Providing helpful and appropriate homeowner’s insurance coverage options to clients depends on several important factors. These factors are:
- Does the client(s) own or rent their home?
- How old is the dwelling?
- What are their coverage needs, i.e. basic, deluxe, or somewhere in between?
- Which of the covered disasters (listed below) pose a risk to the home based on geography and other factors?
Policy Options
- HO-1: Limited coverage policy- This “bare bones” policy covers you against the first 10 disasters. It's no longer available in most states.
- HO-2: Basic policy- A basic policy provides protection against all 16 disasters. There is a version of HO-2 designed for mobile homes.
- HO-3: The most popular policy- This “special” policy protects your home from all perils except those specifically excluded.
- HO-8: Older home- Designed for older homes, this policy usually reimburses you for damage on an actual cash value basis which means replacement cost less depreciation. Full replacement cost policies may not be available for some older homes.
If the Client Rents Their home
- HO4-Renter Created specifically for those who rent the home they live in, this policy protects the client’s possessions and any parts of the apartment that they own, such as new kitchen cabinets they installed, against all 16 disasters.
If the Client Owns a Co-op or a Condo
- H0-6: condo/co-op- A policy for those who own a condo or co-op, it provides coverage for all the client’s belongings and the structural parts of the building that they own. This policy protects clients against all 16 disasters.
Appropriate Level of Coverage
In addition to the decision of which specific policy above provides the best option of coverage for the client’s home, the other specific decision point concerns the level of coverage within the policy chosen.
Regardless of whether the client owns or rents, they have the following three options:
- Actual Cash Value This type of policy pays to replace the home or possessions minus a deduction for depreciation.
- Replacement Cost A policy with this level of coverage pays the cost of rebuilding/repairing the client’s home or replacing their possessions without a deduction for depreciation.
- Guaranteed or Extended Replacement Cost This policy offers the highest level of protection. An extended replacement cost policy pays whatever pays a certain percentage--generally 20 to 25 percent--over the policy limit to rebuild a home as it was before the fire or other disaster.
As an example, if the client's policy is for $100,000, they could get up to an extra $20,000 or $25,000 of coverage. This gives the client protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It generally won't cover the cost of upgrading the house to comply with current building codes. Clients can, however, get an endorsement (or an addition) to the policy called Ordinance or Law to help pay for these additional costs. A guaranteed replacement cost policy may not be available if the client's home is older.
Some insurance companies may offer an a guaranteed replacement cost policy. A guaranteed replacement cost policy pays whatever it costs to rebuild the home as it was before the fire or other disaster-even if it exceeds the policy limit significantly.
Even though a guaranteed/extended replacement cost policy may be a bit more expensive, it offers clients the best financial protection against disasters for their home. These coverages, however, may not be available in all states or from all companies.
Definitions and policy coverage material provided by and permission of the © Insurance Information Institute.
Disaster Coverage List
- Windstorm or hail
- Fire / lightning
- Explosion
- Smoke
- Damage caused by aircraft
- Damage caused by other vehicles
- Damage caused by riot or civil unrest
- Damage cause by vandalism or mischief
- Theft
- Falling object
- Volcanic eruption
- Weight of ice or snow
- Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system
- Accidental discharge/ overflow of water from plumbing, etc
- Freezing of a plumbing, heating, air conditioning or automatic, fire-protective sprinkler system, etc
- Sudden and accidental damage from artificially generated electrical current
