Home insurance

Major factors in price estimation include location, coverage, and the amount of insurance, which is based on the estimated cost to rebuild the home ("replacement cost").[2]

If insufficient coverage is purchased to rebuild the home, the claim's payout may be subject to a co-insurance penalty. In this scenario, the insured will be subject to an out of pocket fee as a penalty. Insurers use vendors to estimate the costs, including CoreLogic subsidiary Marshall Swift-Boeckh, Verisk PropertyProfile, and E2Value, but leave the responsibility ultimately up to the consumer. In 2013, a survey found that about 60% of homes are undervalued by an estimated 17 percent.[3] In some cases, estimates can be too low because of "demand surge" after a catastrophe.[2] As a safeguard against a wrong estimate, some insurers offer "extended replacement cost" add-ons ("endorsements") which provide extra coverage if the limit is reached.[2]

Prices may be lower if the house is situated next to a fire station or is equipped with fire sprinklers and fire alarms; if the house exhibits wind mitigation measures, such as hurricane shutters; or if the house has a security system and has insurer-approved locks installed.

Typically payment is made annually. Perpetual insurance which continues indefinitely can also be obtained in certain areas.

Home insurance offers coverage on a "named perils" and "open perils" basis. A "named perils" policy is one that provides coverage for a loss specifically listed on the policy; if it's not listed, then it's not covered. An "open perils" policy is broader in the sense that it will provide coverage for all losses except those specifically excluded on your policy.

For insurance policies that cover specific named perils, the insurer frequently offers a choice between one policy that will cover a basic set of specific perils, and another policy that covers the same basic set plus several additional perils, as discussed below. Together with an open peril, a.k.a. "special form" policy, these two groupings of named perils allow the insurer to offer a choice among three types of policy, with three levels of coverage, which can be priced in a fair and accurate manner and appeal to a variety of resident homeowners as well as owners of apartment buildings and condominium associations.

Basic "named perils"[4] – this is the least comprehensive of the three coverage options. It provides protection against perils most likely to result in a total loss. If something happens to your home that's not on the list below, you are not covered. This type of policy is most common in countries with developing insurance markets and as protection for vacant or unoccupied buildings.

Basic-form covered perils:

• Fire
• Lightning
• Windstorm or hail
• Explosion
• Smoke
• Vandalism
• Aircraft or vehicle collision
• Riot or civil commotion

Broad "named perils"[5] – this form expands on the "basic form" by adding 6 more covered perils. Again, this is a "named perils" policy. The loss must specifically be listed to receive coverage. Fortunately, the "broad form" is designed to cover the most common forms of property damage.

Broad-form covered perils:

• All basic-form perils
• Burglary, break-in damage
• Falling objects (e.g. tree limbs)
• Weight of ice and snow
• Freezing of plumbing
• Accidental water damage
• Artificially generated electricity

Special "all risk"[6] – special-form coverage is the most inclusive of the three options. The difference with "special form" policies is that they provide coverage to all losses unless specifically excluded. Unlike the prior forms, all unlisted perils are covered perils. However, if something happens to your home, and the event is on the exclusions list, the policy will not provide coverage.

Special-form excluded perils:

• Ordinance of law
• Earthquake
• Flood
• Power failure
• Neglect
• War
• Nuclear hazard
• Intentional acts

The first homeowner's policy per se in the United States was introduced in September 1950, but similar policies had already existed in Great Britain and certain areas of the United States. In the late 1940s, US insurance law was reformed and during this process multiple line statutes were written, allowing homeowner's policies to become legal.[10]

Prior to the 1950s there were separate policies for the various perils that could affect a home. A homeowner would have had to purchase separate policies covering fire losses, theft, personal property, and the like. During the 1950s policy forms were developed allowing the homeowner to purchase all the insurance they needed on one complete policy. However, these policies varied by insurance company, and were difficult to comprehend.[11]

The need for standardization grew so great that a private company based in Jersey City, New Jersey, Insurance Services Office, also known as the ISO, was formed in 1971 to provide risk information and it issued simplified homeowner's policy forms for reselling to insurance companies. These policies have been amended over the years.

Modern developments have changed the insurance coverage terms, availability, and pricing.[2] Homeowner's insurance has been relatively unprofitable, due in part to catastrophes such as hurricanes as well as regulators' reluctance to authorize price increases.[2] Coverages have been reduced instead and companies have diverged from the former standardized model ISO forms.[2] Water damage due to burst pipes in particular has been restricted or in some cases entirely eliminated.[2] Other restrictions included time limits, complex replacement cost calculations (which may not reflect the true cost to replace), and reductions in wind damage coverage.[2]

According to a 2018 National Association of Insurance Commissioners (NAIC) report on data from 2016,[12] 73.8% of homes were covered by owner-occupied homeowners' policies. Of these, 79.52% had an HO-3 Special policy, and 13.35% had the more expensive HO-5 Comprehensive. Both of these policies are "all risks" or "open perils", meaning that they cover all perils except those specifically excluded. Homes covered by an HO-2 Broad policy accounted for 5.15%, which covers only specific named perils. The remaining 2% includes the HO-1 Basic and the HO-8 Modified policies, which are the most limited in the coverage offered. HO-8, also known as older home insurance, is likely to pay only actual cash value for damages rather than replacement.[13]

The remaining 21.3% of home insurance policies were covered by renter's or condominium insurance. 14.8% of these had the HO-4 Contents Broad form, also known as renters' insurance, which covers the contents of an apartment not specifically covered in the blanket policy written for the complex.[13] This policy can also cover liability arising from injury to guests as well as negligence of the renter within the coverage territory. Common coverage areas are events such as lightning, riot, aircraft, explosion, vandalism, smoke, theft, windstorm or hail, falling objects, volcanic eruption, snow, sleet, and weight of ice. The remainder had the HO-6 Unit-Owners policy, also known as a condominium insurance, which is designed for the owners of condos and includes coverage for the part of the building owned by the insured and for the property housed therein. Designed to span the gap between the coverage provided by the blanket policy written for the entire neighborhood or building and the personal property inside the home. The condominium association's by-laws may determine the total amount of insurance necessary. E.g., in Florida, the scope of coverage is prescribed by statute – 718.111(11)(f).[14]

If a home can not be insured, obtaining a mortgage on it is difficult or impossible. If the homeowner's insurance is canceled after a mortgage agreement is in force, and the home judged to be uninsurable, a standard mortgage contract that compels homeowner's insurance allows the lender to purchase collateral protection insurance, (sometimes called "force-placed insurance") and charge the premiums to the homeowner via escrow. CPI's pay off the balance owed on the mortgage if the homeowner defaults on mortgage payments, and some will cover damage to the home that impacts the resale value. This repair coverage can benefit the homeowner, but by design the contractual benefits flow to the mortgagee. If the structure is deemed uninsurable, the homeowner also benefits from not having the mortgage called in by the lender - without CPI the homeowner would be in serious breach of his contractual obligations.[15]

According to the 2008 Insurance Information Institute factbook, for every $100 of premium, in 2005 on average $16 went to fire and lightning, $30 to wind and hail, $11 to water damage and freezing, $4 for other causes, and $2 for theft. An additional $3 went to liability and medical payments and $9 for claims settlement expenses, and the remaining $25 was allocated to insurer expenses.[16] One study of fires found that most were caused by heating incidents, although smoking was a risk factor for fatal fires.[17]

After a loss, the insured is expected to take steps to mitigate the loss. Insurance policies typically require that the insurer be notified within a reasonable time period. After that, a claims adjuster will investigate the claim and the insured may be required to provide various information.

Filing a claim may result in an increase in rates, or in nonrenewal or cancellation. In addition, insurers may share the claim data in an industry database (the two major ones are CLUE and A-PLUS[18]), with Claim Loss Underwriting Exchange (CLUE) by Choicepoint receiving data from 98% of U.S. insurers.[19]