You will hear the term “homeowners insurance,” and “home insurance” interchangeably, but they refer to the same thing: financial protection from a peril. A peril is an insurance geeky term that refers to a “specific risk,” or “reason” for a loss. Some examples of a “peril” include an earthquake, a flood, a fire, a burglary, wind, a falling aircraft, and so on and so forth. It’s important to keep in mind that your insurance will only cover you in so far as that peril is included in the policy.
Different insurance companies provide different packages within a policy, but there are some basic universal coverages that exist across all homeowners insurance policies. The standard policy typically includes coverage within these categories:
- Personal property
- Personal liability
- Loss of Use
Levels of Coverage
Whether you’re a renter or a homeowner, there are 3 main levels of coverage within each policy. These can also be added onto any existing policy as an “endorsement” or an “add-on” to fill any gaps in coverage.
Actual cash value – Replaces your home or personal belongings minus a deduction for depreciation.
Replacement cost – Pays the cost of rebuilding/repairing your home or replacing your personal belongings without a deduction for depreciation.
Guaranteed or extended replacement cost – Guarantees to replace or rebuild your home as it was before a covered peril, even beyond policy limitations. This is especially useful to hedge against inflation on materials or construction costs.
Additional types of coverage
At an additional cost, you can tack on “endorsements” or “insurance riders,” such as the ones listed below, to fill gaps or limitations within a standard homeowners insurance policy. Different companies will have different terms for each coverage, but these listed here will give you an idea of the types of coverage which enhance your protection.
Business Insurance: If you work from, or run your business from home, this provides limited coverage for business machines, tools, and liability.
“Scheduled” Personal Property (also called a “floater”): You can take an inventory of your special personal belongings like jewelry, furs, coins, computers, antiques, artwork, and silverware, and “schedule” them into this specialized coverage called a “floater.” Scheduled items are covered for higher limits of loss as compared to the limits provided in the included coverage.
Sewer Backup and Sump Pump Overflow Endorsement: Pays for damage to the interior of your home caused by sewer backup or sump pump overflow.
Animal Liability: Most homeowners policies exclude liability on all animals. Most carriers will allow you to “buy back” the liability coverage if the breed of animal is not on their excluded breeds list. Animal Liability is typically not available for exotic, saddle or farm animals such as horses, cows, snakes, monkeys, and other non-traditional household pets.
Flood Insurance: Pays for damage caused by flood. Flood insurance is available from a variety of insurance companies, as well as the National Flood Insurance Program. You must live in a community that participates in this federal program. Lenders require flood insurance if you live in certain flood hazard areas. This coverage is NEVER included in a homeowners policy. A separate flood policy must be purchased for flood damage to the home or contents to be covered.