Understanding Your Home Insurance: The BIG 3

We have previously given our top tips to consider when selecting home insurance; but what does your home policy actually protect? Whether you are purchasing home insurance for the first time or renewing for your 20th year, understanding the basics of your insurance policy is important so you can better evaluate your options.

A habit many insurance agents fall into is using insurance jargon. So before we dive into the three main components of a home insurance policy, let’s define three important insurance vocabulary terms: limits of coverage, deductibles, and premium. A limit of coverage, or a maximum amount the insurance company will pay on a claim, is set for each component of your home policy. A deductible is the amount of money you, as the insured, agree to pay out of pocket before the insurance pays (up to the limit of coverage). Premium is the annual amount you as the insured pay for the coverage.

There are three primary components to your home insurance policy: structure, personal property, and liability:

  1. Structure

Often known as “dwelling coverage,” the structure component of the home policy refers to the house itself. It provides coverage for the house in the event of damage or complete loss.

The limit of coverage for the structure component of your policy should equal replacement cost, which is the amount needed to completely rebuild or repair the structure in the event of a total or partial loss. The alternative to replacement cost is actual cash value (ACV). ACV is not beneficial because it insures your home at replacement cost minus depreciation. Often, this will result in a larger out of pocket expense for the homeowner.

The manner in which you suffer damage or loss is important when determining if the insurance company will pay. Some examples would be hurricane, fire, windstorms, or water damage. These are referred to as perils. Your policy type dictates the perils covered. A Home Owners Form 3 (HO-3) covers ALL perils unless otherwise excluded while Forms 1 and 2 only cover a limited amount of perils.

  1. Personal property

Personal property refers to your personal belongings within the home. The limit of coverage can often be adjusted to the amount you believe will completely recover your contents if they were to be lost, destroyed, or damaged. There are limitations for jewelry, fine art, and silverware, which can be individually listed on your policy in order to obtain an agreed replacement cost value and no deductible for those items at the time of loss.

  1. Liability

The liability portion of your home policy covers your personal fault, specifically in causing bodily injury or property damage to others. This coverage protects you from occurrences both on and off your property. Liability insurance pays for court costs, attorney fees, and settlement costs.

You could be liable for bodily injury if you or your negligence caused someone to get hurt. Another form of liability is property damage. This component of your policy provides coverage in the event that you or your negligence causes damage to another person’s property.

Additional limits:

There are three additional outlined coverages on your home policy. These components carry separate limits of coverage. The limits are automatically determined as a percentage of the dwelling coverage.

Other Structure

Pools, sheds, fences, and driveways are a few examples of other structures on your property. Damage to these structures are covered under this separate limit.

Loss of Use

In the event that your home is uninhabitable while it is being repaired or rebuilt, the additional living expenses you incur such as hotel costs and moving expenses would be covered under this limit.

Medical payment

Medical payment coverage is enacted if bodily injury occurs on your premises to help reimburse for the medical expenses of your guests, regardless of fault.

It’s important to understand the basics of your insurance so you can better evaluate your options. Insurance can be a difficult topic to understand. Knowing the basics can give you confidence in purchasing what’s right for you and help you choose an insurance advisor that is working for your best interests.

If you would like to speak with an advisor for your home insurance, give us a call at (866) 845-4676, or email us at stewartinsurance@stewart.com.

Leave a Reply