Home insurance

Home insurance, also commonly called hazard insurance or homeowner's insurance (often abbreviated in the US real estate industry as HOI), is a type of property insurance that covers a private residence. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.

Homeowner's policy is referred to as a multiple-line insurance policy, meaning that it includes both property insurance and liability coverage, with an indivisible premium, meaning that a single premium is paid for all risks. In the US standard forms divide coverage into several categories, and the coverage provided is typically a percentage of Coverage A, which is coverage for the main dwelling.^[1]

The cost of homeowner's insurance often depends on what it would cost to replace the house and which additional endorsements or riders are attached to the policy. The insurance policy is a legal contract between the insurance carrier (insurance company) and the named insured(s). It is a contract of indemnity and will put the insured back to the state he/she was in prior to the loss. Typically, claims due to floods or war (whose definition typically includes a nuclear explosion from any source) are excluded from coverage, amongst other standard exclusions (like termites). Special insurance can be purchased for these possibilities, including flood insurance. Insurance is adjusted to reflect replacement cost, usually upon application of an inflation factor or a cost index.

The home insurance policy is usually a term contract, i.e. a contract that is in effect for a fixed period of time. The payment the insured makes to the insurer is called the premium. The insured must pay the insurer the premium each term. Most insurers charge a lower premium if it appears less likely the home will be damaged or destroyed: for example, if the house is situated next to a fire station or is equipped with fire sprinklers and fire alarms; if the house exhibits wind mitigation measures, such as hurricane shutters; or if the house has a security system and has insurer-approved locks installed. Perpetual insurance, a type of home insurance without a fixed term, can also be obtained in certain areas.

In the United States

A home in Louisiana damaged by Hurricane Katrina

In the United States, most home buyers borrow money in the form of a mortgage loan, and the mortgage lender often requires that the buyer purchases homeowner's insurance as a condition of the loan, in order to protect the bank if the home is destroyed. Anyone with an insurable interest in the property should be listed on the policy. In some cases the mortgagee will waive the need for the mortgagor to carry homeowner's insurance if the value of the land exceeds the amount of the mortgage balance. In a case like this, even the total destruction of any buildings would not affect the ability of the lender to be able to foreclose and recover the full amount of the loan.

Home insurance in the United States may differ from other countries; for example, in Britain, subsidence and subsequent foundation failure is usually covered under an insurance policy.^[2] United States insurance companies used to offer foundation insurance, which was reduced to coverage for damage due to leaks, and finally eliminated altogether.^[3] The insurance is often misunderstood by its purchasers; for example, many believe that mold is covered when it is not a standard coverage.^[4]

History

The first homeowner's policy per se in the United States was introduced in September 1950, but similar policies had existed in Great Britain and certain areas of the United States. In the late 1940s, US insurance law was reformed and during this process multiple line statutes were written, allowing homeowner's policies to become legal.^[5]

Prior to the 1950s, there were separate policies for the various perils that could affect a home. A homeowner would have had to purchase separate policies covering fire losses, theft, personal property, and the like. During the 1950s, policy forms were developed allowing the homeowner to purchase all the insurance they needed on one complete policy. However, these policies varied by insurance company, and were difficult to comprehend.^[6]

The need for standardization grew so great that a private company based in Jersey City, New Jersey, Insurance Services Office, also known as the ISO, was formed in 1971 to provide risk information and it issued simplified homeowner's policy forms for reselling to insurance companies. These policies have been amended over the years.^{[citation needed]}

Modern developments have changed the insurance coverage terms, availability, and pricing.^[7] Homeowner's insurance has been relatively unprofitable, due in part to catastrophes such as hurricanes as well as regulators' reluctance to authorize price increases.^[7] Coverages have been reduced instead and companies have diverged from the former standardized model ISO forms.^[7] Water damage due to burst pipes in particular has been restricted or in some cases entirely eliminated.^[7] Other restrictions included time limits, complex replacement cost calculations (which may not reflect the true cost to replace), and reductions in wind damage coverage.^[7]

Policies

The Insurance Services Office has standardized the following homeowner's insurance policy forms in general use^{[citation needed]} (names of the forms are given per the following reference^[8]):

HO0 – Dwelling Fire Form

A form that provides coverage on a home against fire, smoke, windstorm, hail, lightning, explosion, vehicles, and civil unrest. It does not cover your personal property, personal liability, or medical expenses. It is the type of policy your mortgage lender will buy for you if you let your homeowner policy lapse.

HO1 – Basic Form

A basic policy form that provides coverage on a home against 11 listed perils; contents are generally included in this type of coverage, but must be explicitly enumerated. The perils include fire or lightning, windstorm or hail, vandalism or malicious mischief, theft, damage from vehicles and aircraft, explosion, riot or civil commotion, glass breakage, smoke, volcanic eruption, and personal liability. Exceptions include floods, earthquakes. Most states no longer offer this type of coverage.

HO2 – Broad Form

A more advanced form that provides coverage on a home against 16 listed perils (including all 11 on the HO1). The coverage is usually a "named perils" policy, which lists the events that would be covered.

HO3 – Special Form

The typical, most comprehensive form used for single-family homes. The policy provides "all risk" coverage on the home with some perils excluded, such as earthquake and flood. Contents are covered on a named peril basis. (Note: "all risk" is poorly termed as it is essentially named exclusions (i.e., if it is not specifically excluded, it is covered).)

HO4 – Contents Broad Form

The Contents Broad, or Tenants, form is for renters. It covers personal property against the same perils as the contents portion of the HO2 or HO3.^[9] An HO4 generally also includes liability coverage for personal injury or property damage inflicted on others.

HO5 – Comprehensive Form

Covers the same as HO3 plus more. On this policy the contents are covered on an open peril basis, therefore as long as the cause of loss is not specifically excluded in the policy it will be covered for that cause of loss.

HO6 – Unit-Owners Form

The form for condominium owners. It insures your personal property, your walls, floors and ceiling against all of the perils in the Broad Form.

HO8 – Modified Coverage Form

The form is for the owner-occupied older home whose replacement cost far exceeds the property's market value.

Coverage rates

According to a 1998 National Association of Insurance Commissioners (NAIC) report, 83% of homes were covered by owner-occupied homeowners policies. Of these, 87% had the HO3 Special, and 8% had the more expensive HO5 Comprehensive. Both of these policies are "all risks" or "open perils", meaning that they cover all perils except those specifically excluded. 3% were the HO2 Broad, which covers only specific named perils. Others, at 1% each, include the HO1 Basic and the HO8 Modified, which is the most limited in its coverage. HO8, also known as older home insurance, is likely to pay only actual cash value for damages rather than replacement.^[10]

The remaining 13% of home insurance policies were covered by renter's or condominium insurance. Two-thirds of these had the HO-4 Contents Broad form, also known as renters insurance, which covers the contents of an apartment not specifically covered in the blanket policy written for the complex. This policy can also cover liability arising from injury to guests as well as negligence of the renter within the coverage territory. Common coverage areas are events such as lightning, riot, aircraft, explosion, vandalism, smoke, theft, windstorm or hail, falling objects, volcanic eruption, snow, sleet, and weight of ice. The remainder had the HO-6 Unit-Owners policy, also known as a condominium insurance, which is designed for the owners of condos and includes coverage for the part of the building owned by the insured and for the property housed therein. Designed to span the gap between the coverage provided by the blanket policy written for the entire neighborhood or building and the personal property inside the home. The condominium association's by-laws may determine the total amount of insurance necessary. E.g., in Florida, the scope of coverage is prescribed by statute – 718.111(11)(f).^[11]

In addition, about 2.4% of homes were covered by a dwelling fire policy^[10] (the term dwelling fire comes from the fact that, originally, these home owner's policies only covered fires) which covers property damage to a structure and is typically sold to noncommercial owners of rented houses. It may also cover the owner's personal property (such as appliances and furnishings). The owner's liability may be extended from their own primary home insurance and, thus, may not comprise part of the Dwelling Fire policy.

It should be noted that not all states allow the ISO forms to be utilized or may require that additional clauses are included to meet state insurance regulations.

Typically consumers can save money by purchasing their insurance directly from a company rather than through an agent, but there are not many companies selling home insurance directly.^[12] However, an experienced agent can provide expertise (especially expertise with the local insurance environment) that a company may lack.^[13]

Coverage classifications

For each policy, there are typically 5 classifications of coverage. These are based on standard Insurance Services Office or American Association of Insurance Services forms.

Section I — Property Coverages

Coverage A – Dwelling

Covers the value of the dwelling itself (not including the land). Typically, a coinsurance clause states that as long as the dwelling is insured to 80% of actual value, losses will be adjusted at replacement cost, up to the policy limits. This is in place to give a buffer against inflation. HO-4 (renter's insurance) typically has no Coverage A, although it has additional coverages for improvements.

Coverage B – Other Structures

Covers other structure around the property that are not used for business, except as a private garage. Typically limited at 10% to 20% of the Coverage A, with additional amounts available by endorsement.

Coverage C – Personal Property

Covers personal property, with limits for the theft and loss of particular classes of items (e.g., $200 for money, banknotes, bullion, coins, medals, etc.). Typically 50 to 70% of coverage A is required for contents, which means that consumers may pay for much more insurance than necessary. This has led to some calls for more choice.^[14]

Coverage D – Loss of Use/Additional Living Expenses

Covers expenses associated with additional living expenses (i.e. rental expenses) and fair rental value, if part of the residence was rented, however only the rental income for the actual rent of the space not services provided such as utilities.

Additional Coverages

Covers a variety of expenses such as debris removal, reasonable repairs, damage to trees and shrubs for certain named perils (excluding the most common causes of damage, wind and ice), fire department changes, removal of property, credit card / identity theft charges, loss assessment, collapse, landlord's furnishing, and some building additions. These vary depending upon the form.

Exclusions

In an open perils policy, specific exclusions will be stated in this section. These generally include earth movement, water damage, power failure, neglect, war, nuclear hazard, septic tank back-up expenses, intentional loss, and concurrent causation (for HO3).^[15] The concurrent causation exclusion excludes losses where both a covered and an excluded loss occur. In addition, the exclusion for building ordinance can mean that increased expenses due to local ordinances may not be covered.^[16] A 2013 survey of Americans found that 41% believed mold was covered, although it is typically not covered if the water damage occurs over a period of time, such as through a leaky pipe.^[17]

Floods

Flood damage is typically excluded under standard homeowners and renters insurance policies. Flood coverage, however, is available in the form of a separate policy both from the National Flood Insurance Program (NFIP) and from a few private insurers. ^[18]

Section II — Liability Coverages

Coverage E – Personal Liability

covers damages which the insured is legally liable for and provides a legal defense at the insurer's own expense. About a third of the losses for this coverage are from dog bites.^[19]

Causes of loss

According to the 2008 Insurance Information Institute factbook, for every $100 of premium, in 2005 on average $16 went to fire and lightning, $30 to wind and hail, $11 to water damage and freezing, $4 for other causes, and $2 for theft. An additional $3 went to liability and medical payments and $9 for claims settlement expenses, and the remaining $25 was allocated to insurer expenses.^[20] One study of fires found that most were caused by heating incidents, although smoking was a risk factor for fatal fires.^[21]

Claims process

After a loss, the insured is expected to take steps to mitigate the loss. Insurance policies typically require that the insurer be notified within a reasonable time period. After that, a claims adjuster will investigate the claim and the insured may be required to provide various information.

Filing a claim may result in an increase in rates, or in nonrenewal or cancellation. In addition, insurers may share the claim data in an industry database (the two major ones are CLUE and A-PLUS^[22]), with Claim Loss Underwriting Exchange (CLUE) by Choicepoint receiving data from 98% of U.S. insurers.^[23]

In the United Kingdom

As in the US, mortgage lenders within the UK require the rebuild value (the actual cost of rebuilding a property to its current state should it be damaged or destroyed) of a property to be covered as a condition of the loan. However, the rebuild cost is often lower than the market value of the property, as the market value often reflects the property as a going-concern, as opposed to just the value of the bricks and mortar.

A number of factors, such as an increase in fraud and increasingly unpredictable weather, have seen home insurance premiums continue to rise in the UK.^[24] For this reason, there has been a shift in how home insurance is bought in the UK—as customers become a lot more price sensitive, there has been a large increase in the amount of policies sold through price comparison sites.

In addition to standard home insurance, some 8 million households in the UK are categorized as being a "non standard" risk. These households would require a Specialist or Non Standard insurer that would cover home insurance needs for people that have criminal convictions and/or subsidence in the property or have previously been underpinned.

References

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