Property Insurance: Definition and How Coverage Works

What Is Property Insurance?

Property insurance is a broad term for a series of policies that provide either property protection or liability coverage for property owners. Property insurance provides financial reimbursement to the owner or renter of a structure and its contents in case of damage or theft—and to a person other than the owner or renter if that person is injured on the property.

How Property Insurance Works

Property insurance can include a number of types of policies, such as homeowners insurance, renters insurance, flood insurance, and earthquake insurance. Both structural losses and personal property are usually included in a homeowners or renters insurance policy. The exception is personal property that is very high value and expensive, which is usually covered by purchasing an addition to the policy called a rider. If there's a claim, the property insurance policy will reimburse the policyholder for the actual value of the damage or the replacement cost to fix the problem.

Perils covered by property insurance typically include select weather-related afflictions, such as damage caused by fire, smoke, wind, hail, the impact of snow and ice, and lightning. Property insurance also protects against vandalism and theft, covering the structure and its contents. This insurance also provides liability coverage in case someone other than the property owner or renter is injured while on the property and decides to sue. Most mortgage lenders require homeowners to have property insurance if there's an outstanding mortgage loan on the property.

Property insurance policies normally exclude damage that results from a variety of events, including tsunamis, floods, drain and sewer backups, seeping groundwater, standing water, and a number of other sources of water. Mold is typically not covered, nor is the damage from an earthquake. In addition, most policies will not cover extreme circumstances, such as nuclear events, acts of war, or terrorism.

Understanding Property Insurance

There are three types of property insurance coverage: replacement cost, actual cash value, and extended replacement costs.

• Replacement cost covers the cost of repairing or replacing property at the same or equal value. The coverage is based on replacement cost values rather than the cash value of items.
• Actual cash value coverage pays the owner or renter the replacement cost minus depreciation. If the destroyed item is 10 years old, you get the value of a 10-year-old item, not a new one.
• Extended replacement costs will pay more than the coverage limit if the costs for construction have gone up; however, this usually won't exceed 25% of the limit. When you buy this insurance, the limit is the maximum amount of benefit the insurance company will pay for a given situation or occurrence.

Special Considerations

Homeowners and tenant insurance policies typically include some basic levels of coverage. However, several types of policies exist that extend beyond basic packages to include more comprehensive coverage. The greater the coverage, the more expensive the premiums will be for the policy. Below are the most common types of homeowners policies (HO) and their coverage.

HO1

HO1 is the most basic "bare bones" homeowners insurance available. While it does cover basic risks like fire, lighting, theft, and vandalism, its typically provides only minimal coverage and is seldom recommended. Most homeowners prefer to obtain the more comprensive coverages listed below.

HO2

HO2, or broad form coverage, offers more extensive coverage that HO1. It typically the named perils listed for HO1 plus such risks as damages caused by falling objects, water from plumbing problems, and electrical issues. Also like HO1, HO2 is not typically recommended because it of its limited coverage.

HO3

Most homeowners purchase this hybrid policy that compensates for physical loss or damage caused by 16 perils, including fire, vandalism, and theft. The HO3, also known as the special form policy, still has certain conditions and exclusions (such as earthquakes and floods) that require separate insurance.

There is a predetermined limit on the coverage of certain valuables and collectibles, including gold, wedding rings and other jewelry, furs, cash, firearms, and similar items. Coverage is not usually provided in an HO3 for accidental breakage/damage and mysterious disappearance (lost, misplaced) of valuables, including fine art and antiques.

HO5

HO5 homeowners coverage includes everything in an HO3 policy but is more geared toward the structure itself and the property within the home, including furniture, appliances, clothing, and other personal items. An HO5 also doesn't cover earthquakes or floods. HO5 insurance policies are available to homes that were either built in the��last 30 years or renovated in the previous 40 years, and they typically cover any damages at replacement cost.

HO4

HO4 property insurance, also known as renters insurance, covers tenants from loss of personal property and liability issues. However, it does not cover the actual house or apartment being rented, which should be covered by the landlord’s insurance policy.

HO6

Also known as condominium insurance, HO6 provides similar coverage to renters insurance, with personal property, unit improvements, internal damage, and liabiity protecton included. HO6 does not cover external or structural damage to the building, as the condo association typically insures its buildings.

Exclusions

Note that none of these coverage levels reimburses the homeowner for property that breaks down or is damaged in more normal wear-and-tear situations, such as a roof that begins to leak without damage from wind and hail. That's where home warranties—another way to protect your property—can be helpful. Home warranties are essentially service contracts that cover named appliances and systems (such as plumbing or HVAC) in your home.

The Bottom Line

Property insurance is a broad term that includes such policies as homeowners, renters, flood, and earthquake insurance. These coverages provide property owners with compensation for loss of personal belongings, physical damage to structures, and liability coverage. Property insurance can also provide financial reimbursement to renters in case of damage or theft.