Why do I need homeowners insurance, and what does it cover?
For many Americans, buying a home is a huge life milestone and, of course, a substantial personal investment. The next thing that should come to mind, then, is protecting that asset, and all the memories that will come with it. That’s where homeowners insurance comes in!
Of course, as with many aspects of home buying and homeownership, insurance is complicated. It brings together different concepts and, more often than not, uses really dense language that can feel inaccessible. That’s why we’re here to walk you through homeowners insurance in plain English.¹
Why should I buy homeowners insurance?
Most simply put: homeowners insurance can provide the funds to repair or replace your damaged property, including your personal belongings, and protect you from certain liabilities.
Of course, it’s not quite that simple once you get under the surface. A homeowners insurance policy is what is known in insurance lingo as a “package policy,” and one of the most common homeowners policies is the “HO-3” policy. The HO-3 comprises five distinct coverages that help keep money in your pocket in case of damage to your property or personal belongings, or exposures to certain liabilities:
- Coverage A (Dwelling coverage): This protects your home, including the structure and any permanent fixtures like plumbing and cabinetry — basically the stuff that’s part of the house.
- Coverage B (Other Structures coverage): This applies to structures on the insured property, but not the dwelling. This could mean buildings which are separated from the dwelling by space or only linked by a fence, utility line, or something of that nature.
- Coverage C (Personal Property coverage): This covers all of your personal property. One interesting thing to note is that it covers your property wherever it's located, anywhere in the world, not just in your home.
- Coverage D (Loss of Use coverage): Coverage D is relevant when the insured premises are considered uninhabitable. This then covers living expenses as well as fair rental value, if and when applicable.
- Coverage E (Liability coverage): “Section 2” of your policy is where you’ll find the liability coverages. Personal liability coverage kicks in if you’re considered responsible for damage. It means that the insurer will pay up to the limit of liability for damages that you are determined to have caused, and they’ll also typically provide legal defense. You’ll want to closely read the policy and consider talking to an agent to determine if defense costs could exhaust your limits. In other words, consider how much legal fees could be, on top of the other costs to repair damages, and then evaluate that number relative to the limit of your liability coverage.
- Coverage F (Medical Payments to Others coverage): Often called “Good Neighbor” coverage, this pays for the medical bills of third parties, regardless of fault.
Depending on the claim, the insurance company may either pay to repair or replace damaged property, or they may choose to reimburse you a certain amount of money (coverages A-D). If you have a liability claim (coverages E & F) because you’re sued for damaging someone, the insurance company will work to defend you and help pay what you’re legally obligated to pay.
When you receive your insurance quote, make sure you review every one of these coverages. Each will have a stated coverage limit (the limit the insurance company will pay for a certain type of damage), and it is important to understand and request adjustments to these limits as needed.
One more note: with an HO-3 policy, your home is covered on what is known as an “open perils” basis and your personal property on a “named perils” basis. We’ll cover these terms in more detail in another post, but they’ll also be outlined in your policy documentation. Make sure to check it thoroughly!
Why does my mortgage lender require me to have homeowners insurance?
Your mortgage lender puts a major financial investment into your home by providing funds for the mortgage loan upfront, so it’s natural that they’re also interested in protecting your property. The most common way to do this is through homeowners insurance. Homeowners insurance has a special section, called the mortgagee clause, that will indicate the lender legally owns the home and if there's a claim, the payment must go to them.
Homeowners insurance protects one of your most valuable financial investments, along with everything in it. If you’re working with a mortgage lender, you’ll likely be required to get homeowners insurance - but it can prove invaluable to all homeowners. That’s why we always encourage our members to look into homeowners insurance.
At Marble, we believe that insurance puts you in control of your most important assets, and we’ve built Marble to put you in control of your insurance. Sign up to get organized with Marble today.
¹ Could you imagine if we’d done it in Shakespearean English instead?