Property Insurance: Definition And How Coverage Works
Property insurance is a broad term for a collection of policies that provide property owners with either property protection coverage or liability coverage. Property insurance compensates the owner or renter of a structure and its contents in the event of damage or theft, as well as a person other than the owner or renter who is injured on the property.
Property insurance policies can include homeowners insurance, renters insurance, flood insurance, and earthquake insurance. A homeowners or renters policy will usually cover personal property. The exception is high-value and expensive personal property, which is usually covered by purchasing a "rider" to the policy. If a claim is made, the property insurance policy will either reimburse the policyholder for the actual cost of the damage or the cost of replacing the problem.
How Property Insurance Works
Property insurance typically covers certain weather-related calamities, such as damage caused by fire, smoke, wind, hail, the impact of snow and ice, lightning, and more. Property insurance also covers vandalism and theft, as well as the structure and its contents. Property insurance also includes liability coverage in the event that someone other than the property owner or renter is injured and decides to sue.
Property insurance policies typically exclude damage caused by a variety of events, such as tsunamis, floods, drain and sewer backups, seeping groundwater, standing water, and a variety of other water sources. Mold and earthquake damage are typically not covered. Furthermore, most policies will not cover extreme events such as nuclear events, acts of war, or terrorism.
Understanding Property Insurance
Property insurance comes in three varieties: 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. Replacement cost values, rather than cash values, are used to determine coverage.
- Actual cash value coverage reimburses the owner or renter for the cost of replacement minus depreciation. If the destroyed item is ten years old, you will receive the value of a ten-year-old item rather than 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. The limit is the maximum amount of benefit that an insurance company will pay for a given situation or occurrence when you purchase insurance.
Special Considerations
Most homeowners buy a hybrid policy, which covers physical loss or damage caused by 16 perils such as fire, vandalism, and theft. Certain conditions and exclusions apply to the coverage, known as a HO3 policy. Certain valuables and collectibles, such as gold, wedding rings and other jewelry, furs, cash, firearms, and other items, have a predetermined coverage limit. In most cases, a HO3 policy does not cover accidental breakage/damage or the mysterious disappearance (lost, misplaced) of valuables such as fine art and antiques.
HO5 homeowners coverage includes everything in a HO3 policy, but is focused on the structure and personal property within the home, such as furniture, appliances, clothing, and other personal items. An HO5 policy does not cover earthquakes or floods. HO5 insurance policies are available for homes built or renovated within the last 30 years, and they typically cover any damages at replacement cost.
HO4 property insurance is also known as renter's insurance because it protects tenants against personal property loss and liability. It does not cover the actual rental house or apartment, which should be covered by the landlord's insurance policy.
It is important to note that none of these coverage levels reimburse the homeowner for property that fails or is damaged due to normal wear and tear, such as a roof that begins to leak without being damaged by wind or hail. This is where home warranties, another way to protect your property, can come in handy.