Your home is insured for what it costs to rebuild

The six parts of a homeowners policy

A homeowners policy is usually written as a bundle of separate coverages, each with its own limit and sometimes its own deductible. Reading it as a single sum is what produces the two most common surprises: a limit that binds long before the total does, and a loss that falls under a coverage you did not know was separate.

• Dwelling - the house itself and what is attached to it
• Other structures - detached garage, fence, shed; commonly set as a percentage of the dwelling limit
• Personal property - your belongings, usually also derived as a percentage
• Loss of use - somewhere to live while the home is uninhabitable after a covered loss
• Personal liability - if you are held responsible for injury or damage to someone else
• Medical payments - small medical costs for someone hurt on your property, regardless of fault

Your home is insured for what it costs to rebuild

Not what you paid, and not what it would sell for. Market value includes the land and the location, and neither of those needs rebuilding.

Rebuild cost moves with construction costs and labour availability rather than with the property market, so the two figures drift apart in both directions. A home can be worth far more than it costs to rebuild, or - where construction costs have risen sharply - considerably less.

This is the most consequential number on the policy and the one most often set by assumption. Ask how the figure on yours was arrived at.

Replacement cost or actual cash value - and it is set twice

Replacement cost pays to repair or rebuild with materials of like kind and quality. Actual cash value pays that figure less depreciation for age and wear.

The setting people most often assume is uniform across the policy usually is not. A policy can be written on replacement cost for the dwelling and actual cash value for personal property, and the difference only becomes visible at claim time.

Roofs increasingly carry their own arrangement. Many policies settle roof claims on a depreciation schedule tied to the roof's age even where the rest of the dwelling is on replacement cost, and it is one of the largest differences between two policies that look identical on a summary.

Deductibles, and the one that is a percentage

Most policies carry a flat deductible for ordinary claims. Many also carry a separate deductible for wind, hail or named storms, and that one is frequently expressed as a percentage of the dwelling limit rather than as a dollar figure.

That distinction is the single most expensive surprise in the product, because a percentage of a rebuild cost is a much larger number than the flat deductible most people believe they have. Check which applies to yours, and when it is triggered.

What a standard policy leaves out

Exclusions are how the product is defined rather than fine print, and most of them have a separate solution available - the problem is that people read them after a loss rather than before one.

Flood is excluded from standard homeowners policies, which is why the federal National Flood Insurance Program exists. Where a property sits in a Special Flood Hazard Area and carries a federally backed mortgage, flood cover is generally mandatory under federal law rather than optional. Water escaping from a system inside the home is a different question and is often covered.

Earth movement - earthquake, landslide, sinkhole, subsidence - is typically excluded and typically available separately. So is sewer and drain backup, usually as an inexpensive endorsement. Wear, maintenance and gradual damage are structural to how insurance works and cannot be bought back.

What your lender requires, and where that stops

A mortgage lender will require homeowners insurance, and the requirement is written to protect the lender's interest in the property. That is generally less than you would want for your own.

A lender cares about the structure securing the loan. It does not care what your belongings are worth, whether you have somewhere to live during repairs, or whether your liability limit would survive a serious claim. Meeting the requirement and being properly covered are two different exercises.

Liability, and when an umbrella starts to make sense

Dwelling coverage is constrained by what the house costs to rebuild. Liability is constrained only by what you choose, and it is the coverage that responds to losses with no natural ceiling - an injury claim is not capped by the value of your property.

Raising a liability limit is usually inexpensive. Where household assets have grown beyond what the home and auto policies would cover, a personal umbrella sits above both and is generally the cheapest way to buy a large amount of liability protection.

Document what you own before you need to

After a serious loss, the burden of establishing what was in the house generally sits with you, and memory is a poor instrument for it. People routinely under-claim simply because they cannot recall what they owned.

The workable version is not a spreadsheet nobody finishes. Walk through the house with a phone camera, opening cupboards and drawers as you go, and narrate what things are. Photograph serial numbers on anything substantial and keep receipts for high-value items.

Store the record somewhere that is not in the house - a cloud account or with a relative. A perfect inventory that burned with the building is no inventory at all.

Discounts worth asking about by name

Insurers rarely volunteer discounts, and several of the most useful ones are applied only if asked. It is worth running the list at renewal rather than at purchase, because circumstances change.

• Bundling home and auto with the same insurer
• Monitored alarm, smoke detection or water leak detection systems
• A new or recently replaced roof
• Updated electrical, plumbing or heating systems
• Claims-free history over a defined period
• Higher deductible, where you could genuinely absorb it
• Paying the term in full rather than monthly, which avoids installment fees

How to compare two home quotes

Two quotes are only comparable if the underlying settings match, and on home insurance there are more of those than on any other personal line.

Line the declarations pages up and check them in this order: the dwelling limit and how it was derived, whether the dwelling is on replacement cost or actual cash value, whether personal property is on the same basis, the personal property limit itself, the liability limit, the flat deductible, and then the wind or hail deductible and what triggers it.

Only once those match does the premium mean anything. A quote that is meaningfully cheaper than another is usually a different policy rather than a better deal on the same one.

What the claim process actually looks like

Report promptly, take steps to prevent further damage, and keep receipts for anything you spend doing so - most policies require reasonable steps to mitigate and will generally reimburse the cost of taking them.

Document the damage before repairs begin. An adjuster will assess the loss, and the assessment goes considerably better where there is a clear record of the condition before anyone touched anything.

Keep your own log of the claim - dates, names, what was agreed. Most denied claims fail on process rather than on coverage, and a clear record is the most effective defence against that.

Renovations, and telling your insurer

Work on the house changes what it would cost to rebuild, and a dwelling limit set before an extension is a limit set against a different house.

Tell your insurer before substantial work starts rather than after it finishes. A property undergoing major work is a different risk - some policies restrict cover while a home is a building site, and a home left unoccupied beyond a stated period is commonly excluded entirely.

Afterwards, update the dwelling limit to reflect what is now there. Upgraded electrical, plumbing, heating or roofing can also reduce the premium, so the conversation is not one-directional.

Working from home, and letting rooms

Standard homeowners policies are written for residential use, and they generally include only a small limit for business property with little or no business liability cover.

Working from home at a desk is rarely an issue. Holding stock, seeing clients at the property, or running equipment that others depend on generally is - and the point at which it stops being covered is not obvious until a claim tests it.

Short-term letting is the other common gap. Renting the property or a room out, even occasionally, is usually outside what a standard policy contemplates. Platforms sometimes provide their own cover, and it is generally narrower than people assume. In both cases the fix is usually an endorsement rather than a different policy, and it is inexpensive relative to the exposure.

Condominiums and townhouses are a different policy

A condo is not insured the way a detached house is, and buying the wrong form is a common and expensive mistake.

The association typically carries a master policy covering the building's structure and common areas, funded through your dues. What that master policy stops at is the question, and the answer is set by the association's own documents rather than by any general rule. Some are written bare walls in, leaving everything from the drywall inward to you. Others include original fixtures and fittings but not improvements made since.

Your own policy fills the gap: the interior, your belongings, your liability, loss of use, and improvements you have made. Sizing it requires reading the association's documents rather than guessing, and it is worth asking for them before closing rather than after.

Two further points catch people. Loss assessment coverage responds when the association levies a charge across all owners after a loss that exceeds the master policy, and it is inexpensive relative to what it can prevent. And the master policy's deductible can itself be assessed to owners, which is worth checking the size of.

Getting flood cover, if you need it

Because flood is excluded from standard policies, it has to be bought separately, and the route depends on where the property sits.

The federal National Flood Insurance Program is the long-established option and is available in participating communities. A private flood market also exists and has grown considerably, sometimes offering higher limits than the federal programme.

Two practical points. Flood policies commonly carry a waiting period before cover begins, so buying one as a storm approaches generally does not work. And flood risk is not confined to designated high-risk zones - a substantial share of flood claims come from properties outside them, which is worth weighing before deciding the exclusion does not concern you.