The Importance of Property Insurance and How property insurance provides protection for homeowners

Anbarasan Appavu
How property insurance provides protection for homeowners

What is Property Insurance?

Property insurance refers to a variety of policies that provide property owners with either property protection coverage or liability coverage. Property insurance provides financial compensation to the owner or lessee of a structure and its contents in the event of damage or theft, as well as to a third party who is injured on the property.

The Importance of Property Insurance

There are numerous types of property insurance, including homeowner's insurance, renter's insurance, flood insurance, and earthquake insurance. Personal property is typically protected by a homeowner's or renter's insurance policy. The exception is extremely valuable and costly personal property, which is typically covered by purchasing a "rider" to the policy. If a claim is filed, the property insurance policy will reimburse the policyholder for either the actual value of the damage or the cost to repair the issue.

·       Property insurance refers to a collection of policies that provide either property protection or liability coverage.

·       Property insurance can include, among other policies, homeowners insurance, renters insurance, flood insurance, and earthquake insurance.

·       Replacement cost, actual cash value, and extended replacement cost are the three forms of property insurance coverage.

How the Property Insurance Works

Property insurance typically covers a variety of weather-related perils, such as damage caused by fire, smoke, wind, hail, the impact of snow and ice, and lightning. The structure and its contents are protected against vandalism and theft by property insurance. Additionally, property insurance provides liability coverage in the event that someone other than the property owner or renter is injured on the property and sues.

The majority of property insurance policies exclude damage caused by tsunamis, floods, drain and sewer backups, standing water, seeping groundwater and a number of other sources of water. Mold and earthquake damage are typically not covered by property insurance. In addition, the majority of policies do not cover extreme events, such as nuclear incidents, acts of war, or acts of terrorism.

Property insurance includes homeowner's, renter's insurance, flood insurance, and earthquake coverage.

Understanding About Property Insurance

The three types of property insurance coverages are replacement cost, actual cash value, and extended replacement costs

Replacement cost

Replacement cost encompasses the price of repairing or replacing an asset with one of equal or greater value. The coverage is based on the cost to replace items rather than their cash value.

Actual cash value

Actual cash value coverage reimburses the owner or lessee for the cost of replacement minus depreciation. If the item is 10 years old, you will receive the value of a 10-year-old item, not a brand-new one.

Extended replacement

Extended replacement costs will pay more than the coverage limit if construction costs have increased; however, this will typically not exceed 25 percent of the coverage limit. The limit is the maximum amount of benefit that an insurance company will pay for a given situation or occurrence.

Special Considerations

The majority of homeowners purchase a hybrid policy that covers physical loss or damage caused by sixteen perils, such as fire, vandalism, and theft. The coverage, known as a HO3 policy, is subject to certain restrictions and conditions. Certain valuables and collectibles, such as gold, wedding rings and other jewelry, furs, cash, firearms, and other items, have a predetermined coverage limit. Typically, a HO3 policy excludes coverage for accidental breakage/damage and mysterious disappearance (lost, misplaced) of valuables, such as fine art and antiques.

HO5 homeowners insurance includes everything in a HO3 policy, but is tailored to the structure and the property within the home, such as furniture, appliances, clothing, and other personal items. The HO5 policy does not cover earthquakes or floods. Homes built within the last 30 years or renovated within the last 40 years are eligible for HO5 insurance policies, which typically cover damages at replacement cost.

HO4 property insurance is commonly referred to as renter's insurance because it protects tenants against loss of personal property and liability. The actual house or apartment being rented must be covered by the landlord's insurance policy.

Note that none of these levels of coverage reimburse the homeowner for property that breaks down or is damaged due to normal wear and tear, such as a roof that begins to leak without wind or hail damage. This is where home warranties, another method of property protection, can be useful.

The Importance of Property Insurance

Who Needs Property Insurance?

Essentially everyone who owns expensive property. In many instances, you are required by law or a mortgage contract to carry property insurance. All fifty states in the United States, for instance, mandate that drivers carry auto insurance, typically in the form of liability insurance.

In the event of an accident, liability insurance compensates parties other than the at-fault driver for damages and losses. For instance, the at-fault driver's liability insurance pays for the other driver's vehicle repairs and medical expenses. Fortunately, when you purchase the required liability coverage, you also have the option to purchase property insurance (in the form of comprehensive insurance and collision insurance in the case of auto insurance), thereby protecting you from financial hardship if your own vehicle is damaged in an accident.


According to a survey published in the Journal of Financial Planning, many homeowners have grossly erroneous perceptions of what their homeowner's insurance covers. According to a 2007 survey conducted by the National Association of Insurance Commissioners and reported in The New York Times, 33% of homeowners believed that flood damage would be covered, 51% believed that damage from a broken main water line would be covered, and 34% believed that mold damage is covered.

In reality, the following risks (causes of property destruction) are typically excluded from coverage:

        Flood damage (this is a separate policy has to be bought)

        Earthquake (this is a separate policy has to be bought)


        Sewer backup

·       Maintenance damage

Policies are frequently written so that something must be "sudden and accidental" for it to be covered, meaning that a slow leak that caused damage over months would not be covered. This is frequently not covered by insurance. If your roof caves in due to old age, as opposed to storm damage, it is unlikely to be covered.

The risks typically covered by insurance include:

  • Fire or lightning
  • Windstorm or hail
  • Smoke
  • Explosion
  • Riot or civil commotion
  • Theft
  • Vandalism or malicious mischief
  • Volcanic eruption
  • Damage caused by aircraft or vehicles

Liability Coverage

In addition to covering the value of your home or other property, the majority of insurance policies include an essential liability coverage provision. You may not see the significance of this. However, there are a large number of eager attorneys in every city actively seeking lawsuits against individuals like yourself. Automobile owners are familiar with liability coverage, whereas homeowners may be less so.

If your neighbor's home catches fire because you left your charcoal grill unattended, you are responsible for the resulting damages. You have paid premiums to the insurance company so that it will pay larger claims when they occur. The same holds true for anyone who is injured and needs medical attention on your property.

If your property, such as a diamond ring, necklace, is stolen while you are on a vacation, you may be entitled to compensation. Be sure to document the theft with proof that you owned the item, and you should be able to provide the insurance company with a police report.

You must understand what your policy covers and, more importantly, what it does not cover. Insurance companies cannot stay in business if they charge a minimal premium to cover everything that could happen to your property.

Additional (Non) Coverage

Typically, home-based businesses are not covered. This does not include a home office, but rather a location where customers visit you, such as a workshop where you repair furniture. To properly insure this area and its related liability, you will need a separate business (commercial) policy. These regulations vary from state to state and nation to nation.

Also, if your property, especially your home, is left vacant for more than a certain period of time, usually 30 days, the insurance company may immediately cancel your homeowners policy. It is assumed that a vacant home is at a significantly higher risk of perils such as fire and theft, which alters the risk profile sufficiently to necessitate a separate policy. If you have a second home or vacation property, you can purchase a separate policy to cover it.

Be familiar with your policy's coverage for repairs. Covering the replacement cost in full is preferable to just the actual cash value (ACV), but it will increase your premiums.

Pitfalls to Avoid

Check your policy to see if repairs are covered at actual cash value (ACV) or replacement cost. Typically, the latter is vastly superior. In the event that your roof was damaged and needs to be completely replaced, the replacement cost will cover the cost of the replacement, minus your deductible, while the actual cash value (ACV) will pay you the estimated value of your roof at the time of the damage. ACV coverage is less expensive than the replacement cost coverage.

Art and Jewelry

Additionally, if you want to cover expensive jeweler or artwork, you may need to add a floater. This is an extension of your primary policy. Many policies have standard payout amounts for losses to specific items, and they will not pay more.

Coinsurance Clauses

Some property owners only wish to insure their property for the amount they paid for it, which could trigger a coinsurance clause. This occurs when the property is insured  (depending on local laws) for less than, say, 80 percent of its current replacement cost. If you have less coverage, the insurance company will require you to contribute a portion of the repairs in excess of the deductible.

Premium Factors

Do you reside in a region susceptible to tornadoes, hurricanes, or floods? Do you have a large dog or a pool? Are you a smoker? What is your credit rating?

Based on your responses to these questions, you may pose a greater-than-average risk, and an insurance company will charge you accordingly. These factors are considered when determining your insurance premiums. The greater your exposure to these and other risks, the higher your rates will be.

A Note of Caution

Some insurance companies offer policies at astronomically high prices. A red flag should be raised if the company is unknown and its rates are exceptionally low. Do not rely solely on the salesperson's assertions regarding the company's standing. Examine the policy to determine what it does and does not cover.

You may discover too late that the coverage you believed to be adequate was barely the legal minimum in your area. In order to reap the benefits of property insurance, insist on quality protection. Remember that inexpensive insurance can be quite costly.


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