What Does Home Insurance Cover?

## What Is Home Insurance? Homeowners insurance — sometimes called hazard insurance — is a policy that protects your house, your belongings, and your finances if something goes wrong. Mortgage lenders require it, but even if you own your home outright, going without coverage is a significant financial risk. A single house fire or liability lawsuit could wipe out years of savings. A standard homeowners policy (known in the industry as an HO-3 policy) bundles several types of coverage into one package. Understanding each component helps you make sure you're neither overpaying for coverage you don't need nor leaving dangerous gaps in your protection. ## Dwelling Coverage Dwelling coverage is the core of your policy. It pays to repair or rebuild your home's structure — walls, roof, floors, built-in appliances, and attached structures like a garage — if they're damaged by a covered event. The key number here is your dwelling coverage limit. It should reflect the **cost to rebuild your home**, not the market value or the price you paid. Rebuilding costs depend on local labor rates, materials, and your home's square footage and features. Many insurers offer extended replacement cost endorsements that add 20-25% above your coverage limit for unexpected construction cost increases. ## Personal Property Coverage Your policy also covers your belongings — furniture, clothing, electronics, appliances, and other personal items — if they're stolen or destroyed by a covered peril. Standard policies typically cover personal property up to 50-70% of your dwelling coverage limit. There's an important distinction here: **actual cash value** versus **replacement cost**. Actual cash value pays what your items are worth today after depreciation. Replacement cost pays what it costs to buy new, equivalent items. The replacement cost option costs more but provides far better protection. A five-year-old laptop depreciates significantly, but you still need a working computer. High-value items like jewelry, art, and collectibles usually have sub-limits (often $1,500-$2,500 for jewelry). If you own valuable items, you may need a scheduled personal property endorsement, sometimes called a floater or rider, to cover them fully. ## Liability Protection If someone is injured on your property or you accidentally damage someone else's property, liability coverage pays for their medical bills, legal fees, and any court judgments against you. Standard policies provide $100,000 in liability coverage, but most financial advisors recommend at least $300,000 to $500,000. Liability coverage also extends beyond your property. If your dog bites someone at the park or your child breaks a neighbor's window, your homeowners policy can cover the resulting expenses. For additional protection, consider an umbrella policy, which adds $1 million or more in liability coverage on top of your home and auto policies. Umbrella policies are surprisingly affordable — often $200-$400 per year for $1 million in coverage. ## Additional Living Expenses (ALE) If a covered event makes your home uninhabitable, ALE coverage pays for temporary housing, restaurant meals, and other increased living costs while your home is being repaired. This coverage typically lasts up to 12 months or until your home is livable again. ALE is one of those coverages you don't think about until you need it. If a kitchen fire forces your family of four into a hotel for three months, the bills add up fast. Make sure your ALE limit is realistic for your area's rental and hotel rates. ## What Home Insurance Does NOT Cover This is where many homeowners get caught off guard. Standard policies exclude several significant risks: - **Floods**: Flood damage requires a separate policy, typically through the National Flood Insurance Program (NFIP) or a private insurer. Even if you don't live in a designated flood zone, about 25% of flood claims come from moderate- to low-risk areas. - **Earthquakes**: Earthquake coverage requires a separate policy or endorsement. This is essential in seismically active regions but worth considering anywhere. - **Sewer backups**: A common and messy problem that requires a separate endorsement, usually costing $40-$70 per year. - **Maintenance issues**: Gradual damage from neglect — a slowly leaking pipe, termite damage, mold from poor ventilation — is never covered. Insurers expect you to maintain your property. - **Certain dog breeds**: Some insurers exclude liability claims related to specific breeds. Check your policy if you own a dog. ## Tips for Choosing the Right Coverage 1. **Get a replacement cost estimate** — don't just use your purchase price or tax assessment 2. **Choose replacement cost over actual cash value** for personal property 3. **Review your policy annually** — renovations, new purchases, and inflation can change your needs 4. **Bundle home and auto** — most insurers offer 10-25% discounts for bundling 5. **Raise your deductible** to lower your premium, but make sure you can afford to pay it 6. **Document your belongings** — take video or photos of each room and store them off-site or in the cloud