Personal Insurance Blog

A homeowner's policy is considered a “package” type of policy where the premium is derived from the coverage for the dwelling and other coverages are provided based on this limit at no additional premium. The dwelling limit is based on details of the home (year of construction, type of construction, finished or unfinished basement details, number of bathrooms, quality of  construction, wall and floor finishes, heating type, etc) which are plugged into carrier estimating software which then provides an estimated cost to rebuild for the home. This amount is what is used as the dwelling limit on the policy. The other coverages are usually provided at a percentage of the dwelling limit and no premiums are attached. Other structures (such as fencing, garage, shed, pool, patio, gazebo, etc) is usually at 10% of the dwelling coverage, contents (personal belongings as well as above ground pools) is usually at 50% or 70% of the dwelling limit, and loss of use (when insureds are displaced following a covered loss) is usually at 20% of the dwelling limit.

An issue that can arise is if the dwelling limit has not been increased for renovations or has not kept up with inflation and there is a covered loss and the carrier has determined that the limit is not at least at 80% of the replacement cost estimate. If this occurs, a co-insurance penalty is incurred. If the replacement value is $1,000,000 but coverage is at $750,000 (this is only 75% of the replacement cost) then the carrier would only pay 75% of the total loss. 

Liability and medical payments are the other coverages provided by the policy and do include premiums for injuries incurred.

A homeowner policy can be written as an HO-3 which is the standard policy offering “open perils” coverage for the dwelling and limited “named perils” coverage for contents or as an HO-5 which is “open perils” for both thus broadening coverage for an insured’s belongings.

There are several endorsements to the homeowner policy which most people opt to include in their coverage. Some of the more common are replacement cost coverage for the dwelling.  Carriers provide either “guaranteed” replacement cost coverage on the home or coverage at 125% or 150% of the dwelling limit. To be eligible for this endorsement, it is required to maintain the coverage at the estimated cost to rebuild based on the company’s software determination. Replacement cost coverage on the contents allows for the full replacement without taking depreciation following a covered loss. Homeowners can add Identity Theft coverage, Water Back-Up/Sump Pump Failure coverage, Ordinance or Law Coverage which allows for the additional costs to rebuild/repair according to new town codes which may have been put in place since the original construction of the home and schedules for valuable articles, which requires current appraisals. There are other additional endorsements available which are applicable to particular scenarios that are present in the lives of our customers.

Hopefully this brief synopsis of a homeowner policy provides an overview so that you can review your coverages with a little more insight. Learn more about home insurance here.