What Does Your Homeowners Insurance Cover?

“What does home insurance cover?” is a common question among first-time homeowners—and for good reason. In all likelihood, your home is probably the most valuable asset you own, so it makes sense to protect it with comprehensive home insurance.

What Is the Goal of Home Insurance?

The goal of home insurance is to give you and your family the peace of mind you deserve. It does this by protecting you in case your home suffers damage from a fire, storm or another covered event. The last thing you want is to be unprepared if the unexpected happens.

But home insurance actually covers a lot more than just the physical structure of your home. Here is a synopsis of what a standard homeowners insurance policy covers:

• Your Property – Home insurance coverage helps pay to repair or rebuild your home and other structures from all kinds of damaging events. Other structures include a detached garage, storage shed or fence.
• Your Possessions – If your personal items are damaged or destroyed by a covered event, your home insurance can help pay to replace them. Examples include TVs, furniture, computers and china.
• Temporary Housing – Your insurance policy may cover the cost of lodging while your home is being fixed or rebuilt. It may cover meals and other related living expenses during this time as well.
• Medical and Legal Bills – If a visitor slips on your walkway and injures themselves, you may be found responsible. In this case, your homeowners insurance can help cover the related medical bills and any legal costs.

Home insurance may seem complicated, but it’s actually fairly easy to grasp when it’s broken down into all of its separate coverages.

Dwelling Coverage

Dwelling, also known as Coverage A, is probably the most important part of a standard homeowners insurance policy. It covers the physical structure of your home, as well as those permanently installed fixtures and appliances in your home.

Dwelling coverage will pay to repair or replace your home if the damage is the result of a covered loss, such as a fire, a falling object or vandalism. It will not cover fixtures and appliances if they fail due to mechanical breakdown or wear and tear.

When you have a mortgage, your mortgage company wants to make sure your property is protected by insurance. That’s why they generally require proof that you have homeowner’s insurance before they lend you money.

Which Parts Are Covered by Home Insurance?

Dwelling coverage extends to far more than just the wood, bricks or concrete that make up your home’s structure. The following parts of your home are typically protected by Dwelling coverage:

• Frame
• Roof
• Chimney
• Attached patios, porches and garage
• Permanently installed fixtures (e.g., flooring, cabinets, bathroom fixtures)
• Built-in appliances (e.g., furnace, hot water heater, sump pump)

When it comes to water damage, it’s important to note that Dwelling coverage only covers damage caused by things like a broken pipe or water coming through the ceiling. It does not cover any damages caused by water coming up from the ground, such as a flood. You will need to buy a separate flood insurance policy if you live in an area prone to flooding.

How Much Coverage Do You Need?

Check the declarations page of your home insurance policy to see how much Dwelling coverage you currently have. You can only be paid up to the limit stipulated there.

But how do you know if your coverage limit is enough? The answer to that question depends on how much it would cost to repair or replace your home if it was damaged. Remember that the cost of construction materials and labor can fluctuate, so you may want to increase your limit over time.

One way to determine if you have enough Dwelling coverage is to simply ask your agent or insurer. They’ll let you know if you still have adequate coverage given the current economy.

Another way is to figure it out yourself. A good rule of thumb is to research what home builders in your area are charging per square foot and then calculate the square footage of your home. You’ll also need to approximate the cost of flooring, roofing and other materials.

Bear in mind, when it comes to recovering from catastrophic events, it’s much better to be over-insured than underinsured.

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Other Structures Coverage

Structures that aren’t directly attached to your home, like a garage or shed, aren’t usually part of Dwelling coverage. However, they may be covered by something called Other Structures coverage, which is also known as Coverage B.

These structures can still be expensive to repair so they require adequate coverage. They’re also insured for the same types of risks or perils that your home is covered for, including fire, falling objects and vandalism. For example, if a tree falls on your detached garage, Other Structures coverage will help pay to repair it or replace it.

Which Structures Are Covered by Your Home Insurance?

The types of other structures that are covered by your home insurance policy will vary by state. Here are some that are usually covered:

• Detached garages
• Fences
• Guest houses
• Sheds
• Barns
• Gazebos

Other Structures coverage does not apply to structures that are used for business purposes. For instance, a homeowner will not be covered if they use their guest house for rental income or if they run a business out of their detached garage. The coverage does not apply to any items being stored inside a detached structure, either.

Your homeowners insurance policy includes everything you need to know about what’s covered and what isn’t, so be sure to read it carefully.

How Much Other Structures Coverage Do You Need?

The coverage limit for all the other structures on your property combined is usually 10 percent of your Dwelling coverage. So if your Dwelling coverage limit is $250,000, then your Other Structures coverage limit is $25,000.

In certain cases, 10 percent of your Dwelling still may not be enough. For example, if you build a new shed on your property, that will increase the combined value of all the other structures you own. So now, if a catastrophic event damages your shed, garage and fence, it may cost you $30,000 to rebuild instead of $25,000—making you underinsured by $5,000.

To prevent this from happening, you can simply increase your Other Coverages limit. Here are two ways to do it:

• Raise the overall amount of your Dwelling coverage, or
• Increase your Other Structures policy limit to an amount that’s more than 10 percent of your Dwelling amount.

The takeaway message is to approximate the cost to repair, replace and rebuild all the other structures on your property, and then determine the amount of coverage you need based on that.

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Personal Property Coverage

Personal Property, also known as Coverage C, is a standard coverage within homeowners insurance policies. It helps to pay for personal items that have been damaged, destroyed or stolen due to a covered event, such as vandalism, fires and severe storms.

Personal Property covers all those belongings you keep inside your home. However, the items don’t have to be in your home at the time they are damaged in order to qualify for a home claim. For example, you’ll be covered if someone breaks into your car and steals your laptop.

Here’s a list of common items that people file home insurance claims for:

• Furniture
• Appliances
• Televisions
• Computers
• Electronics
• Clothing
• Exercise equipment
• Musical instruments
• Sports paraphernalia
• Certain jewelry

It’s important to note that highly valuable items, like jewelry and art, are only protected by Personal Property coverage up to a certain dollar limit. It is possible to purchase additional coverage for these items.

How Much Personal Property Coverage Do You Need?

How much coverage you need depends on how much your belongings are worth. For example, a college student may only own a laptop, TV and some clothes, so they wouldn’t need a lot of protection. On the other hand, a married couple with a house full of furniture and appliances would require a lot more.

To figure out the approximate value of your personal property, make a list of everything you have in your home. Then write down how much you bought each item for and the year that you bought it. This will give you a better idea of the actual cash value of your personal property.

Actual Cash Value vs. Replacement Cost

Personal Property coverage usually insures the actual cash value of an item (i.e., its depreciated value), not the full replacement cost of an item. Here’s a quick explanation of the difference:

• Actual cash value – Pays you what the item is worth at the time of the loss. It factors in depreciation caused by age and wear and tear.
• Replacement cost value – Pays you to replace the item with a new, similar item, without considering age and wear and tear. It is more expensive than actual cash value coverage, so it will raise your home insurance payment.

Let’s say the TV you purchased for $1,000 five years ago is damaged in a fire. If your policy provides for actual cash value, you’ll receive what your TV was worth at the time of the fire—which may only be $500 due to depreciation.

If you have replacement cost value, you’ll receive the value of a new TV of the same type. In this case, you may receive $1,200 due to inflation.

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Loss of Use Coverage

Loss of Use coverage, also known as Coverage D, is included in most homeowners insurance policies. If your home is damaged by a covered event (e.g., fire or tornado), and you’re unable to live there while repairs are being made, this coverage will pay for your temporary housing and other related expenses.

In simpler terms, Loss of Use coverage reimburses you for expenses that you wouldn’t ordinarily incur if you were living in your own home. That’s why this coverage is also sometimes referred to as Additional Living Expense coverage. Here’s a list of expenses that are typically covered:

• Cost of temporary housing, such as a hotel or a motel
• Increased cost of meals
• Credit check fee associated with renting a temporary residence
• Cell phone overages incurred as a result of losing a landline
• Cost of increased mileage to your place of employment

Loss of Use coverage also helps people who make part of their homes available as long-term rentals. For example, let’s say you own a multi-family home and have long-term tenants. If the home becomes unlivable due to a covered event, the rental income you’re missing out on would be reimbursed.

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Personal Liability Coverage

Like it or not, the risk of legal liability is part of life. In fact, it might be the largest financial risk most individuals face. Common incidents where someone is injured on your property can result in significant medical bills and even lawsuits.

Personal Liability coverage, also known as Coverage E, helps to protect against this risk. It provides coverage to help pay for bodily injury or property damage that you are found responsible for.

For example, let’s say you have a party and a guest trips on your rug and breaks an arm. Your Personal Liability coverage would apply if you were found legally responsible for their injuries. Personal Liability will cover the cost of medical bills, as well as legal fees and other damages up to the coverage limit.

The protection afforded by Personal Liability coverage extends to household relatives as well. That means if your child accidentally damages your neighbor’s property, you may also be covered.

The coverage limit for Personal Liability usually ranges from $100,000 to $500,000. If you want additional coverage, you can also purchase an umbrella policy as an extra layer of protection.

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Medical Payments Coverage

Medical Payments coverage, also known as Coverage F, pays for medical expenses related to injuries that occur on your property—no matter who is at fault.

This coverage sometimes gets confused with Personal Liability, but they’re actually quite different from one another.

Let’s say someone trips on your front steps and sprains their ankle, requiring a trip to the hospital. Medical Payments might pay for the ambulance ride, the X-rays and any follow-up physical therapy treatments.

However, if you are subsequently found legally responsible, additional treatment, legal expenses and other damages would fall under Personal Liability coverage.

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