Most of us sign up for a homeowner's insurance policy when we purchase a home not only because of the protection it offers us, but also because of the “required reading” aspect of it to our mortgage lender. Those institutions lending us the money to make homeownership possible cover their bases by making sure their own financial investments are protected in case of fire or natural disasters.

But how much does the average homeowner know about what the typical homeowner's policy covers?

According to information available through the Insurance Information Institute and endorsed by the U.S. Office of Consumer Affairs, the Homeowners-3 (HO3) is the most common homeowner policy in the U.S. Some policies are more restrictive than others, so be sure to check up on just what your policy includes. For the purposes of generality, however, the HO3 will be used as an example here.

The typical homeowner's policy includes coverage for perils and losses due to fire, lighting, tornadoes, windstorms, hail, explosions, smoke, vandalism and theft. Those owning homes in coastal areas may want to pay special attention to the restrictions their coverage places on wind damage protection, however.

It is important that homeowners become comfortable with the limits on the amount of insurance for which they have contracted. The dollar amounts placed on specific items, such as jewelry, expensive paintings, and silverware are a vital element in that comfort level. An insurance agent can arrange for a special addendum, called a “floater,” to be added for such specific items not covered by the average policy.

Insurance policy limits are set by the homeowner's choice of cash value or replacement cost for structural damage, when it occurs. Many homeowners think of the value of their home for insurance purposes the way they would for a home purchase or refinance, which includes the price of the land. It is only the structure that should become the focus of the insurance coverage, however, since the land usually remains intact after a disaster has occurred.

As grisly as the thought may be, homeowners should think seriously about whether they would replace their homes on their home site in the case of a total or partial loss of the house, or whether they would take the cash value, calculated by taking the replacement cost of their home and deducting any depreciation. If opting for replacement coverage, as most do, make sure the dollar amount covers the entire cost of rebuilding. For instance, a home with $180,000 of insurance that would cost $210,000 to rebuild in today's environment will find the homeowner forking out $30,000 out of pocket, not a pleasant prospect.

The Federal government provides flood and mudslide insurance under a program run by the Federal Insurance Administration. This coverage is not included in a basic homeowner's policy and should be scrutinized by those living in flood-prone areas.

Plumbing-caused floods are usually covered, but ground water seepage is not, as it is deemed a homeowner maintenance issue. Earthquake coverage is not covered, but must be offered by your agent – its cost depends on how prone your geographic area is to such a natural phenomenon.

Roof damage from storms by wind or trees are covered, and specified funds for tree removal as a result of damage is also a part of the typical homeowners policy. Replacement of those same trees, surrounding bushes and shrubs are not covered if uprooted and damaged by a windstorm, but they are covered against risks like vandalism, fire, or theft.

The standard amount of liability coverage the HO3 contains for both legal and medical claims against you for an injury sustained on your property, should someone file suit, is $100,000. If you consider your property to be at higher risk, more coverage can be added.

Your HO3 policy covers your personal property anywhere in the world, less the applicable deductible. If the item is old, its current value is all that would be reimbursed unless a replacement cost endorsement for that item is arranged by you and your agent. Boat owners will find that they may be able to recover only about $1,000 if their boat is stolen from their property, however, and nothing if the boat is stolen from another location. Liability insurance for boat owners is limited as well, so check with your agent on where to look for separate boat owners' coverage.

Just as you would scrutinize the terms of your medical insurance, the nuances and details of your homeowner's policy should be examined seriously. Too often, homeowners sign up for a policy and go on autopilot regarding its terms and coverage without taking new acquisitions, risks, and increasing value of their homes into consideration.

Most insurance agents recommend a regular insurance “check-up” for consumers, so that homeowners are not left “high and dry” when disasters and losses strike.

Published: January 24, 2001

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