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How to Get the Best Homeowners Insurance Policy for Your Needs

This image depicts the various types of hazards that an insurance policy could cover.

You’ve gone through the process of securing a mortgage for your home and now it’s time to protect your dwelling and possessions from devastating circumstances. What if your home is damaged by a fire or a storm? What if your home is robbed? Insurance is offered to protect homeowners from various events. Here are a few insurance basics.

There are different types of homeowners insurance that are listed by the letters HO followed by a numerical reference ranging from one to eight. HO-3 is the most common form of coverage in the U.S. What are the differences among these types of insurance? Hazards covered by HO-1, HO2, HO-3, and HO-5 are the focus of this document.

HO-1 offers coverage from 10 basic perils including fire, lightning, hail and theft. Insurance agents don’t recommend this plan because of its strict limitations. HO-1 provides coverage that will only cover the named perils. If an HO-1 policy holder incurs an unnamed hazard, he will have to replace destroyed property with money from his own pocket. HO-1 excludes coverage for personal property, loss of use, and medical payments for someone injured on their property.  

HO-2 provides protection against not only the 10 perils listed in HO-1, but also against additional perils that include riots, pipe freezing and volcanic eruptions. This is a named policy peril that covers 16 named hazards. HO-2 also provides coverage for loss of use, personal liability, and medical payments for people injured on your land. The most common type of coverage involves HO-3 policies.

While HO-3 is an open perils policy, it contains some of the characteristics of named peril plans. This is a hybrid plan that covers the following: (1) dwellings (2) other structures such as detached garages (3) personal property (4) loss of use (5) personal liability (6) medical payments for someone injured on your property. These are the basic parameters for HO-3.

If consumers want coverage from other types of damage - such as flooding or wet rotting - they can add this coverage to their policy. HO-3 differs from HO-1 and HO-2 because this policy covers all perils except those excluded from the policy. All policy holders must explicitly state what item they want to cover such as furniture, clothes, jewelry and electronics. 


What is unprotected? There are several categories including the following: (1) flood damage or water seepage (2) earthquake damage (3) pest infestations (4) normal wear and tear (5) and mold or wet rot. If someone with HO-1, HO-2 or HO-3 coverage wants protection from unprotected hazards, they can obtain additional insurance called an endorsement. Flood insurance is an example of an endorsement.

HO-5 coverage protects your home and personal property on an open peril basis. This policy is robust. Insurance agents offer HO-5 for consumers with higher-value homes and for people who have valuable personal belongings. A comparison helps. HO-5 offers coverage that is more comprehensive than coverage offered by HO-3. HO-5 coverage exceeds HO-3. The biggest difference addresses personal property coverage.

If a fire damages your house, when you file your claim, an HO-3 policy will only cover the rebuilding of your home up to the amount listed on the policy. In comparison, HO-5 guarantees the full replacement cost. This means that the insurance company will rebuild the home back to its original form. While HO-5 is comprehensive, policy holders need to acknowledge that there are perils not covered by an HO-5 policy. This includes earthquakes, flooding, wet rot, negligence, and pet or insect damage.

There are two methods for replacing personal property. First, policy holders can have replacement cost coverage (RCC) – this coverage reimburses policy holders with new and similar items. Second, policy holders can have actual cash value coverage (ACV) – this coverage reimburses policy holders based on the depreciated value of their belongings.

There are two types of personal property coverage. To calculate ACV, insurance companies determine the initial price of the product minus depreciation. Consumers with ACV coverage will be required to pay the depreciated value of the product out of their pocket. ACV pales in comparison to the protection offered by RCC that reimburses consumers with a product that is brand new or similar in value to the worth of the destroyed product.  

How do insurance companies determine ACV? They determine the depreciated value of the product by focusing on the age of the product. Products lose value as they age. If a policy holder purchased a computer for $3,000 and the product has a lifespan of 10 years, the insurance company will focus on the age of the product to arrive at the ACV. If the computer has aged 5 years, the consumer would be reimbursed $1,500.

How do insurance companies determine RCC? This coverage reimburses policy holders 100% of the replacement value for a new or similar computer. The difference between RCC and ACV is recoverable depreciation. With RCC, the only cost to the consumer would be cost of the deductible. RCC would be the better option for consumers who don’t want to pay a percentage out of pocket for the replacement of expensive personal property.


Insurance providers require consumers to insure their home for at least 80% of the worth of the structure. If your house is damaged, your insurance provider will cover the full cost of the damage only if the consumer has 80% coverage. If you bought your home for $200,000, your insurance company would pay for the repairs only if you met the threshold - this means you would need coverage of $160,000.

Policy needs change. The homeowner invested $40,000 in his home and now these changes must be reflected in his insurance policy. His house now has a value of $240,000. Adhering to the 80% rule, the homeowner must increase coverage to $192,000. To avoid being underinsured, homeowners need to increase their coverage after they complete home improvements.

To summarize, an HO-3 policy doesn’t cover every hazard. Consumers must have a clear understanding about what constitutes coverage. An HO-3 policy provides coverage for dwellings and other structures. Home owners must know not only what their HO-3 policy covers, but also what this policy doesn’t cover.  Endorsements can protect homeowners from perils such as flooding and earthquakes.



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