms of the contract, up to the policy limit. A peril is a cause of loss, such as fire or theft. Coverage can be for all perils, except those explicitly excluded, or for just those perils specifically named in the policy. Homeowners policies typically include coverage for fire, lightning and extended coverage. Extended coverage includes coverage for perils such as windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, smoke, vandalism, malicious mischief, theft and breakage of glass.

The limits of coverage on a policy represent the amount of insurance purchased. Dwelling coverage should be enough to cover the cost to fully rebuild the insured home. Coverage limits for personal liability and medical payments are chosen by the policyholder. The limits of coverage for the other coverages are typically calculated as percentages of the dwelling limit. You can insure based on replacement cost (cost to rebuild) or actual cash value (market value).

Before an insurer will pay a claim, the policyholder must pay the deductible. A deductible is the portion of financial loss on the home and/or personal property for which the policyholder is responsible. Insurers share in the losses beyond the dollar threshold set by the deductible. Thus, the lower the deductible amount, the higher the policy premium. 

Status: Homeowners face increasing exposure to damage from severe weather. The NAIC sponsored a survey in 2017 to understand how homeowners account for changing weather patterns when making decisions on home insurance. The survey was undertaken as part the NAIC Insure U consumer education program, created in 2006. It indicated homeowners need to review their policies and home inventory more frequently. To assist consumers, the NAIC offers a free myHOME Scr.APP.book downloadable inventory app. The app is available at www.insureUonline.org

Insure U also provides other consumer tools and resources related to homeowners insurance on its website. This includes the Best Practices for the Design and Implementation of Web-Based Consumer Premium Comparison Guide for Homeowners Insurance and the Consumer Shopping Tool for Homeowners Insurance. These documents are maintained by theNAIC Transparency and Readability of Consumer Information (C) Working Group. The consumer shopping tools explain how to purchase homeowners insurance. The best practices document provides guidelines for state insurance departments to use when creating consumer online insurance policy resources.

The NAIC produces the Homeowners Insurance Report, which provides data on market distribution and average cost by policy form and amount of insurance. It includes countrywide and state-specific premium and exposure information for non-commercial dwelling fire insurance and for homeowners insurance package policies. The report is maintained by the Casualty Actuarial and Statistical (C) Task Force and is updated annually.

Sources:
NAIC Consumer Shopping Tool for Homeowners Insurance
NAIC Insure U