Homeowners Insurance

The world of homeowners insurance can be difficult to navigate, especially for first time home buyers.  With a little bit of information and understanding, however, purchasing and identifying what you need in homeowners insurance can be relatively simple.  In this article, we explore the different types of homeowners insurance and the various coverages they provide.

Overview of Homeowners Insurance

Homeowners insurance is a type of property insurance that protects a private residence.  Typically the policies cover a variety of losses, including damage to the property itself due to fire, vandalism, and other hazards, the loss of a property’s contents due to those hazards or theft, as well as liability coverage for accidents that may happen at the property.  Because it covers both property losses and potential liability, homeowners insurance is referred to as a multiple-line insurance policy.  Policies typically last one year, and the premium depends on a variety of factors, including property type, size, location, and whether the property is equipped with loss mitigation systems, such as deadbolts, fire sprinkler systems, a theft deterrent alarm, etc.  In order to protect their investment, lenders typically require that borrowers have an active homeowners insurance policy.

Different Types of Homeowners Insurance

The first step in purchasing homeowners insurance is determining what type of insurance you need based on whether you have a single family home, condominium, townhome, or other property.

Homeowners Insurance for Single Family Homes

The types of homeowners insurance that cover single family homes are referred to as HO0-HO3 and HO5.  The HO0 policy is the least comprehensive, while the HO5 policy is the most comprehensive.  The differences between the policies can be explained as follows:

•  The HO0 policy is the most limited, providing coverage against fire, smoke, windstorm, hail, lightning, explosion, vehicles, and civil unrest.  It does not cover personal property, medical expenses, or personal liability for accidents at the property.  If a homeowner’s policy expires, this is the type of policy that a lender will typically purchase on behalf of the owner (and will pass the cost along to the borrower).

•  An HO1 policy adds coverage against vandalism or malicious mischief, theft, damage from aircraft, glass breakage, smoke, volcanic eruption, and personal liability.

•  An HO2 policy, also known as the broad form coverage, adds coverage for damage from falling objects, the weight of ice or snow, water from plumbing systems, freezing of the plumbing system, electrical damage to applicances, and water damage from a rupture of water heaters or heating systems.  HO2 policies are also referred to as “named perils” policies because they cover only the risks that are specifically named.

•  HO3 policies, on the other hand, are an “all risk” form of homeowners insurance policy because it covers all losses except those that are specifically excluded, as well as coverage for personal injury or property damage caused to others.  Risks that are typically excluded are earthquakes and floods.  Contents, however, are covered on a “named perils” basis.  The National Association of Insurance Commissioners has reported that 87% of homeowners with a homeowners insurance policy hold an HO3 policy.

•  HO5 policies are the most expansive type of homeowners insurance available.  Like an HO3 policy, this type of homeowners insurance covers the property on an “all risk” basis.  The difference between HO5 and HO3 policies is that HO5 policies also cover contents on an “all risk” basis.  The NAIC has reported that only 8% of homeowners with a homeowners insurance policy hold an HO5 policy.

Homeowners Insurance for Condos and Townhomes

Owners of condominiums and townhomes typically are not required to insure the structure of the building in which they live – the building is typically the HOA’s responsibility.  However, owners of these properties are required by lenders to insure the interior of the property, including interior improvements (e.g. cabinets, walls, floors, ceilings, etc.) and personal property.  HO6 policies were created for that purpose.  Because their coverage does not protect the structure of the building, these policies are typically less expensive than policies for comparable single family homes.

Insurance for Other Properties

There are two other types of homeowners insurance policies that are typically not used by owners of single family homes, townhomes, or condominiums.  The first is the HO4 policy, or a renter’s policy, which covers a renter’s personal property against the same perils as the contents portion of the HO2 or HO3.  An HO4 policy generally also includes liability coverage for personal injury or property damage inflicted on others.  The second is the HO8 policy, which is for older owner-occupied homes that have a replacement cost exceeding its market value.

Different Classifications of Homeowners Insurance Coverage

Each policy provides protection for a variety of different assets and against various liabilities.  Below is a description of the types of available coverages.  Home owners should adjust their coverage limits for each type of coverage to ensure (1) they have sufficient coverage to protect assets and (2) they are not overpaying for unnecessary coverage.

Coverage A – Dwelling

This is the coverage that applies to the structure of the building.  It does not provide coverage for damage to the land itself.  Mortgage providers typically require that the property be insured to 80% of its value.  This is because homeowners insurance typically includes a coinsurance clause that states that as long as the dwelling is insured to 80% of its value, losses are adjusted at replacement cost.  This coverage is typically not required for renters and owners of condominiums and/or townhomes.

Coverage B – Other Structures

This type of coverage is self explanatory – it applies to structures other than the dwelling and garages.  Most homeowners will not need this coverage, particularly in Los Angeles where there are few properties with structures other than the primary dwelling.

Coverage C – Personal Property

This type of coverage applies to personal possessions that are kept within a property, including clothing, furniture, electronics, etc.  However, certain classes of personal property, such as jewelry, are subject to limitations in order to encourage owners to individually insure particularly expensive items.  For example, engagement rings and expensive artwork are typically not covered under a homeowners insurance policy, and thus a separate policy is required to specifically cover the engagement ring and/or artwork.  Personal property can be insured for either cash value or replacement cost – cash value will pay to replace the belongings minus depreciation, while replacement cost will replace the item regardless of depreciation.

Coverage D – Loss of Use

Loss of Use coverage applies to expenses incurred in connection with the loss of use of one’s home.  For example, if a house becomes unusable due to fire and needs extensive repair, loss of use coverage will cover the expense incurred in connection with living at a hotel until the home becomes liveable again.

Coverage E – Personal Liability

Personal liability coverage applies to liabilities that may be incurred by the homeowner inside of the home.  Common examples are dog bites and other injuries that occur inside the home.  This coverage is what makes a homeowners insurance policy a “multiple-line” policy.

Shopping for Homeowners Insurance in Connection with a Home Purchase

As discussed above, almost all lenders will require that borrowers obtain a homeowners insurance policy that covers at least 80% of a property’s value.  Lenders will often prevent escrow from closing on a deal if the policy is not in place.  Additionally, if a homeowner allows his or her policy to lapse while the mortgage is still in place, the lender will often provide notice of the failure to insure the property and, if the failure is not cured, will obtain a policy on behalf of the borrower and tag the cost on to the loan amount.

As a result, it is important to obtain a homeowners insurance policy in connection with purchasing a new home.  The above information should provide some guidance on the type of policy and coverage that you need.  Quotes are relatively easily obtainable online and/or through insurance brokers.  Contact an insurance provider, select your coverages, coverage limits, and deductible amounts, and use that information to obtain quotes from a variety of providers.  Once you have selected a provider, you will need to provide contact information for the provider to the escrow company, who will then coordinate with your lender to ensure you have the appropriate coverage.

Remember that policies need to be renewed every year.  Some insurers take that as an opportunity to increase your premium.  Pay attention to any attempts to increase your premium – it may be time to do some more homeowners insurance shopping.

If you would like to further discuss how Esquire Real Estate Brokerage, Inc. can help you in the Los Angeles real estate market, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com.