ABA Family Legal Guide

Home Ownership

Property Insurance and Other Protections

Homeowner's Insurance

What kind of homeowner's insurance do I need?

Broadly speaking, a homeowner's policy is a package deal designed to pay for the repair or replacement of your house and belongings, plus extra living expenses if, for example, you and your family have to stay in a motel for several months while your home is being rebuilt. It also covers claims and legal judgments against you for injuries people suffer in your home or damage you cause. How much the insurer pays depends, of course, on the limits of your policy, which in turn depends on how much you've paid in premiums.

Although details of insurance policies vary among companies, the general forms of coverage are fairly standard. Many homeowners opt for an inexpensive basic policy, called HO-1 or HO-A, which pays actual cash value of your home and contents in case of loss due to specific causes, such as fire. This minimal type of policy usually satisfies lenders, because they are interested only in your ability to repay the mortgage, not rebuild your house.

Many financial professionals recommend policies that provide at least 80 percent replacement value, rather than actual cash value, of your home in the event of damage from specific causes, such as fire and theft. These are called broad policies, or HO-2 or HO-B. In most cases, you're better off with replacement value, because it usually costs more to replace the house than its "market" or "cash" value. Note that "replacement cost" is estimated by the insurance agent, and, for an additional small fee, guaranteed replacement cost coverage will protect you if your agent has underestimated the cost of replacing your home. Another way to guard against underinsurance is with an inflation guard clause, which increases the face value of the policy either according to the annual increase in local construction costs or by a given percentage every three months. This rider can reduce the chances of your being underinsured, but it doesn't guarantee replacement cost.

For the best protection, a comprehensive or all-risk policy covers any kind of damage except specific exclusions, such as floods and earthquakes. Even with this type of policy, however, insurance for luxury items, jewelry, art, and antiques may require separate riders. If you live in a condo or a cooperative, an HO-6 policy gives you coverage similar to the HO-2. A few companies do offer all-risk coverage for condo and co-op owners. As with any other type of significant purchase, it pays to shop around.