Most homeowners know they need insurance, but few understand what their policy actually covers — and more importantly, what it doesn't. Here's a clear breakdown.
What a Standard Policy Covers
A typical homeowner's insurance policy (known as HO-3) covers four main areas:
- Dwelling coverage — The structure of your home, including walls, roof, and built-in appliances. This protects against fire, windstorms, hail, lightning, and vandalism.
- Personal property — Your belongings inside the home: furniture, electronics, clothing, and appliances. Standard policies cover these up to a percentage of your dwelling coverage, typically 50-70%.
- Liability protection — If someone is injured on your property, liability coverage pays for their medical bills and your legal defense. Most policies include $100,000 to $300,000 in liability.
- Additional living expenses (ALE) — If your home becomes uninhabitable after a covered event, ALE pays for hotel stays, meals, and other temporary living costs.
Common Coverage Gaps
Standard policies do not cover everything. These are the most common exclusions that catch homeowners off guard:
- Flooding — Water damage from rising water (storms, overflowing rivers) requires a separate flood insurance policy through FEMA's National Flood Insurance Program or a private insurer.
- Earthquakes — Seismic damage is excluded from standard policies. Separate earthquake coverage is available and recommended in earthquake-prone areas.
- Sewer and drain backup — Water damage from backed-up sewers or drains is usually excluded but can be added as an endorsement for a small additional premium.
- Maintenance issues — Mold, pest infestations, and gradual wear and tear are considered maintenance problems, not insurable events.
- High-value items — Jewelry, art, and collectibles have sub-limits (often $1,500-$2,500). You need a scheduled personal property endorsement for full coverage.
Replacement Cost vs. Actual Cash Value
This distinction matters significantly when you file a claim:
- Replacement cost pays what it costs to replace your damaged property with new items of similar quality. This is the better option.
- Actual cash value pays the depreciated value — what your items are worth today, not what they cost new. A 5-year-old laptop might only net you $150.
Always choose replacement cost coverage if available. The premium difference is modest compared to the payout difference at claim time.
How Much Coverage Do You Need?
Your dwelling coverage should equal the cost to rebuild your home from scratch — not its market value or what you paid for it. Land value and location premiums don't factor in. Ask your insurer for a replacement cost estimate or hire an independent appraiser.
Ways to Save
- Bundle home and auto insurance (5-25% discount)
- Install security systems and smoke detectors
- Raise your deductible to $1,000 or higher
- Maintain good credit
- Review and compare quotes annually
The Bottom Line
Home insurance is essential, but understanding what you're paying for is equally important. Review your policy's declarations page, know your exclusions, and make sure your coverage limits match the actual cost to rebuild your home and replace your belongings.