How to Read a Home Insurance Policy – The following is a simplified explanation of each section contained within Homeowners HO-3 and Dwelling Fire DP-3 policies. Homeowners’ policies typically cover primary residences and dwelling fire policies typically cover rented/investment properties and poor quality, high risk primary residences. Regarding covered losses for ANY insurance policy is best determined by reading the exclusion section of the policy. Typically, if a loss is not excluded, it is covered.
Reading your property insurance declarations page:
Section A – Dwelling
This is the maximum amount the insurer is entitled to payout, in the event of a covered loss/claim less the deductible. HO-3 is an ALL PERIL policy meaning ALL losses/accidents are covered unless excluded in the policy. DP-3 is a NAMED PERIL (wind, aircraft, riots, fire, volcanoes, lightning, explosion, hail) policy meaning all covered losses are explained in the policy unless excluded.
Section B – Separate Structures
This covers all structural property NOT permanently attached to the main dwelling i.e. garage, workshop, guest house. Typically the limit is 10% of the dwelling limit less deductible.
Section C – Additional Living Expense/Loss of Rents
Additional living expense applies to HO-3 policies. If the insured is unable to live in the house after a covered loss, the insurer is obligated to reimburse the homeowner any additional expenses incurred (i.e. hotel costs, food/meals, apparel). The limit is not subject to deductible and payable for 1 year, typically.
Loss of Rents applies to DP-3 policies. If a covered loss causes the tenant to move out, the insurer is obligated to reimburse the landlord monthly rent actually sustained for 1 year up to maximum limit amount( i.e. $1,000 monthly rent, 6 months of repairs = $6,000). Limit is not subject to deductible.
Section D – Contents/Personal Property
This covers the homeowners “stuff” like furniture, clothing, electronics, etc. and is subject to deductible. This coverage includes theft on an HO-3. DP-3 policies for rented properties typically do not have contents because the “stuff” in the house belongs to the tenant.
Section E – Medical Payments
This coverage is for anyone injured on the insured property NOT related to the insured or living on the property. This coverage is paid in the event someone gets hurt on the covered property and needs medical attention. The amount is typically paid out-of-claim meaning it is not included in the total amount paid by the insurer and does not have to be tied to any property or liability loss. Some insurance carriers automatically include $2,000 at no additional premium. This is inexpensive coverage that is used to prevent a larger liability claim and NOT subject to deductible.
Section F – Liability
This is the least expensive coverage for the limit amount. Most HO-3 policies included $300,000 at no additional premium and increasing the limit to $500,000 is usually less than $50 annually. This coverage is the “slip-and-fall” coverage. If someone, not related to the homeowner or landlord or living in the house, gets hurt due to a negligent accident (i.e. slippery floor, banister breaks, tree falls on neighbors car), the insurance carrier is obligated to pay on the insured’s behalf. Also, most HO-3 policies cover personal injury inflicted to others including liable and slander. Another example is accidentally hitting someone with a golf ball while playing golf. DP-3 policies usually include $100,000 at no additional premium with nominal premiums for increased limits.
Hopefully this explains property insurance in a way that makes it less Greek and more understandable for the average policyholder. Your policy may contain additional endorsements, coverages and exclusions. The above illustration defines typical coverages and limits contained in standard U.S. insurance policies.
Insurance policies are contracts constructed by lawyers for lawyers yet mortgage companies and state motor vehicle departments require we have insurance in place in order to finance our homes and drive our cars. A good insurance agent will always be happy to explain policy coverages and limits until you have a comfortable grasp. If you ever feel afraid to ask questions to your insurance agent, then maybe you should look for a new agent.