What Does Homeowner Insurance Actually Cover?

By Eric Tyson, Robert S. Griswold

When you own a home with a mortgage, your mortgage lender will insist as a condition of funding your loan that you have adequate homeowners insurance, which includes both casualty and liability coverage. The cost of your insurance policy is largely derived from the estimated cost of rebuilding your home. Although land has value, it doesn’t need to be insured, because it wouldn’t be destroyed in a fire.

Buy the most comprehensive homeowners insurance coverage you can and take the highest deductible you can afford, to help minimize the cost.

You might be asking, “what does homeowners insurance cover?” The answer depends on the particular policy you have chosen. However, typical homeowners insurance coverage will involve the following:

  • Coverage related to the structural elements of your home: This involves repairs and rebuilding of your home when the damage is caused by natural disaster, accident, or theft. However, most policies do not cover damage due to earthquakes or floods. Damage due to those incidents require a specialized policy. Most policies do not cover damage that is due to normal wear and tear.
  • Coverage to replace personal belongings: If you lose or find damage to your personal belongings as a result of the instances listed in the previous bullet, your items are likely covered on your policy.
  • Liability: Typical homeowners insurance policies cover bodily injury or property damage that you or members of your family cause to other people.
  • The cost of additional living expenses: Additional living expenses involves the money your family would need to live if you needed to be away from your home for repairs or rebuilding. These costs typically have a time limit associated with them. Check your individual policy for more details.

As a homeowner, you’d be wise to obtain insurance coverage against possible damage, destruction, or theft of personal property, such as clothing, furniture, kitchen appliances, audiovisual equipment, and your collection of vintage fire hydrants. Personal property goodies can cost big bucks to replace. Some prized possessions like jewelry, antiques, and collectibles are often excluded from your base policy and can require a special added coverage policy with limits that need to be set based on the replacement value of the items.

In years past, various lenders learned the hard way that some homeowners with little financial stake in the property and insufficient insurance coverage simply walked away from homes that were total losses and left the lender with the loss.

Thus, in addition to sufficient casualty and liability insurance, lenders require you to purchase private mortgage insurance if you put down less than 20 percent of the purchase price when you buy. This is risk insurance that protects the lender by making the mortgage payments to the lender if you’re unable to. This could be because you have a loss of income whether from a job loss or an injury/illness.

Private mortgage insurance is an extra cost that will factor into the calculation for the amount of your loan and reduce your ability to borrow. You may be able to avoid paying private mortgage insurance by using 80-10-10 financing.