What Is the Purpose of Homeowner's Insurance?

by Chuck Ayers ; Updated July 27, 2017
Homeowner's insurance can help you recover after a house fire.

Homeowner's Insurance protects your home and its contents in the event of damage or loss. Because purchasing a home is the biggest investment made by the vast majority of people, it makes sense to want it protected. If a home buyer is purchasing the house with a loan, the lender will require homeowner's insurance, The home serves as collateral for the loan so the mortgage company has a vested interest in maintaining the home and its value, as well.

Different Types of Homeowner's Insurance

There are two important distinctions a home buyer needs to know before purchasing homeowner's insurance--the difference between replacement cost insurance and actual cash value insurance. Replacement cost insurance pays the cost of restoring the home to its pre-claim condition or to build you a new home and contents of equal value. There is no deduction for depreciation of the home. The second, and less desirable, insurance is actual cash value that will pay you an amount equal to the replacement value of the damaged property minus depreciation. In essence, you won't get your whole home back in the second type of insurance.

What Homeowner's Insurance Covers

There are eight different kinds of insurance referred to as homeowner's insurance but for most people, there are three principal concerns: protect your home, protect your personal property and provide liability coverage. Most homeowners purchase a policy referred to as HO-3 and it covers damage to a home from fire and lightning, windstorms, ice, snow, sleet and hail, explosions, theft and vandalism (if the home hasn't been unoccupied for more than 30 days), smoke damage, things (like trees) falling on your home, most plumbing and heating system damage, and personal property and liability, whether on or off property.

Exclusions

HO-3 policies name specific damage that is not covered, referred to as exclusions. Most all such policies exclude the land under your house, floods, earthquakes, war, nuclear accidents, intentional damage, sewer backups and overflow, damage to cars, trucks and motorboats, theft from houses under construction, frozen pipes in unoccupied or under-construction homes, weather damage to fences, pavements, patios, swimming pools and docks and property belonging to tenants. Riders may be added at additional cost of the basic insurance policy for flooding, earthquakes, areas of the home that may be used for a home business and houses under construction.

Actual Cash Value Insurance

This kind of insurance covers pretty much the sames things as those covered in an HO-3 policy minus the depreciation. Take a television set and surround sound system, for example. The cost when you installed the system three-years prior could have been $5,000. But under in an Actual Cash Value policy if the system is stolen or damaged under the terms of the claim that are covered by the policy, the reimbursement is adjusted for depreciation. The same system may be worth only $3,000 now. An adjuster will make the determination and reimburse the homeowner the depreciated amount. The same goes for your home. It and its contents could be worth $1 million but after it's been adjusted for depreciation, the insurance company may reimburse the policy holder substantially less. Nobody wants partial coverage, or a part of a home for that matter, should it burn down.

Exceptions to Replacement Cost Endorsements

A replacement cost policy won't cover valuables expected to increase in value. Things like antiques, jewelry (although the first $10,000 may be covered), gun collections and other valuables collected for their eventual increase in value can be covered under additional riders at additional cost. Surprisingly, personal property that is damaged or stolen, say from your car, will be covered by homeowner's insurance. Be wary, though, of making small claims against a homeowner's policy as it could increase rates beyond the cost of replacement of small items.

About the Author

Chuck Ayers began writing professionally in 1982, breathing life into obituaries, becoming a political and investigative reporter at a major East Coast metropolitan newspaper. He now freelances and is a California communications and political consultant. He graduated from American University, Washington, D.C., with degrees in political science and economics.

Photo Credits