How to Read a Homeowners Insurance Policy

Homeowners’ policies contain three preliminary sections (a declarations page, a general agreement, and the definitions section), and two coverage sections (Section I – Property Coverages and Section II – Liability Coverages).

The declarations page lists the coverage purchased (including limits and deductibles), the premium charged for that coverage, and the coverage period. When a covered loss occurs, the insured pays the deductible before insurance begins. Higher deductibles mean lower premiums, but increase the money the insured needs to keep available. The declaration page also indicates the policy number and identifies the insurer, insured, and property insured. Endorsements, indicated on the declarations page, allow customized coverage for specific needs.

The General Agreement makes the coverage listed on the declarations page dependent upon the policyholder’s payment of premium due and compliance with policy provisions. The Definitions section defines key words and phrases.

Each homeowner’s policy also contains two coverage sections explaining the terms of the coverage listed on the declarations page. The first of these sections, Section I, explains property coverages, and consists of:

Coverage A – Dwelling covers the insured’s home, attached fixtures, such as built-in appliances, and structures attached to the home, such as a garage. Coverage A excludes damage to land and to structures separated from the home by a clear space, such as sheds. On the declaration page, the Coverage A limit represents the money available, in the event of a loss, to replace or restore the insured home. This limit does not represent the home’s purchase price, current market value, or any outstanding mortgage debt. Instead, it should represent 100% of the cost to replace the home; any coverage shortfall, when a loss occurs, becomes the insured’s responsibility. Since the land will remain to build upon, it is not considered in this limit’s calculation.

Homeowners’ policies consider the potential for losses over many years and future inflation can make the initial coverage limits of the policy insufficient for the coverage of future losses. Because of this, many insureds elect the inflation guard endorsement, which indexes coverage limits to inflation indexes in order to ensure that limits are sufficient to replace the home in the case of loss.

Coverage B – Other Structures covers losses to other structures on the insured premises, including some detached structures excluded by Coverage A. Detached garages, toolsheds, fences, driveways, and sidewalks are covered under Coverage B. Coverage B generally excludes structures used for business purposes or property rented to others and typically represents a fixed percentage of the Coverage A limit.

Coverage C – Personal Property covers losses to personal property owned or used by the insured regardless of its location. Insurers offer coverage on either a replacement cost or an actual cash value basis. Replacement cost coverage provides the money needed to replace a lost or damaged item with a similar new item. Actual Cash Value (ACV) coverage considers the age and condition of the item lost and may require the insured to pay some money out of pocket when replacing the lost item with a new item. Special limits apply to many items including cash, jewelry, and silverware.

Coverage D – Loss of Use covers living expenses incurred by an insured to maintain their normal standard of living after a covered loss and also rental income lost due to a covered loss.

The second coverage section, Section II, explains liability coverages and consists of:

Coverage E – Personal Liability, which covers bodily injury and property damage that result in personal liability. Under Coverage E, insurers defend the insured and pay any resulting damages.

Coverage F – Medical Payments to Others, which covers medical expenses incurred by anyone not defined as an insured in the policy and are made regardless of whether the insured is at fault.

All homeowners’ policies also include an Additional Coverages section, which includes coverages for other property-based expenses such as: debris removal, repairs designed to prevent further damage, and fire department service charges, as well as other liability-based expenses such as defense costs and first aid costs. When you receive your homeowners policy each year, it’s a good rule of thumb to review the sufficiency of your coverage and to discuss any concerns with your agent.