What Is Property Insurance?
Property insurance is a broad term for a variety of insurance policies that provide either property protection or liability coverage for property owners. Property insurance provides financial compensation to the owner or lessee of the structure and its contents in the event of damage or theft – and to a person other than the owner or lessee if that person is injured on the property.
Key things
Property insurance refers to a variety of insurance policies that offer property protection, including structural damage, personal property theft, and liability coverage.
Property insurance can include homeowners insurance, renters insurance, flood insurance, and earthquake insurance.
The three types of property insurance are replacement cost, actual cash value, and extended replacement cost.
Lenders typically require you to purchase homeowner’s insurance in order to obtain and maintain a mortgage.
How Property Insurance Works
Property insurance can include a variety of policy types, such as homeowners insurance, renters insurance, flood insurance, and earthquake insurance. Structural losses as well as personal property are usually included in homeowners or renters insurance.
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The exception is personal property, which has a very high value and is expensive, which is usually covered by purchasing an add-on to the policy called an add-on. If a claim is made, the policy will reimburse the policyholder for the actual value of the damage or the cost of a replacement to fix the problem.
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Property insurance perils typically include selected weather-related ailments such as fire, smoke, wind, hail, snow and ice, and lightning damage. Property insurance also protects against vandalism and theft, covering the building and its contents. This insurance also provides liability coverage in the event that someone other than the property owner or tenant is injured on the property and decides to file a lawsuit. Most mortgage lenders require homeowners to have homeowner’s insurance if there is an outstanding mortgage on the property.
Property insurance typically excludes damage that results from a variety of events, including tsunamis, floods, sewer and drain backups, seeping groundwater, standing water, and a variety of other water sources. Mold is usually not covered, as is earthquake damage. Additionally, most policies will not cover extreme circumstances such as nuclear events, acts of war or terrorism.
Understanding property insurance
There are three types of property insurance: replacement cost, actual cash value, and extended replacement cost.
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Replacement costs cover the cost of repairing or replacing property of equal or equal value. Coverage is based on replacement cost values rather than the cash value of the items.
Actual cash value coverage pays the owner or lessee the replacement cost less depreciation. If the destroyed item is 10 years old, you get the value of the 10 year old item, not the new one.
Extended replacement costs will pay more than the cover limit if construction costs increase; however, this usually does not exceed 25% of the limit. When purchasing this insurance, the limit is the maximum amount of compensation that the insurance company will pay out for a given situation or event.
Special Considerations
Homeowners and renters insurance usually includes some basic levels of coverage. However, there are several types of policies that go beyond basic packages to include more comprehensive coverage. The greater the coverage, the more expensive the policy premium will be. Below are the most common types of Home Owners (HO) policies and their coverage.
HO1
HO1 is the most basic “bare bones” homeowners insurance available. While it covers basic risks such as fire, lighting, theft and vandalism, it usually only provides minimal cover and is rarely recommended. Most homeowners prefer to get the more comprehensive coverages listed below.
HO2
HO2, or wide coverage, offers wider coverage than HO1. These are usually the listed hazards listed for HO1 plus such hazards as damage from falling objects, water from installation problems and electrical problems. Like HO1, HO2 is usually not recommended as it has limited coverage.
HO3
Most homeowners buy this hybrid insurance policy that covers physical loss or damage caused by 16 perils, including fire, vandalism and theft. Also known as a special form policy, the HO3 still has certain conditions and exclusions (such as earthquakes and floods) that require separate insurance.
There is a pre-set limit to cover certain valuables and collectibles, including gold, wedding rings and other jewelry, furs, cash, firearms, and similar items. Cover for accidental breakage/damage and mysterious disappearance (lost, misplaced) of valuables, including fine art and antiques, is not normally provided with HO3.
HO5
HO5 Homeowners coverage includes everything included in the HO3 policy, but is more focused on the structure itself and the possessions in the home, including furniture, appliances, clothing and other personal items. HO5 also does not cover earthquakes or floods. HO5 policies are available for homes that have either been built in the last 30 years or renovated in the previous 40 years, and usually cover any damage up to the replacement cost.
HO4
HO4 property insurance, also known as renters insurance, covers renters for loss of personal property and liability. However, it does not cover the actual rental house or apartment that should be covered by the landlord’s policy.
HO6
Also known as condo insurance, HO6 provides coverage similar to renters insurance, including personal property, unit improvements, interior damage and liability protection. HO6 does not cover external or structural damage to the building as housing associations usually insure their buildings.
Exclusions
Note that none of these levels of coverage will compensate the homeowner for property that breaks down or is damaged in more common wear and tear situations, such as a roof that begins to leak without wind and hail damage. This is where home warranties can come in handy – another way to protect your property. Home warranties are essentially service contracts that cover named appliances and systems (such as plumbing or HVAC) in your home.
What Is the Difference Between Home Insurance and Property Insurance?
Homeowners insurance typically provides financial coverage for liability claims and loss of property or personal belongings due to physical damage. Property insurance, on the other hand, is an umbrella term describing different types of policies that include flood, earthquake, and hurricane coverage. Property and casualty insurance includes the above classifications of property insurance and insurance from commercial general liability to m
What Does Property Insurance Not Cover?
Property insurance usually does not cover damage caused by the age of the home or normal wear and tear. Depending on the policy, mold and insect damage may not be covered either.
Is Property Insurance Mandatory?
There are no laws that require property insurance. However, banks and other mortgage lenders usually require you to insure the property while your loan is outstanding. Still, home insurance is a good tool to protect yourself against potential financial losses if you own your home outright.
Bottom Line
Property insurance is a broad term that includes homeowners, renters, flood and earthquake insurance. These coverages provide property owners with compensation for loss of personal belongings, physical damage to structures, and liability coverage. Property insurance can also provide financial compensation to renters in the event of damage or theft.
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