People take out homeowners insurance for the same reason they take out car and health insurance: If a home is damaged or someone else injured on the property, insurance helps owners cope with the financial consequences. Homeowners insurance is actually a combination of two different types of protection, hazard insurance and liability insurance.
In the event of things like fire, flood, or theft, renters insurance helps cover your personal possessions. And if you’re ever held responsible for injury or damages, liability coverage helps protect your financial security. Most landlords will require that you have a renters insurance policy to cover your own possessions. They will be responsible for insuring the actual house, but all of your belongings should not be their responsibility to cover.
Hazard insurance protects you against unintentional damage or destruction to your house or its contents, including fire, storm, theft, vandalism and similar threats, the Nolo legal website states. It can cover the cash value of the damages or the replacement value; replacement value pays enough to replace what you lost, but cash value only pays what a property is worth. The cash value for a five-year-old $1,000 television won’t be $1,000, for instance, because it depreciates with age, making it worth less in the insurer’s eyes.
Liability insurance covers personal liability for accidents on your property. If your neighbor trips on a hose in your yard and breaks his ankle, for example, liability insurance will pay for his medical expenses, up to the policy limit.
One reason homeowners need insurance is that mortgage companies require it. If you take out a mortgage, your house is the lender’s collateral, so your lender will require you to buy a minimum level of hazard insurance. That doesn’t prevent you from buying a greater amount than the minimum, Nolo states, if you think it necessary.
Homeowners insurance covers most of the property in your home, but there are limits to what the insurer will pay for certain items, such as cash or jewelry, the “This Old House” website states. If you have a home office, hazard insurance doesn’t cover business equipment either. If you have personal or business property that isn’t covered, consider paying more money for a supplemental policy that will protect you if they’re damaged.
Homeowners insurance doesn’t protect you against everything: Insurers routinely exclude things such as flood damage and earthquake damage from coverage, though separate flood and earthquake policies may be available where you live. “This Old House” states that a “law exclusion” in your policy can be very expensive. If an older building is damaged more than 50 percent, it will have to be rebuilt to the current building-code standards; the law exclusion means the insurer won’t pay the cost of upgrading wiring or roofs to meet the code.
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