Real Estate

Are All Homeowners' Insurance Policies the Same?

By Ilona Bray, J.D., University of Washington Law School
Understanding what choices and options you have when buying insurance coverage for your house.

The fundamental intent of a homeowners' insurance policy is to protect the property from damage due to various named causes or perils. Any policy above the most basic level will also protect the owners from personal liability, mainly if someone is injured on the property. And, although individual insurance companies create the policies and offer the coverage, the insurance industry as a whole operates using standard language and approaches, largely created by an organization known as "ISO" (the Insurance Services Office, Inc.). For example, the "exclusions" you find in any policy are likely to be quite similar (but read them closely, regardless.)

All that said, there can be significant variations among the policies available to or purchased by homeowners. There are good reasons to both shop around for an insurance company that best meets your needs and to look carefully at the insurance terms you sign up for.

Also note that the type of property you buy makes a difference in what the standard policy will contain; a single-family home policy will be covered differently than a condominium or townhouse, for instance, based on what portion of the property you actually "own" versus what common areas are owned by a community association.

Choosing a Homeowners' Insurance Company

Even if your mortgage lender (likely a bank) is requiring you to buy insurance, the choice of which company to buy from is yours.

After getting recommendations from fellow homeowners and your real estate agent, it's definitely worth comparing reviews of each company's reputation and customer responsiveness, and shopping around for the best premium price. Balancing these two concerns is important; paying bottom dollar only to have the company dither around and refuse to pay after a disaster will not do your wallet any good in the long run.

Choosing Insurance Terms and Extent of Coverage

While you may want or be required by your mortgage lender to have a certain minimum amount of coverage, you will also have some choice as to things like:

  • how high a deductible you will pay for each insurable event (the higher your deductible, the lower your premium)
  • how far you want the coverage to extend (for instance, whether you want earthquake or flood insurance, which aren't part of the standard policy and may or may not be required by your lender), and
  • how much you want the insurance company to pay you in the event of damage (the higher the payout, the more you'll need to pay in, in the form of premiums).

Some of your needs with respect to the policy may be unique, and may require either separate coverage or a "rider" to your current policy. If, for example, you will be running a small business out of your home, or you have a valuable collection of jewelry, stamps, or coins, bring such issues up when purchasing insurance. The standard policy will not cover such activities or expenses.

In the event of major damage to your home, the section of the policy dealing with how much you'll be covered for is especially important to pay attention to. The industry norm is what's called "replacement cost coverage," which is the amount of money it would take to rebuild your damaged or destroyed home with the same or a similar home in the current market. This may be well below the amount you actually paid for your home, but the idea is to make you "whole" again.

By contrast, "actual cash value" in a homeowners insurance policy means you'd be paid the market value or initial cost of your home and personal property minus depreciation as the home wears down--which can quickly bring your payout down below what it would actually cost to rebuild.

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