Home Insurance News

Homeowners, apartment owners and renters can buy many different kinds of property and casualty insurance.

In terms of risks covered, there are two subcategories: named peril and all peril. Named-peril policies specify risks covered and exclude everything else. All-peril policies specify risks not covered but include everything else.

The most basic policy (called an HO-1) provides protection against losses caused by fire, lightning, windstorm, hail, explosion, riot, smoke, vandalism, theft and damage caused by aircraft, vehicles and even volcanic eruptions. It is the least common.

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A broader policy, an HO-2, usually covers other named perils like falling objects and the weight of ice, snow or sleet; leaks from plumbing, heating, air-conditioning and fire-sprinkler systems; cracking, bursting, burning or freezing of such systems; and sudden and accidental damage to fixtures or appliances caused by an electrical discharge.

An all-peril policy, HO-3 (the most common) covers all risks except those specifically excluded. Typically, an HO-3 policy excludes coverage for damage caused by flood, earthquake, war, nuclear accident, landslide, mudslide and sinkholes. Some insurers now exclude or limit coverage for mold. Flood insurance must be bought separately.

In terms of reimbursement for loss, two basic types are available -- actual cash value and replacement cost coverage.

The least expensive is actual cash value coverage, in which a home is insured for only the face amount of the policy, no matter how much it might actually cost to rebuild it, and the contents are insured for their actual cash value, up to a cap that is typically a percentage of the face value of the policy. Such a policy reimburses an owner for only an item's depreciated value.

With replacement cost coverage, different forms are offered. Most replacement cost policies, despite the name, do not in practice replace the structure and its contents item by item. Most insurance carriers have caps, which vary by company, on the maximum reimbursement.

In addition, different carriers often define "replacement'' differently. There is true replacement cost coverage -- which pays to replace an item with its equal -- and functional replacement cost coverage, which replaces it with a functional equivalent. With true replacement cost coverage, a hand-hewed oak beam would be replaced with a hand-hewed oak beam. With functional coverage, it would be replaced with a beam that would perform the same function.

The very best coverage, experts say, provides true replacement of the structure regardless of the cost. Such policies generally cost about 25 percent more than less-comprehensive policies.

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