What Is It and How Is It Useful?

Homeowner's insurance protects homeowners against losses resulting from damage to their home, its contents and certain other structures, as well as for personal liability. Renter's insurance provides similar protection for apartments and rental houses. Whether you rent or own your home, you want to protect it from loss.

Insurance companies offer standard homeowners' policies that provide a stated minimum amount of coverage for losses resulting from certain causes. These standard policies may be supplemented with additional coverage based on your particular needs.

How Do You Assess Your Needs?

If your house is destroyed, could you replace it? What if you lost all your furnishings and personal property in a fire, could you replace them?

These are just two of the relevant questions you should ask yourself in evaluating your coverage needs. You should carefully review the coverage in your homeowner's policy to determine whether it reimburses you if one of the covered risks occurs.

Policy Provisions to Review

Exclusions.  Several types of damage are commonly excluded for homeowner's coverage. These include wear and tear on your home, mechanical or construction defects and pollution damage.

Named Perils. The standard and the broad homeowner's policy cover a list of named perils or events that cause loss, such as fire, lightning, smoke and theft. An open perils policy provides broader protection against any perils unless the policy specifically excludes coverage.  

Tip: The broader open peril coverage provides greater protection and is included in an HO 00 03 Policy.

Extent of Liability Coverage.  Liability Coverage covers personal liability, medical payments, and property damage for damage or personal injury caused to others.

Tip: Coordinate your benefits under your other liability coverages such as auto or umbrella because many of the same risks are covered under both policies

Policy Limits.  Your policy contains limits of coverage that are generally based on the value of the dwelling. Other coverages are stated either as a percentage of the dwelling coverage or as a flat dollar amount.

Inflation Guard.  Automatically increases the amount of your coverage annually by the rate of inflation. This can help keep the value of your coverage up to date.

What Products Are Available?

Insurance companies offer standard homeowner's insurance policies designated as HO 00 01, HO 00 02, HO 00 03, HO 00 04, HO 00 06 and HO 00 08 which provide a stated minimum amount of coverage for damages involving the following:

• Dwelling (i.e., your home)
• Structures (e.g., garage, patio, shed)
• Contents (i.e., personal property)
• Loss of use (e.g., temporary dislocation)
• Personal liability (e.g., bodily injury or property damage to others)
• Medical payments (e.g., medical expenses of others)

All homeowner's policies contain two sections. The first section deals with property coverage and will vary depending on the type of policy. The second section deals with liability and medical coverage.

The property coverage section deals with the dwelling, other structures, contents and loss of use.

Dwellings and structures under all homeowner's policies are covered on a replacement cost basis. However, you are required to maintain an amount of coverage equal to at least 80% of the replacement cost. If the property is insured for less than the 80% amount, the amount you recover can be reduced significantly.

What does this mean to you?

Have you reviewed the limits of coverage on your policy in the last two to five years to ensure that the policy limits meet your replacement costs?

Standard policies are:

• HO 00 01. The basic form policy for homeowners. This policy has been phased out nationally in recent years and is currently used in only a few states.
• HO 00 02. The broad form policy for homeowners. This policy covers a broad list of named perils or risks, including: fire, lightning, windstorm, hail, riot, aircraft, vehicles, smoke, vandalism, theft, falling objects, weight of ice, snow, or sleet, water overflow, explosion, freezing of plumbing, and volcanic eruption.
• HO 00 03. The special form policy for homeowner's.  This policy provides higher limits of coverage and insures open perils other then named perils.
• HO 00 04. The broad form contents policy for renters or tenants. This policy provides protection to contents for renters against the same broad list of named perils as HO 00 02.
• HO 00 06. The broad form policy for condominium unit owners. It covers the same named perils as the broad homeowners (HO 00 02) policy, but coverage limits may be lower.
• HO 00 08. The modified coverage for homeowners. This policy is intended for older homes or lower-valued dwellings. The scope and amount of coverage is limited.

These standard policies (HO 00 01; HO 00 02; HO 00 03; HO 00 04; HO 00 06 and HO 00 08) differ in the number of risks or perils covered and the amount of coverage. For example, homeowners interested in obtaining the broadest risk coverage would purchase an HO 00 03 policy rather than an HO 00 01 or HO 00 02 policy because an HO 00 03 policy covers the greatest number of perils. Here is a comparison of HO 00 01, HO 00 02, HO 00 03, HO 00 04, HO 00 06, and HO 00 08 homeowners' policies.  

Homeowners can purchase additional coverage to pay certain expenses associated with a loss that are not otherwise covered in a standard policy, such as damage to trees, shrubs, plants and lawns.   Homeowner's insurance may also be expanded or modified with policy "endorsements" which provide greater dwelling and contents coverage. For example, an HO 290 endorsement modifies the contents coverage of the standard homeowners' insurance policies (i.e. HO 00 01, HO 00 02 and HO 00 03) from actual cash value (current market value less depreciation) to replacement cost (cost to repair damage or replace item).

Premium and Policy Considerations

The following factors affect the premium costs of homeowner's insurance:

• Prior loss experiences of the insurance company
• State Insurance Commission Rate Regulations
• Location, value and type of structure insured
• Amount of coverage purchased
• Premium discounts.

Other Considerations

There are several ways to ensure adequate homeowner's insurance coverage while minimizing your premiums. Consider these tips:

Review deductibles.  Review the deductible under the policy. A low deductible usually means that you are paying a significant amount of your premium to insure small claims. Increasing the deductible may allow you to purchase additional coverage.

WARNING: If you increase your deductible, make sure you have enough cash or liquid assets to pay the deductible.

Update home's replacement cost.  Update your home's replacement cost every two years and make sure your coverage matches it. A variety of software programs and videos are available to help you develop a replacement cost inventory.

Determine the replacement cost of home's contents.  Determine the replacement cost of your home's contents and update your records as you make new purchases. Consider videotaping your home and its contents and reviewing the tape with your agent. Review your policy to make sure you have enough coverage for all valuable contents.

Coordinate policies.  Coordinate your liability insurance under your auto and homeowner's policy with an umbrella liability policy. Insurers generally require homeowners to maximize their homeowner's liability insurance before they will issue umbrella liability insurance.

Look for discounts.  Smoke/fire alarms and fire extinguishers make your home a safer place to live. In addition, these items can often earn you a discount on your homeowner's policy. Further discounts may be available if you purchase other types of insurance (auto, umbrella, etc.) from the same carrier or if you store valuables away from home.

Document your claims.  If your home or its contents are damaged, you should carefully document your claim. Photos or a videotape and a summary description of the cause of the damage can help expedite the claims process.

As you review your homeowner's insurance policy, you may need to consider several additional types of coverage:

• Flood Insurance.  This policy covers damage to your home and property caused by flooding. It is a named peril type of coverage and special limitations can apply. The policy only covers flooding and does not include damage caused by water overflow from household appliances. This type of coverage is often required for financing if the property is located in a flood plain.
• Earthquake Insurance.  This policy covers damage to your home and property caused by an earthquake or volcano. This coverage modifies the limitations or exclusions under most homeowner's policies and expands the coverage available.
• Personal Property Rider.  All homeowner's policies have dollar limits for certain personal property items. You can purchase additional insurance (called a rider) to increase the dollar limits on items such as cameras, furs, jewelry, and collections. If you purchase a personal property rider, you must be able to verify the cost of the item and the condition of the item (with photos or a video).

Help and More Information

Enjoy the following special features and information sources that Deloitte & Touche OnLine has put together to guide you through your insurance planning!

Books

How to Buy the Right Insurance at the Right Price, by Bailard, Biehl & Kaiser (Dow Jones-Irwin, Homewood, IL 1989)

How to Get Your Money's Worth in Home & Auto Insurance, by Barbara Taylor (McGraw-Hill, Inc., New York, NY 1991).

Personal Financial Planning, by G. Victor Hallman & Jerry S. Rosenbloom (McGraw-Hill, Inc., New York, NY 1993).

Policy Wise (an AARP book), by Nancy H. Chasen (Scott, Foresman & Company, Glenview, IL 1983).

The Guide to Buying Insurance: How to Secure the Coverage You Need at an Affordable Price, by David Scott (The Globe Pequot Press, Old Saybrook, CT 1994).

Understanding Homeowner's Insurance, by Sheryl Lilke (Dearborn R&R NewKirk, Chicago, IL 1995).

Periodicals

Are You Wasting Money on Insurance? Redbook (March 1993).

Homeowner's Insurance, Consumer Reports (October 1993).

What's Covered With Homeowner's Insurance, Consumer Reports (September 1991).

Jumps to the Internet

Chartered Property Casualty Underwriters (CPCU): Provides consumer information about property insurance and home safety.

Insurance Information Institute: This organization seeks to improve the public's understanding of property/casualty insurance by providing information and analysis to the media, individuals and organizations. The III publishes a number of helpful consumer guides (available at no cost) such as 12 Ways to Lower Your Homeowners Insurance Costs.

Insurance News Network: This organization provides unbiased consumer information about auto, home and life insurance, including premium costs by state and insurance company ratings from Standard & Poor's.

National Association of Insurance Commissioners: This is an organization of insurance regulators from the 50 states whose primary purpose is to protect the interests of insurance consumers. The NAIC publishes a number of consumer guides including 1995 Guide to Health Insurance for People with Medicare, Consumer's Guide to Home Insurance and Consumer's Guide to Auto Insurance.

SafeTnet: A comprehensive set of links to insurance-related Internet sites.

Click here to see State Insurance Departments

Insurance Organizations

Insurance Information Institute
110 Williams Street, 4th Floor
New York, NY 10038
(212) 669-9200 or (800) 942-4242

National Insurance Consumer Helpline
(800) 942-4242

National Consumers League
815 15th Street, NW, Suite 928
Washington, DC 20005
(202) 639-8140

National Insurance Consumer Organization
121 North Payne Street
Alexandria, VA 22314
(703) 549-8050