How to Read a Homeowners Policy

Unfortunately, most of us never read our homeowners insurance policies, not realizing it is our personal responsibility to do so. By understanding how to read a homeowners insurance policy, you can be sure you have the right coverage for your home.

Insurance companies use the abbreviation HO for homeowners insurance. The type of HO policy will depend on whether you own a house, have a condominium, or if you rent. Whatever the case, each policy is composed in essentially the same way.

The HO policy has four parts: the Declarations Page, Insuring Agreement, Exclusions and Conditions. The Declarations Page, sometimes called the “Coverage Selections Page,” identifies the parties to the contract, namely you and the insurance company. It will also identify the agreed amount of coverage for each type of potential financial loss.

Reading the declarations is very important. The amount of coverage you carry on your home can hurt your financial income if there is a total loss. In most cases, if your home is insured for less than 80% to 90% of its value, the insurance company can apply a penalty when it comes time to pay. When you buy the policy, the insurance company will inspect your home to place a value on what it would cost to rebuild in the event of a total loss. It is up to you to choose the level of coverage you want.

The Insuring Agreement is the nuts and bolts of the policy. It specifies the types of financial losses covered. Section 1 covers your property and Section 2 is for your personal liability. Section 1 consists of Coverages A-D, plus Additional Coverages. Section 2 is made of Coverages E and F.

Coverage A is for the “dwelling” or home you permanently reside in. Coverage B is for any “Other Structures” on your property like an unattached garage or pool. Coverage C is for your personal property, or anything not permanently installed in your home. This coverage will be different for condominium owners and renters.

Coverage D is for Loss of Use, or the cost to use a substitute for your damaged property until it can be repaired or replaced permanently. You should discuss any Additional Coverage that may be available with your agent. Any such coverage is shown after Coverage D.

Section 2 of the Insuring Agreement is for Liability Coverage. It contains Coverage E for personal liability when a third injured party accuses you of wrongdoing. Coverage F is for Medical Payments to others. This coverage pays medical expenses of any non-resident injured on your property, regardless of fault.

Because insurance is there to cover unexpected events, some losses are considered inevitable and are therefore not covered. The Exclusions section defines such events. You can overcome some exclusions by purchasing Additional Coverage, so discuss this with your agent.

Finally, you will find the Conditions of the policy. Conditions place certain limitations on the insurance company’s responsibility to pay claims or defend you in court. Read this section carefully to be sure you are complying with all terms of the insurance contract. Otherwise, the insurance company may not be obligated to pay a claim.