Homeowners insurance. You know you should probably have it, and if you have a mortgage, you’re required to have it. But how much do you know about it beyond that – what it covers (and does not cover), the types of policies, how much coverage you need? What happens in case of minor damage from a storm, or even something as rare as fire damage? If you’re not familiar with these things, you may very well be overpaying and/or be underinsured. To help you out, we’ve put together this homeowners insurance guide for homebuyers in Port Orchard, WA.
Homeowners Insurance Overview
Homeowner’s insurance is a safety net. It will “compensate you if an event covered under your policy damages or destroys your home or personal items. It will also cover you in certain instances if you injure someone else or cause property damage.”
The three main functions of this insurance are to…
- “Repair your house, yard and other structures.
- Repair or replace your personal belongings.
- Cover personal liability if you’re held legally responsible for damage or injury to someone else.”
There are three basic levels of coverage with homeowner’s insurance – actual cash value, replacement cost, and extended replacement cost/value. In addition, “[p]olicy rates are largely determined by the insurer’s risk that you’ll file a claim.” This risk is assessed on the basis of “past claim history associated with the home, the neighborhood, and the home’s condition.”
Types of Policies
There are several types of homeowner’s insurance (also called “policy forms”), with some providing more coverage than others. The most common policy types are . . .
HO-1 AND HO-2
The least popular policies provide the least amount of coverage and payout only for damage caused by issues specifically listed in the policy. These are known as “named peril” policies, and they offer limited protection compared to broader options. Together, these two types account for about 8% of homeowners coverage, typically chosen only when cost is the primary concern or when the property doesn’t qualify for broader coverage.
HO-2 insurance, the more common of the two, typically covers your house and belongings only for the 16 listed causes, such as fire, theft, and certain types of water damage. However, if a problem arises that’s not on the list—like mold growth from long-term leaks or damage from earth movement—you’ll be responsible for the repair costs. It’s often considered a “mid-tier” option, striking a balance between affordability and protection.
HO-1, which isn’t widely available anymore, is the most bare-bones type of homeowners insurance. It covers losses from an even shorter list of perils than the HO-2 form, often limited to only around 10 named hazards. This type of policy may exclude coverage for personal belongings and liability, making it a risky choice for most homeowners. HO-1 policies are generally phased out or only offered for specific scenarios, like covering older homes that may not qualify for more comprehensive plans. If you’re considering either of these policies, it’s crucial to read the fine print and weigh the potential risks against the lower premium.
HO-3
“HO-3 insurance policies, also called ‘special form,’ are by far the most common,” accounting for almost 80% of coverage on owner-occupied homes. If you have a mortgage, your lender is likely to require at least this level of coverage to protect both your property and their financial interest. An HO-3 policy provides robust protection, making it the go-to choice for most homeowners. It offers all-risk coverage for your home, meaning it typically covers damage from any cause except those the policy specifically excludes, such as earthquakes, floods, or wear and tear from poor maintenance. This broad protection ensures you’re covered for most unexpected events, from fire damage to vandalism.
However, when it comes to your belongings, an HO-3 policy typically covers only damage from the 16 “named perils”—specific causes of loss that are explicitly listed in the policy, such as theft, smoke, or falling objects. This means your personal property might not be covered for certain types of damage unless you purchase additional protection, like an endorsement or a separate rider. For example, if you live in a region prone to flooding or earthquakes, you’ll need to add supplemental insurance, as these events are generally excluded from an HO-3 policy. While this coverage is generally more comprehensive than the basic HO-1 or HO-2 policies, homeowners should be aware of any exclusions and gaps in coverage and make adjustments as needed to ensure full protection for both their home and belongings.
HO-5
Also known as comprehensive form or premier coverage, this type of policy provides the broadest and most extensive protection available. It’s designed to cover damage to your home and belongings from virtually any cause, except for those the policy explicitly excludes by name, such as intentional damage, neglect, or specific natural disasters like earthquakes and floods. This level of coverage offers peace of mind, knowing that whether it’s a fire, theft, or an unforeseen accident, your home and possessions are protected under most circumstances.
Because of its expansive nature, comprehensive coverage is typically available only for well-maintained homes in low-risk areas, where the likelihood of significant natural disasters or other high-risk events is minimal. It’s also often offered to homeowners with a strong claims history and good home maintenance practices. Additionally, not all insurers offer this type of policy, making it a somewhat exclusive option for those who meet specific criteria. While the premiums for comprehensive coverage may be higher than those for more basic policies, many homeowners find it worthwhile for the peace of mind and extensive protection it offers. If you live in an area where risks like wildfires, hurricanes, or flooding are a concern, this comprehensive form can be a perfect fit—just make sure to double-check exclusions and any specific add-ons required to cover those unique hazards.
Replacement Cost, Actual Cash Value, and More
You also need to be aware that “[i]fyour home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your payout could differ depending on the cost to rebuild and the coverage you chose – and much of it will be paid directly to contractors rebuilding your home, in many cases.”
Concerning this, here are some things you need to consider when deciding on coverage:
REPLACEMENT COST
This is coverage that will pay however much it takes to rebuild your home(and that may exceed your policy limits). “This situation may arise, for instance, if construction costs have increased in your area while your coverage has remained level.”
ACTUAL CASH VALUE
“Actual cash value coverage pays the cost to repair or replace your damaged property, minus a deduction for depreciation. Most policies don’t use this method for the house itself, but it’s common for personal belongings.”
FUNCTIONAL REPLACEMENT COST VALUE
This type of coverage will pay to repair damage to your home, but possibly with cheaper materials than the original. For example, damage to plaster walls may be repaired with drywall, which is cheaper.
REPLACEMENTCOST VALUE
“Replacement cost value coverage pays to repair your home with materials of ‘like kind and quality,’ so plaster walls can be replaced with plaster. However, the payout won’t exceed your policy’s dwelling coverage limits.”
EXTENDED REPLACEMENT COST VALUE
This type of coverage “will pay out more than the face value of your dwelling coverage, up to a specified limit, if that’s what it takes to fix your home.” This limit is typically a percentage or a dollar amount, but in either case, it provides “a cushion if rebuilding is more expensive than you expected.”
Guaranteed Replacement Cost Value
“Guaranteed replacement cost value coverage pays the full cost to repair or replace your home after a covered loss, even if it exceeds your policy limits.” The catch, though, is that this level of coverage isn’t offered by all insurance companies.
Determining Amount of Coverage Needed
Now, you need to determine exactly how much coverage you need from your homeowner’s insurance. You’ll need enough coverage to rebuild/repair your home in the case that is destroyed or severely damaged. You can estimate the cost to rebuild by multiplying your home’s square footage by per-square-foot local construction costs. YourPort Orchard, WA agent can also provide some guidance here. Just call(360) 329-4331 to find out more.
What you shouldn’t do is “focus on what you paid for the house, how much you owe on your mortgage, your property tax, or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.”
When it comes to your belongings, your personal property, “you’ll generally want coverage limits that are at least 50% of your dwelling coverage amount, and your insurer may automatically set the limit that way.” You can, however, lower the limit or purchase more coverage if you need to/
With respect to the liability limit, experts advise having a “limit at least high enough to cover your net worth,” including “savings, investment accounts, and other assets, minus auto loans, credit card balances, and other debts.”
Cost of Homeowners Insurance
So what does homeowner’s insurance cost? The national average is about $1,600 per year, but this is an average and individual prices can be much higher or lower. In addition, your credit score can also affect the cost of your insurance.
And then there’s the deductible – the amount you have to pay out of your pocket before the insurance kicks in. Here are the two main things to keep in mind when choosing your policy’s deductible:
- A higher deductible will reduce your premium, but you’ll pay a lot more when you file a claim.
- With a lower deductible, you’ll pay a higher premium, but will pay a lot less out of your pocket for a claim.
When It’s Time to Buy
Ultimately, homeowners insurance isn’t a luxury – it’s a necessity. But there are so many influencing factors and available options, it’s difficult to know what kind of policy and coverage is right for you. An experienced Port Orchard, WA agent can provide valuable assistance in many of these areas. We suggest that Port Orchard, WA home buyers trying to untangle the homeowner’s insurance puzzle, contact us today at (360) 329-4331.