Home Insurance Types, Explained
Written by: Mike Tonsetic
Welcome home to Home Insurance World…your home insurance away from home! We’ll be your spritely & spirted guide today as we adventure forth into homelands unknown and explore perilous insurance hazards. As we ascend the ladders of insurance into elaborate treetop homes and descend into dwelling sunken far into the earth, you’ll feel the heat of the dragon’s breath, the watery plunge down the waterfall, the soaring winds of the storm…You’ll also see how we make the insurance magic happen behind the scenes and bring your home coverage to life. And guess what?! It’s FREE for FL residents and we won’t even charge for the parking!
Sounds like cheese right? We can’t present the concept of home insurance any more exhilarating than that because it’s really not that exciting. In fact, it’s downright drab dullness, like a butterknife trying to fall a Redwood. And your average agent out there, well, watching paint dry on walls of the C-SPAN studio might just be a little more entertaining. Their egos can’t help themselves, they know more than you do, but just a little. In reality, no one really wants to understand home insurance, much less any other insurance, because 1) it’s depressing and at time morbid & 2) it’s really just microeconomics 101 all over again Freshman year. So, when that pastel logoed polo tucked into matching khakis starts rambling on in circles with insurance tech speak you probably in fact can throw most of it out the window because they are on auto-pilot and most importantly you are probably not understanding a damn word.
Now that we’ve slipped into something a little more comfortable, we’re going to give you the 5 minute tour of the home insurance in a dialogue you can actually understand and relate to. We’re confident by illustrating a few of the most common home insurance types and a few of the advantages, we can’t point you in the right direction so you can open up a conversation with us or an agent of your choice…
The HO-3 Special: What’s so special?
Irony is, it’s not really that special at all. Actually, it’s by far the most common home insurance. By ‘special’ they mean they cover more than your average basic perils & risks such as fire & wind. For example, an HO-3 home insurance policy covers water damage, theft, vandalism, etc. as well as perils that might not be catastrophic.
If the property you are insuring is your primary or secondary residence, this is in all likelihood the home insurance policy you will wind up with. If you have a mortgage, your lender will almost always request this type of insurance.
These policies are based on Replacement Cost, meaning they are designed to make you whole again after a claim, no better or no worse. Replacement Cost generally factors out nasty words like depreciation and does not rely on market value of which all know can fluctuate at times unpredictably.
This homeowner’s insurance policy is a true workhorse if you own a home or are thinking of buying one, and albeit it automatically covers most of your back, you can also customize the policy to the individual.
The HO-8: The Problem Child
We’re not going to sugarcoat it; this home insurance policy is designated for hazardous living. It is the distant convict cousin of the HO-3 for a reason. Albeit the HO-8 has become reformed in recent years, this insurance should still always be your plan B due to its limitations.
These home insurance policies usually exclude those risks the HO-3 picked up like water damage & theft and will generally have more limiting coverage. This policy was designed to provide an option for people & properties that are too risky to cover under a standard homeowner’s policy. Let’s say you have a lengthy claim rap sheet, or a mean old junkyard dog, or maybe you’re a few decades behind on renovation projects, this might be the more suitable and sometimes only option for you.
A lot of the times these home insurance policies are temporary fixes until the homeowner can fix the problems at hand and move back into a more traditional standard HO-3 policy. These policies are also sometimes the only option for older properties or homes in high-risk areas.
The DP-3: The Landlord
The sibling of the HO-3. Think of this insurance policy as a homeowner’s insurance policy made for investment & rental properties. You’re going to get all the risk covered like you would on a standard HO-3, but with some differences. While the HO-3 coverage is based on Replacement Cost, most DP-3 policies are based on Actual Cash Value, of which is going to factor in depreciation. This being said, the insurance policies have come a long way in recent years and sometimes you can buy back Replacement Cost at an additional cost, but if you have a 20-year-old roof that is damaged, they are going to most likely depreciate the final claim by a percentage, so you might have more out-of-pocket expense than you might think. The coverage also only extends to the property lines in almost all cases, as opposed to the liability coverage on an HO-3 which usually covers personal liability worldwide.
The biggest misconception with insuring investment properties & rentals is that the Renters Insurance covers everything on the tenant’s dime. This couldn’t be more wrong as you, the property owners, are ultimately legally responsible for anything that happens on your property. Yeah, your renter could throw a rager where somebody needs to be rushed to the ER, but guess what, after their tiny little renter’s insurance runs out, you’re probably footing the bill, and the attorney’s only got eyes for you.
Now, we’re not saying to disregard the Renter’s Insurance, more so we’re advocating as an insulation, a roadblock, a detour from getting directly to you if required and setup correctly, but that’s another conversation altogether.
The other misconception is that this policy is a cheaper alternative to an HO-3 because they generally cost 20-30% less, but it’s far from an alternative for your primary home and better not let your mortgage find out. This home insurance policy is another workhorse dedicated to investment properties.
The DP-1: Oh So Vacant
This home insurance policy is the partner-in-crime with the HO-8, their cellmate. A DP-1 can be owner occupied if an HO-8 policy won’t take you. These policies cover your very basic perils such as fire and maybe wind, if you’re lucky, and come with a lot of potential exclusions.
Generally reserved for vacant properties, the high premiums usually match the high risks involved and come with a minimum 3-month non-refundable premium. There’s not too much to say about the ol’ DP-1 as it’s a pretty vacant policy.
The Builder’s Risk: The Hard Hat of Homeowners Insurance
The BR-3 Builder’s Risk policy is a homeowner’s insurance policy, just without the house and the family. Just because you went out got a loan and found a builder doesn’t mean your off the hook. You still have to insurance the craftsmanship, supplies, & the liability surrounding anything that happens on the property. What if all the building supplies are stolen one night or are blown away in storm? What if the wiring shorts out and burns down the 1st floor before you’ve been able to start the 2nd?
Now, yes, a lot of the times if you are building with a major builder like DR Horton, for example, they are probably just going to add your jobsite to their master insurance policy. When you go customer it’s a whole different ballgame altogether. And don’t just rely on the general contractor to cover everything, as a lot of the times they are just covering their own butts and not even the subs who work under them. Especially in FL, the land of construction mishaps, synonymous with job walk-offs, it is imperative to cover yourself and due your due diligence in making sure the contractor is covering themselves properly.
These policies are not just for new construction, but for renovations as well, where you might be moving around walls with the kitchen renovation, especially if the home might be standing vacant for a while. These home policies are usually sold in 3-month policy terms and usually come with a 3-month non-refundable premium just like the DP-1. You also want to make sure you don’t underinsure. Meaning if your project is going to take 8 months, buy 9-12 months of insurance. If you buy 6 months’ worth, they may not renew for the remaining 3 months because now it’s more of risk to the insurer and they’re not charging you adequate premium. In other words, if you underestimate you could be caught with your pants down.
We hope this blog has shed some light and pointed you in a general direction of which home insurance policy you need, but advice is never a replacement for the guidance of having a conversation with your local insurance agent. A local independent agent is your advocate who has the local experience and knowledge to navigate the local nuances of a homeowner’s insurance market and pick the right home insurance provider for you.
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