Homeowners Insurance: What Is Covered and What Is Not
You can’t get a mortgage without homeowners insurance. Even if you could, having a policy provides precious peace of mind for homeowners and their families.
But while homeowners insurance coverage provides a wide range of valuable protections, it doesn’t cover every contingency. Understanding what basic policies do and do not cover can prevent unwelcome surprises in the aftermath of a disaster.
Here’s what to expect from your insurance.
Homeowners Insurance Covers Your Property
Standard coverage plans with homeowners insurance protect the physical structures on your property against damage from common disasters. Covered structures typically include:
- Sheds and other outbuildings
Covered disasters include:
For the most part, any damage the structures on your property suffer from a qualifying disaster will be covered up to the maximum limit of your policy. This includes fixtures, HVAC systems, and the actual structure itself such as walls, floors, foundations, and roofing.
Standard policies also cover personal belongings located inside the structures on your property. This includes:
- Personal items
- Guests’ personal items
Most policies set maximum coverage limits by category but, up to those limits, everything in your home is covered.
Homeowners Insurance Covers You
Homeowners’ insurance also covers you and your property even when you are not at home. This means it will cover the cost of replacing personal belongings stolen from your vehicles or while you’re on vacation.
It also covers your legal liability and claim-related costs in a range of situations, such as:
- Temporary living expenses if you are forced out of your home as the result of a covered disaster
- Medical and legal expenses if someone is injured on your property
- Medical expenses if you, a family member, or a pet injure another person off-property
- Personal liability in the event that you, a family member, or a pet causes damage to another person’s property
Property damage accounts for 98 percent of claims filed each year, with most claims averaging between $13,000 and $17,000 each.
Homeowners Insurance Plans Don’t Cover All Disasters
In May of 2020, two dams gave way in Midland County Michigan. Raging floodwaters filled homes with four to six feet of water, damaging heirlooms, HVAC systems, walls, and floors. In the aftermath, hundreds of homeowners were devastated to discover that they would get no insurance money to rebuild because flooding is not included in coverage with homeowners insurance policies.
Floods are not the only disasters excluded from standard policies. Other examples of disasters not usually covered include:
Separate policies or riders are available to provide coverage for these events, and homeowners at risk for such catastrophes would be wise to purchase the additional coverage.
Intentional Damage and Neglect Aren’t Covered Either
Homeowners’ insurance also does not cover damage you intentionally inflict on your home. Nor will it cover damage that results from neglect or improper maintenance.
So, for example, if a storm blows shingles off your roof and causes a leak, your insurance would cover it because it is the result of a qualifying disaster. If your roof develops a leak later on because you let debris build up in your gutters or because you didn’t make repairs after previous storm damage, your insurance will not cover it.
Pricy Items May Not Be Fully Covered
Most insurance plans limit coverage by category. This means that they cap reimbursements at a certain amount. Homeowners with many possessions in the same category or very expensive individual items may find that their policy’s cap does not cover their losses in the event of theft or a disaster. This commonly affects:
- Musical instruments
To achieve the best homeowners insurance coverage for their needs, many policyholders need to:
- Have specialty or expensive items appraised
- Document the value of such items
- Purchase insurance riders specific to that value as an add-on to their standard policies
When in doubt, it’s best to document your belongings and their values and compare them to your policy to verify you have enough coverage.
Another key factor in what homeowners’ insurance will or will not cover is your deductible. A deductible is money that you need to put toward damages before your insurance policy kicks in. High-deductible plans usually have lower premiums than low-deductible plans.
Generally, deductibles work on an annual basis. If you have already put money towards anything your insurance would cover this year, those funds count toward your deductible. Once you reach your deductible, your insurance kicks in.
So, if you already paid your deductible on something else, your insurance might cover your whole loss. If you have not yet paid your deductible, you would need to pay that amount out of pocket before your insurance will pay anything at all.
Actual Value vs Replacement Cost Policies
Finally, it is important to consider whether you have an actual cash value policy or a replacement cost policy.
With an actual cash value policy, your insurance payout will be based on the value of an item at the time of its loss. So, for instance, if your couch was $1,000 brand new but had depreciated to around $600 in value when it was destroyed in a house fire, your insurer would give you $600 for it.
With a replacement cost policy, your insurer will pay you what it costs to replace your lost item with a new item of the same quality. So using the same couch example, you would receive $1,000 instead of $600.
Replacement cost policies understandably cost more than actual value policies because they pay out more in the event of a claim. That said, they can be invaluable if you need to rebuild portions of your home after a catastrophe.
Fortunately, many policies allow homeowners to split the difference. For instance, they might be able to choose actual cash value for personal belongings but replacement value for structural components of a home and fixtures. Or they may be able to build pricing “cushions” into their policies to cover unexpected expenses and contingencies.