Best for: Homeowners who assume their policy covers “everything” until they file a claim.
Your home is probably your biggest asset. Your homeowners insurance policy probably doesn’t protect it as much as you think.
Most people buy homeowners insurance, file it away, and assume they’re covered for anything that could go wrong. Then something does go wrong and they discover their policy doesn’t cover floods, or earthquakes, or that mysterious crack in the foundation that’s been slowly growing for three years.
Let’s talk about what you’re actually insured for and where the gaps are.
What’s Actually Covered
A standard homeowners policy (called an HO-3 in insurance speak) covers your dwelling, your personal property, liability, and additional living expenses. But each of these has limits and exclusions that matter.
Your Dwelling: The Structure Itself
This covers damage to your house from specific perils. Fire, wind, hail, lightning, vandalism, theft, falling objects. The usual disasters.
The coverage amount should be enough to rebuild your house from scratch, not what you paid for it. Your home’s market value includes the land. Your insurance doesn’t cover land because land doesn’t burn down. If your house is worth $400,000 but the lot is worth $100,000, you need $300,000 in dwelling coverage.
Most policies cover the dwelling on a replacement cost basis, meaning they’ll pay to rebuild your house with similar materials. Some older policies use actual cash value, which factors in depreciation. Replacement cost is better.
Your Personal Property: Everything Inside
This covers your stuff. Furniture, clothes, electronics, kitchen appliances. Usually it’s set at 50-70% of your dwelling coverage.
But here’s the catch: most policies cover personal property at actual cash value unless you pay extra for replacement cost coverage. Actual cash value means depreciated value. That 5-year-old laptop? Your insurance company will value it at maybe $200, not the $1,200 you paid for it.
Pay for replacement cost coverage on personal property. It costs more but it’s worth it.
Other Structures: Detached Garages, Sheds, Fences
This covers structures on your property that aren’t attached to your house. Usually 10% of your dwelling coverage.
A detached garage, tool shed, fence, or standalone pergola would fall under this. If you have a $300,000 dwelling policy, you’d have $30,000 for other structures. If your detached garage costs $50,000 to rebuild, you’ll need to increase this coverage.
Liability Coverage: When Someone Gets Hurt
Liability covers you if someone gets injured on your property or if you damage someone else’s property. Your kid throws a baseball through a neighbor’s window? Liability. Someone trips on your front steps and breaks their leg? Liability.
Standard policies include $100,000 in liability coverage. That’s not enough. Raise it to at least $300,000, or better yet, $500,000. If you have significant assets, buy an umbrella policy. We’ll cover that in another article.
Additional Living Expenses: When You Can’t Live at Home
If your house is damaged and uninhabitable, this coverage pays for hotel bills, restaurant meals, and other expenses while repairs are being made.
Usually it’s 20% of your dwelling coverage and lasts for a set period, often 12 months. If you have a $300,000 policy, you’d get $60,000 for temporary living expenses.
This coverage is useful but runs out faster than you’d think. Major repairs take months. Hotels and eating out every day get expensive quickly.
What’s Definitely Not Covered
Every homeowners policy has a long list of exclusions. Here are the big ones that surprise people.
Floods
Homeowners insurance does not cover flooding. Period.
Not river floods, not storm surge, not water backing up through the sewer. If water comes from the ground up, it’s not covered.
You need a separate flood insurance policy, usually through the National Flood Insurance Program (NFIP). Even if you’re not in a flood zone, consider buying it. Floods happen outside flood zones all the time.
Earthquakes
Also not covered. If you live in California or anywhere else with earthquake risk, you need a separate earthquake policy.
Earthquake insurance is expensive because earthquake damage is expensive. But if your house collapses in an earthquake, your homeowners policy won’t help you.
Foundation Issues, Settling, and Poor Maintenance
Insurance covers sudden, accidental damage. It doesn’t cover wear and tear, neglect, or things that develop slowly over time.
That crack in your foundation? Not covered. Your roof is 20 years old and needs replacing? Not covered. Termites ate your floor joists? Definitely not covered.
Regular maintenance is your responsibility. Insurance is for unexpected disasters, not deferred upkeep.
Mold (Usually)
Mold is tricky. If mold results from a covered peril, like a burst pipe, it might be covered. But most policies cap mold remediation at $10,000 or so.
If mold develops because of long-term moisture problems or poor ventilation, it’s not covered at all.
Mold remediation can cost tens of thousands of dollars. Read your policy’s mold exclusions carefully.
Acts of War, Nuclear Hazards, and Other Unlikely Disasters
Every policy excludes war, nuclear incidents, and government seizure of property. You’re not going to buy coverage for these because it doesn’t exist. But it’s worth knowing your policy won’t help if the apocalypse arrives.
Replacement Cost vs. Actual Cash Value
This distinction matters more than almost anything else in your policy.
Replacement cost means your insurance pays to replace your damaged property with new property of similar kind and quality. Your 10-year-old roof gets destroyed? They pay for a new roof.
Actual cash value means they pay replacement cost minus depreciation. Same 10-year-old roof? They’ll estimate the roof was halfway through its lifespan and pay you half of what a new roof costs.
Most dwelling coverage is replacement cost by default. Most personal property coverage is actual cash value unless you pay extra.
Always pay extra.
How Much Coverage Do You Actually Need?
Your mortgage company requires you to carry enough insurance to cover the loan balance. But that’s not necessarily enough to rebuild your house.
Construction costs vary wildly by location. A 2,000-square-foot house might cost $200,000 to rebuild in rural Texas and $500,000 in San Francisco.
Your insurance company should calculate your replacement cost based on local construction costs. But you should double-check their math. Get a rough estimate from a local contractor if you’re unsure.
Don’t insure based on your home’s market value. Land value and location premium don’t matter for insurance purposes. You only need to insure the cost to rebuild the structure.
Deductibles: Same Trade-Off as Auto Insurance
Higher deductibles mean lower premiums. Standard deductibles are $500, $1,000, or $2,500.
The same logic from auto insurance applies here. If raising your deductible from $1,000 to $2,500 saves you $300 a year, you’ll break even after 5 years if you never file a claim.
The key question: can you afford to pay the deductible without using a credit card? If not, stick with a lower deductible.
One wrinkle: some policies have separate, higher deductibles for wind and hail damage, often 1-5% of your dwelling coverage. If you have a $300,000 policy, a 2% wind/hail deductible means you pay the first $6,000 of damage out of pocket.
Read your policy. These separate deductibles catch people off guard.
Special Limits on High-Value Items
Your personal property coverage has sub-limits for certain types of items.
Typical sub-limits:
– Jewelry, watches, furs: $1,500 total
– Firearms: $2,500 total
– Silverware, goldware: $2,500 total
– Cash, coins, stamps: $200 total
– Electronics: Sometimes capped per item
If you own a $5,000 engagement ring or $10,000 worth of camera equipment, standard coverage won’t cut it. You’ll need a scheduled personal property endorsement (also called a floater).
This coverage insures specific items at agreed-upon values, usually without a deductible. It costs extra but it’s the only way to properly insure high-value items.
When to File a Claim (And When Not To)
Filing claims increases your premiums. Some claims increase them more than others.
As a general rule, don’t file a claim unless the damage exceeds your deductible by at least $2,000-$3,000. If you have a $1,000 deductible and $1,500 in damage, just pay it yourself.
Some claims don’t impact your rates much. A tree falling on your house during a storm is usually considered not-at-fault. Liability claims and water damage claims tend to hit your rates harder.
And whatever you do, don’t file multiple claims in a short period. Two claims in three years will get you non-renewed faster than almost anything else.
The Big Gaps: What You Probably Need to Buy Separately
Most people need three things their homeowners policy doesn’t include:
- Flood insurance: If you’re anywhere near water or in a low-lying area, buy it. Don’t wait until the forecast shows a hurricane headed your way because by then it’s too late.
- Earthquake insurance: If you’re in California or another seismically active area, get it. It’s expensive but not as expensive as rebuilding a collapsed house out of pocket.
- Personal umbrella policy: This sits on top of your homeowners and auto liability coverage. It’s cheap and protects you from lawsuits that exceed your standard policy limits. We’ll cover this in another article.
Bundling with Auto Insurance
Most insurance companies offer a discount if you bundle your auto and homeowners policies. The discount is usually 15-25%, which is significant.
But don’t bundle just because. Get separate quotes for standalone policies from multiple companies and compare the total cost. Sometimes two different insurers beat one bundled policy.
The Bottom Line
Homeowners insurance is full of gaps, exclusions, and fine print that most people never read until it’s too late.
Here’s what you need to know:
– Insure your dwelling for enough to rebuild it, not its market value
– Pay extra for replacement cost coverage on personal property
– Raise your liability limits to at least $300,000
– Buy flood insurance if you’re anywhere near water
– Get earthquake insurance if you’re in a seismic zone
– Schedule high-value items separately if they exceed sub-limits
– Don’t file small claims unless the damage significantly exceeds your deductible
Read your policy. All of it. It’s boring but it’s the only way to know what you’re actually covered for.
Your insurance company is not going to volunteer information about gaps in your coverage. That’s your job.