Homeowners insurance can be a complicated and confusing subject. Here are some terms that can help make it easier to understand.
Owning a home is a goal to which most Americans aspire to achieve. It is also the largest investment many of us will make in our lifetime, which means it is important to protect it with insurance in case something unexpected or unforeseen happens – such as a fire or natural disaster.
Homeowners insurance covers losses or damages to a house and the belongings inside, as well as other structures on the property that are not attached to the home (e.g., a fence, car port or tool shed). It also provides liability coverage in the event visitors suffer injuries within the home or on the property, and it could extend to events off the premises as well.
It's important to note, though, that not all homeowners policies are the same and not every loss will be covered. Homeowners policies typically don’t cover damage from flooding, for example. Although most mortgage providers require homeowners purchase a separate flood insurance policy if the property is located in an area prone to flooding, the Federal Emergency Management Agency (link opens in new tab) says as many as 25 percent of floods occur outside of a flood zone.
In addition, most policies don’t cover damage from earthquakes. Although the need for a separate earthquake insurance policy may be obvious in areas such as San Francisco or Los Angeles, many people aren’t aware that several Midwest states lie along a major fault line as well. The New Madrid fault (link opens in new tab), which runs from southern Illinois to western Tennessee, was responsible for several major earthquakes in the early 1800s and scientists predict the area will likely see a major earthquake in the future.
If you do need to file a claim, you’ll likely pay a deductible ranging anywhere from $500 to $10,000 before your coverage kicks in. Although a higher deductible will typically mean lower premiums, it’s important to speak with your insurance agent to find out the best coverage options for your specific situation.
Insurance policies can be complicated to understand, especially because they use a lot of legal terminology. To make it a little easier, we put together a glossary of terms to help you better understand what your policy says.
- Actual Cash Value (ACV)
- If items are stolen or damaged, the actual cash value is the amount you would be reimbursed for what the items cost to repair or replace, minus depreciation. The ACV is likely to be different than the replacement cost. (See “Replacement Cost” below.)
- Additional Living Expenses (ALE)
- If your home is damaged and rendered uninhabitable due to a covered loss, additional living expenses will reimburse you for costs you incur to maintain a comparable standard of living while your home is being repaired. It includes hotel accommodations, meals and more, so be sure to save your receipts for your insurance adjuster. Be aware that ALE resulting from earthquakes and flooding are generally not covered – you must purchase separate policies for these.
- An insurance company representative who works to determine the extent of a loss when a policyholder submits a claim.
- A deductible is the amount you agree to pay out-of-pocket for damages before your insurance policy will pay on a covered loss. If you have a $500 deductible, for example, and your home sustains $1,000 worth of covered damages, your insurer will pay $500, which is the amount that exceeded your deductible.
- Dwelling Coverage
- This is the part of a homeowners insurance policy that may help pay for the cost to repair or rebuild the physical structure of your home if it’s damaged by a covered peril (such as a windstorm, hail, lightning or fire).
- An attachment to an insurance policy that amends the coverage it provides. Also known as a Rider.
- An exclusion or exception is a provision in the insurance policy that eliminates coverage for certain perils, events, property or liability. As mentioned above, earthquakes and flooding are generally not covered by typical homeowners insurance policies, so you would need to purchase a separate earthquake or flood insurance policy to be covered against these perils. Additional exclusions include neglect on the homeowner’s part to ensure proper maintenance of the property; intentional loss (e.g., arson); fraud; and intended injury to another party or their property. There are more exclusions you may find in your policy, so we recommend you speak your local insurance agent to discuss them in more detail.
- Medical Payments to Others
- This coverage applies to the costs associated with injuries sustained by guests, regardless of who is at fault. For example, if a non-family member were to trip on a loose brick in your walkway and break an ankle, this coverage might apply towards their medical expenses. The limit varies by state and insurance company, but typically ranges between $1,000 and $5,000 per person. Personal liability coverage may apply if an insured is legally liable for the injury. For additional financial protection you may want to consider purchasing an umbrella insurance policy. (See “Umbrella Liability Policy” below.)
- Ordinance or Law Exclusion
- Some homeowners policies exclude situations where the repair or replacement of damaged property needs to be done with upgraded materials to conform with changes in building codes. Those policies may cover just the cost of repairs using the original grade of materials. Unless the homeowner has purchased additional coverage, they may need to pay the difference in cost between the old materials and the new materials required by the current codes.
- Other Structures
- Coverage for structures on your property that are not attached to the home. These structures may include a detached garage, fence, tool shed, gazebo, driveway or swimming pool.
- Perils Insured Against
- A peril is a cause of loss. Perils insured against are those for which coverage is provided, such as fire, water, vandalism, theft, and wind. Covered perils can vary by coverages and policy terms. Speak with your local insurance agent to learn more.
- Personal Liability
- If a guest is injured while on your property, or you or someone else in your household causes damage to another person’s property, you may be legally responsible to pay medical bills or for the repair. Personal liability provides financial support if you are sued for the damages up to the policy limit. Many homeowners policies carry a minimum limit of $100,000, meaning that the insurance company could pay up to that amount to the injured party per occurrence. Higher limits are available and homeowners can consider purchasing an umbrella policy to protect their assets in the event of a major claim or lawsuit. (See “Umbrella Liability Policy” below.)
- Personal Property
- A home’s contents, including furniture, electronics, clothing and appliances, are defined as personal property and are generally covered by your homeowners policy. On the other hand, possessions that are expensive, valuable and/or difficult-to-replace such as jewelry, fine art and other collectible items may be subject to sub-limits, which is the maximum amount an insurer will pay for that category of personal property as specified by the policy. If you own belongings of this nature, get them appraised to determine their current value, then work with your local insurance agent to determine if you need more coverage. You may want to consider purchasing a “floater” policy or a “Valuable Items Plus” endorsement that covers losses, including theft and accidental loss (such as leaving an engagement ring in a hotel room).
- An insurance premium is the amount a homeowner pays for their insurance policy across the entire term of the policy and may not include such things as installment and other applicable fees. Some ways that might help lower your premium payment include bundling your home and auto insurance policies, installing a security system, remaining claims-free for a given time period, and other discounts available in your state.1 Speak to a local agent for more details.
- Replacement Cost (RC)
- The replacement cost is the amount an insurance company will pay to repair, replace damaged items or rebuild damaged property with materials of similar type and quality at the current day’s prices without deducting for depreciation.
- Umbrella Policy
- A policy designed to provide additional liability protection above and beyond your auto and homeowners policies, an umbrella policy provides excess coverage when the primary policies are exhausted by payment of claims.
Mercury Insurance recommends that you reassess your homeowners insurance each year to ensure you have adequate coverage. Your needs may change depending on an increase in your home’s value, improvements or additions made to the home or the acquisition of goods that are expensive, valuable and/or difficult-to-replace. Be sure to ask your agent any questions you may have about policy limits and the specifics of what is covered.