What is Home Insurance
Home insurance, also commonly called 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.
Additionally, homeowner's insurance provides
financial protection against disasters. A standard home insurance policy
insures the home itself along with the things kept inside.
Overview
Homeowner's policy is 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. This
means that it covers both damage to one's property and liability for any
injuries and property damage caused by the owner or members of his/her family
to other people. It may also include damage caused by household pets. The U.S.
uses standardized policy forms that divide coverage into several categories.
Coverage limits are typically provided as a percentage of the primary 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 the cost of replacement, usually upon
application of an inflation factor or a cost index.
Pricing
Further
information: Replacement value § Home insurance in
the United States
Major factors in price estimation include
location, coverage, and the amount of insurance, which is based on the
estimated cost to rebuild the home ("replacement cost").[2]
If insufficient coverage is purchased to
rebuild the home, the claim's payout may be subject to a co-insurance penalty. In this
scenario, the insured will be subject to an out of pocket fee as a penalty.
Insurers use vendors to estimate the costs, including CoreLogic subsidiary Marshall
Swift-Boeckh, Verisk PropertyProfile, and E2Value, but leave the responsibility
ultimately up to the consumer. In 2013, a survey found that about 60% of homes
are undervalued by an estimated 17 percent.[3] In some cases,
estimates can be too low because of "demand surge" after a
catastrophe.[2] As a safeguard against a wrong
estimate, some insurers offer "extended replacement cost" add-ons
("endorsements") which provide extra coverage if the limit is
reached.[2]
Prices may be lower 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.
Typically payment is made annually. Perpetual
insurance which
continues indefinitely can also be obtained in certain areas.
Covered perils
Home insurance offers coverage on a "named
perils" and "open perils" basis. A "named perils"
policy is one that provides coverage for a loss specifically listed on the
policy; if it's not listed, then it's not covered. An "open perils"
policy is broader in the sense that it will provide coverage for all losses
except those specifically excluded on your policy.
For insurance policies that cover specific
named perils, the insurer frequently offers a choice between one policy that
will cover a basic set of specific perils, and another policy that covers the
same basic set plus several additional perils, as discussed below. Together
with an open peril, a.k.a. "special form" policy, these two groupings
of named perils allow the insurer to offer a choice among three types of
policy, with three levels of coverage, which can be priced in a fair and
accurate manner and appeal to a variety of resident homeowners as well as
owners of apartment buildings and condominium associations.
Basic "named perils"[4] – this is the least
comprehensive of the three coverage options. It provides protection against
perils most likely to result in a total loss. If something happens to
your home that's not on the list below, you are not covered. This type of
policy is most common in countries with developing insurance markets and as
protection for vacant or unoccupied buildings.
Basic-form covered perils:
·
Fire
·
Lightning
·
Windstorm or hail
·
Explosion
·
Smoke
·
Vandalism
·
Aircraft or vehicle
collision
·
Riot or civil commotion
Broad "named perils"[5] – this form expands
on the "basic form" by adding 6 more covered perils. Again, this is a
"named perils" policy. The loss must specifically be listed to
receive coverage. Fortunately, the "broad form" is designed to cover
the most common forms of property damage.
Broad-form covered perils:
·
All basic-form perils
·
Burglary, break-in damage
·
Falling objects (e.g. tree limbs)
·
Weight of ice and snow
·
Freezing of plumbing
·
Accidental water damage
·
Artificially generated electricity
Special "all risk"[6] – special-form
coverage is the most inclusive of the three options. The difference with
"special form" policies is that they provide coverage to all losses
unless specifically excluded. Unlike the prior forms, all unlisted perils are
covered perils. However, if something happens to your home, and the event is on
the exclusions list, the policy will not provide coverage.
Special-form excluded perils:
·
Ordinance of law
·
Earthquake
·
Flood
·
Power failure
·
Neglect
·
War
·
Nuclear hazard
·
Intentional acts
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 purchase 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 such a case
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.[7] United States
insurance companies used to offer foundation insurance, which was reduced to
coverage for damage due to leaks, and finally eliminated altogether.[8] The insurance is
often misunderstood by its purchasers; for example, many believe that mold is
covered when it is not a standard coverage.[9]
History
The first homeowner's policy per se in
the United States was introduced in September 1950, but similar policies had
already 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.[10]
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.[11]
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.[2] Homeowner's insurance
has been relatively unprofitable, due in part to catastrophes such as
hurricanes as well as regulators' reluctance to authorize price increases.[2] Coverages have been
reduced instead and companies have diverged from the former standardized model
ISO forms.[2] Water damage due to burst pipes in
particular has been restricted or in some cases entirely eliminated.[2] Other restrictions
included time limits, complex replacement cost calculations (which may not
reflect the true cost to replace), and reductions in wind damage coverage.[2]
Types of homeowners insurance policies
According to a 2018 National
Association of Insurance Commissioners (NAIC) report on data from 2016,[12] 73.8% of homes were
covered by owner-occupied homeowners' policies. Of these, 79.52% had an HO-3
Special policy, and 13.35% had the more expensive HO-5 Comprehensive. Both of
these policies are "all risks" or "open perils", meaning that
they cover all perils except those specifically excluded. Homes covered by an
HO-2 Broad policy accounted for 5.15%, which covers only specific named perils.
The remaining 2% includes the HO-1 Basic and the HO-8 Modified policies, which
are the most limited in the coverage offered. HO-8, also known as older home
insurance, is likely to pay only actual cash value for damages rather than
replacement.[13]
The remaining 21.3% of home insurance policies
were covered by renter's or condominium insurance. 14.8% 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.[13] 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).[14]
Collateral protection insurance
If a home can't be insured, obtaining a
mortgage on it is difficult or impossible. If the homeowner's insurance is
canceled after a mortgage agreement is in force, and the home judged to be
uninsurable, a standard mortgage contract that compels homeowner's insurance
allows the lender to purchase collateral protection
insurance,
(sometimes called "force-placed insurance") and charge the premiums
to the homeowner via escrow. CPI's pay off the balance owed on the mortgage if
the homeowner defaults on mortgage payments, and some will cover damage to the
home that impacts the resale value. This repair coverage can benefit the
homeowner, but by design the contractual benefits flow to the mortgagee. If the
structure is deemed uninsurable, the homeowner also benefits from not having
the mortgage called in by the lender - without CPI the homeowner would be in
serious breach of his contractual obligations.[15]
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.[16] One study of fires found that most were
caused by heating incidents, although smoking was a risk factor for fatal
fires.[17]
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[18]), with Claim Loss
Underwriting Exchange (CLUE) by Choicepoint receiving data from
98% of U.S. insurers.[19]
In the United Kingdom
As in the US, mortgage lenders within
the United Kingdom (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.[20] 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 require a specialist or
non-standard insurer that would cover home insurance needs for people that have
criminal convictions and/or where the property suffers subsidence or has
previously been underpinned.
Around the world
Premium volume by country (2013)
|
World rank[21] |
Country |
Region |
Premium volume (2013, USD
Mil):[21] |
|
1 |
United States |
Americas |
1,259,255 |
|
2 |
Japan |
Asia |
531,506 |
|
3 |
United Kingdom |
Europe |
329,643 |
|
4 |
China |
Asia |
277,965 |
|
5 |
France |
Europe |
254,754 |
|
6 |
Germany |
Europe |
247,162 |
|
7 |
Italy |
Europe |
168,544 |
|
8 |
South Korea |
Asia |
145,427 |
|
9 |
Canada |
Americas |
125,344 |
|
10 |
Netherlands |
Europe |
101,140 |
Building and contents coverage
Countries such as China, Australia, and the United
Kingdom use
a more straightforward approach to home insurance, called "building and
contents coverage" commonly referred to as "home and contents
insurance". Relative to the insurance policies of the United States,
building and contents coverage offers a very basic level of coverage. Most
standard policies only cover the most basic perils listed below:
·
Storm or flood
·
Fire
·
Lightning or explosion
·
Falling trees or branches
·
Subsidence, drag or landslip
·
Breakage of glass or sanitary fittings
·
Damage from escaped water or oil
·
Shock caused to the house by animals,
vehicles or aircraft
Building coverage
Building covers both the primary structure as
well as detached structures such as garages, sheds, and back houses that are on
property. However, different insurers may not cover things like boundary walls,
fences, gates, paths, drives or swimming pools, so it is important to check the
specific policy language.[22] This is an equivalent of both Coverage
A and B in homeowners insurance policies in the United States.
Contents coverage
Contents insurance covers personal effects
such as furniture, clothes, electronics, jewelry, etc. Most policies limit the
individual amount of money paid out for each category of items.[23] Individual policies
can vary in the amount of coverage they provide. The option to schedule your
personal property is readily available.
Liability coverage
Liability is typically bundled together with
building and contents coverage. Injuries and damage on premises would be
covered by building coverage liability while any offsite occurrences would be
covered under contents coverage.[22]
Common exclusions
As with most insurance policies, there are
always exclusions. The most common are:[22]
·
General wear-and-tear maintenance
·
Faulty workmanship
·
Mechanical or electrical breakdown
·
Any amount over the limits shown on the
policy schedule or in the policy
·
Restricted cover when the home is empty or is
let to tenants
