Homeowners Insurance: What It Covers and What It Leaves Out

A homeowners policy covers the house, your belongings, and your liability for covered accidents, but it does not cover flood or earthquake damage unless you add or buy separate coverage. Most lenders require the policy before they will close, so you will be choosing one before you own the home.

1. Common coverage types

The National Association of Insurance Commissioners (NAIC) lists these common parts of a homeowners policy:

• Dwelling: damage to the house and attached structures, including fixtures and built-in appliances.
• Other structures: fences, sheds, and anything not attached to the house.
• Personal property: furniture, electronics, clothing, and other belongings.
• Loss of use: some additional living expenses while the home is being repaired.
• Personal liability: financial losses if you are legally responsible for property damage or injuries to others.
• Medical payments: medical bills for people hurt on your property or by your pets.

The NAIC says all policies cover the structure, and most also cover contents and liability. It describes unattached structures, personal property, medical payments, and additional living expenses as common optional add-ons, so check which ones your policy includes. The limits for most of the other coverages are typically set as percentages of the dwelling limit, while liability and medical payment limits are chosen by the policyholder.

2. What counts as a covered cause of loss

Policies pay for damage from perils, which are causes of loss such as fire or theft. According to the NAIC, coverage can be written two ways: all perils except those explicitly excluded, or only the perils named in the policy. Typical policies include fire, lightning, and "extended coverage" for windstorm, hail, explosion, riot, aircraft, vehicles, smoke, vandalism, theft, and glass breakage.

The practical step is to read the exclusions section of the policy before you sign, because that is where gaps show up.

3. What is left out: flood and earthquake

The NAIC lists flood and earthquake as separate policies. FEMA is blunter about flood: most homeowners insurance does not cover flood damage. Flood insurance is a separate policy through the National Flood Insurance Program (NFIP) that can cover the building, its contents, or both.

Three flood facts from FEMA that matter to buyers:

• Flood insurance is available to anyone in one of the roughly 22,600 communities that take part in the NFIP.
• Homes in high-risk flood areas that have a mortgage from a government-backed lender are required to carry it.
• There is typically a 30-day waiting period before an NFIP policy takes effect, unless the purchase is required by a government-backed lender or tied to a flood map change. Plan ahead rather than waiting for a flood warning.

Other add-ons the NAIC names include water backup of sewer or drain, personal umbrella liability, and earthquake coverage. These are optional and priced separately.

4. Rebuild cost, not market value

The NAIC says dwelling coverage should be enough to pay to fully rebuild the home. That is a different number from the purchase price, because the price includes land and location. You can insure on a replacement cost basis, which pays the cost to rebuild, or on actual cash value, which pays market value.

5. How the deductible works

You pay the deductible first, and the insurer shares losses above it. The NAIC notes that a lower deductible means a higher premium. Here is an illustration with made-up numbers: with a $2,500 deductible and a covered $9,000 roof repair, the insurer pays $6,500 and you pay $2,500. If the repair costs $2,000, the claim pays nothing.

6. Compare policies on the same terms

When comparing quotes, line up these items side by side:

1. Dwelling limit and whether it is replacement cost.
2. Deductible amounts.
3. Which perils are named or excluded.
4. Liability and medical payment limits.
5. Whether sewer backup or other add-ons are included.

7. Key takeaways

• Common coverages are dwelling, other structures, personal property, loss of use, liability, and medical payments; check which your policy includes.
• Flood and earthquake need separate coverage; FEMA says most homeowners policies do not cover flood.
• NFIP policies usually have a 30-day wait, so buy before you need it.
• Set the dwelling limit at the cost to rebuild, not the price you paid.
• A higher deductible lowers the premium but raises what you pay out of pocket on a claim.