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Home insurance policies protect what is probably your largest asset. Standard Homeowners insurance policies contain two sections. Section I includes coverage for the dwelling, other structures, personal property, and loss of use. Section II is personal liability. While many policies include similar features, there are actually more differences and options than some people might realize. Each state has some variation of a standard HO-3 policy as well as some enhanced versions. In North Carolina, the enhanced policy form is referred to as an HE-7. In other states, there may not be a separate form- but just an enhanced HO-3.
As with all insurance, it’s important to understand what events are covered. Comprehensive includes the most coverage because everything is covered that isn’t specifically excluded. HO3 and HE7 policies in North Carolina both include comprehensive perils. A ‘named perils’ policy is the opposite. On a named Perils policy, If it’s not listed (fire, wind, hail, lightning, etc), it’s not covered. The policies described above are comprehensive for the dwelling- however, only an enhanced policy also covers the personal property on a comprehensive basis. Policies that only cover named perils are typically dwelling policies often used for vacant and rented homes that may not be in the greatest condition.
Most homeowners insurance policies include replacement cost for the dwelling by default. Each insurance company uses their own software system to calculate the replacement cost (which isn’t necessarily the market value), but because there are fluctuations in construction markets- there is typically an extra cushion built into the policy language. 125% is the most common. For example if your declaration page shows $300k in coverage, the policy would actually pay up to $375k to replace the home if you a 125% endorsement for Coverage A. Some enhancements are available to bump this up to 150%, and the best policies actually provide replacement cost that is literally unlimited- meaning that the actual cost is paid, regardless of the limit shown on the policy. Anytime more money has to be paid for Coverage A- the other limits that were a % of that amount (B, C, and D) are increased automatically if needed.
Homeowners Insurance - Section I (1)
The dwelling limit on the homeowners insurance is the amount of coverage for the home itself- and everything attached to the home, including porches, decks, etc. For policies that include replacement cost, the insurance company will likely utilize a software program that estimates the replacement value. This may or may not be similar to the actual market value- depending on the value of your land and the age of the home. The insurance company will not allow you to insure it for less than they estimate it will cost to replace it- but if you would like to increase the amount of insurance, your agent can advise you accordingly.
Insurance for detached garages, fences, sheds, etc is included as Other Structures. By default, this amount will be 10% of the dwelling amount shown on your home insurance policy- but if your detached buildings are larger and more expensive than your average homeowner, you can certainly increase the other structures limit.
Personal property covers the ‘stuff’ in the house and just about anything else that belongs to you. If you have high priced items- like guns, fur coats, jewelry, etc- you may want to ask your agent about specific protection since some items are limited within the personal property section. The standard amount for personal property is 50% of the dwelling coverage if the policy includes Actual Cash Value for the personal property, and that amount is automatically increased to 70% of the dwelling coverage if you have replacement cost. Your personal property is covered by your homeowners insurance anywhere in the world (with a few exceptions).
If you have a significant loss to your home and you need to stay at a hotel or even a rental home temporarily, loss of use is the section in your homeowners insurance that will cover that cost. The default amount for loss of use is 20% of the dwelling amount and the benefit is typically limited to one year- which is more than enough to rebuild most homes. However- if you do have a higher value custom home, you may want to inquire about higher limits or a longer time frame for rebuilding- particularly if you would want to rent a home that is comparable to your own home. Short term rentals in very affluent areas can be difficult to find- and very expensive.
Homeowners Insurance - Section II (2)
Personal liability claims are very rare, so sometimes- people don’t consider this to be a very important coverage, but it is definitely a big bang for the buck in terms of protection. Even for higher limits of $300k or $500k, the premium difference may only be $8 or $10/yr. Even though they are less common than damage to the home, personal liability claims do happen so it is an important part of your homeowners insurance. If you have an enhanced policy (HE-7 in North Carolina), the coverage is broadened to include comprehensive personal liability. Some examples of that broadened definition would be liable, slander, defamation, etc. Without that enhancement, the coverage primarily applies to bodily injury or property damage sustained by a 3rd party that you or a covered household member may be responsible for.