Why You Might Want an HO5 Home Insurance Policy

For homeowners looking for premium homeowners insurance, an HO5 policy typically provides the most protection and highest coverage limits.

For homeowners who want basic protection, an H03 homeowners insurance policy will usually suffice since it provides a wide range of coverage for theft, natural disasters, fire, and vandalism. However, with an H03 policy, you are required to prove that your personal property claim happened due to one of the named perils (insurance-speak for specific dangers) listed on your policy.

Conversely, the onus of proof is on the insurance company with a premium policy like an H05. The only way you won't get reimbursed for personal property damages is if the peril is specifically exempted from your HO5 policy.

Basic H03 Policy vs. Premium HO5 Policy

The most common sort of homeowners insurance, an HO3 policy, regards all risk to the actual building structure of your home, meaning you'd be insured for any peril that could happen to the outside of your home. If you have a mortgage loan, your mortgage lender will likely require you to buy homeowners insurance, which is typically an HO3 policy.

Peril, in terms of insurance coverage, is defined as something that could destroy or cause damage to your property. Burst pipes, fires, hurricanes, and tornadoes are all perils.

Named perils mean the perils you are covered for that are specifically mentioned in your insurance policy contract. If you are covered for all perils except those mentioned as exemptions, you are getting an open perils policy. All risk is also called "open peril," because unless a specific peril is excluded, you are covered. However, your personal property or the contents of your home (i.e., your stereo, computer, and furniture) are only covered by named perils in an H03 policy.

In an HO5 policy, both personal property and your home are covered under an open perils policy. Thus, if you have a claim due to anything that causes damage to your personal property within your home, you wouldn't have to prove that it happened because of a named peril. For instance, if your roof develops a water leak and your property is damaged, you do not have to prove that it happened based on a reason covered by your policy, such as hail. If the peril is not specifically excluded, you are covered.

Perils Covered With an HO3 Policy

There are 16 named perils that are generally insured against in a typical H03 (traditional) policy. This covers most incidents that can happen and is good enough that most people end up with this policy in order to avoid higher insurance premiums. Some of the perils that may be included in an H03 policy are vandalism, damage from thawing ice, mold, theft, and volcanic eruption.

Types of HO3 Coverage

Coverage by HO3 insurance policies usually falls into five basic categories: A, B, C, D, and E.

• Coverage A: This refers to the actual physical building you live in and any attached structures, like a porch, deck, or garage. Your home is usually covered on an open peril basis.
• Coverage B: This covers other structures on your property that are unattached to your home, including detached garages, sheds, fences, swimming pools, and tennis courts. Typically, these structures are insured for up to 10% of your Coverage A amount, but you can increase it.
• Coverage C: This applies to the contents of your home—your furnishings, appliances, and other personal property. Unlike your home, which is covered for open perils, your contents are covered for named perils only—occurrences specifically listed on the policy. If it’s not listed, it’s not covered.
• Coverage D: Also called "loss of use" coverage, this applies if your home becomes uninhabitable. It covers the costs of staying in a hotel and any additional living expenses. This coverage is usually on a named peril basis and is either limited to a certain period of time or 10% of the Coverage A amount.
• Coverage E: This is the personal liability portion of your policy—protecting you if something happens to someone else or someone's property or other situations where you’d be deemed at fault. Typically, it covers any legal fees or court costs paying the damages that are your responsibility.

Reasons to Get an HO5 Policy

Premium H05 policies tend to be more expensive than the more standard H03. However, if you have fantastic credit and the difference in price is relatively small, the investment may be worth it.

First, HO5 policies give you no-fuss, no-muss insurance; they are inclusive rather than exclusive coverage for your property and goods. When making a claim, you don't have to jump through hoops to prove you're covered. Instead, the burden of proof is on the insurance carrier to determine whether or not you're covered.

A more specific benefit of an HO5 is that you are covered in additional circumstances and for the maximum amount (i.e., replacement value) for damage to your personal property. So, it is especially valuable if you own a lot of high-value items.

How can you tell if an HO5 is worth it? Go around your home with a pad and paper and write down everything you own. Then, write down what you think each item is worth. Then, go online to find the replacement cost if you had to buy that same item new. Total the values, and now that you know what your stuff is worth, you can decide whether you need an HO5 policy.

HO5 Exclusions

Before you become a complete convert to the HO5 policy, there are some caveats to consider.

One is that you may not qualify. These policies tend to be for newer homes or those located in low-risk neighborhoods (nothing in a flood zone or landslide-prone area). High property values help, too.

Also, while HO5 policies are more comprehensive, they don't cover everything. There are several common exclusions, as they're called, including damage due to:

• Earth movement
• Ordinance or law
• Water damage from outside: flood, sewer backup
• Power failure
• War
• Nuclear hazard
• Intentional loss
• Government action
• Collapse
• Theft if the structure is under construction
• Vandalism or malicious mischief if the home is vacant more than 60 days
• Mold, fungus, or wet rot (with some exceptions)
• Neglect, wear and tear, and deterioration
• Mechanical breakdown
• Smog, rust, and corrosion
• Smoke from agricultural smudging and industrial operations
• Discharge, dispersal, or seepage of pollutants
• Settling, shrinking, bulging, or expanding of the foundation
• Infestation of birds, vermin, rodents, or insects
• Animals you own

Questions to Ask About Any Policy

No matter whether you choose an HO3 or an HO5 homeowner's policy, you should ask your agent or broker these questions:

• What are the exact exemptions? Even if you have an HO5 policy, you could have exemptions—things or situations not covered in your policy—such as the ones noted above.
• Is replacement value or cash value covered? If you are covered for replacement value instead of cash value, you are paid enough to buy the item new instead of what the item is worth at the time it is damaged.
  

Frequently Asked Questions (FAQs)

The Bottom Line

HO5 policies protect you from your insurance company not reimbursing for certain types of personal property damage. However, opting for this more expensive coverage policy depends on how much your possessions are worth and if you can afford the additional premium. No matter what insurance policy you choose, ask specific questions about what items are not covered. You don't want to shell out the extra cash for an HO5 policy and then discover that what damages your property is the one thing that is not covered.