What homeowners insurance does and does not cover

Homeowners insurance protects you financially when your house or belongings are damaged or destroyed. The policy pays to rebuild or repair the structure, replace your possessions, and cover liability if someone is injured on your property and sues you. It does not cover damage from floods, earthquakes, or wear and tear — those require separate policies or riders.

Your lender requires you to carry homeowners insurance as a condition of the mortgage. If you stop paying the premium, the lender can buy a policy on your behalf and add the cost to your loan balance, which is far more expensive than buying it yourself.

The policy has two main parts: dwelling coverage, which pays to repair or rebuild the house itself, and personal property coverage, which replaces your belongings up to a limit. A third part, liability coverage, pays if you or a family member accidentally injures someone or damages their property.

Key Takeaways

  • Homeowners insurance covers the structure of your home, your belongings, and liability claims, but not floods, earthquakes, or damage from neglect.
  • Your mortgage lender requires you to carry a policy, and will buy one for you at a much higher cost if you let yours lapse.
  • The amount you pay depends on the replacement cost of your home, your location, the age and condition of the house, and your claims history.
  • You choose a deductible — the amount you pay out of pocket before insurance kicks in — and higher deductibles lower your premium.
  • Flood and earthquake coverage must be purchased separately; standard homeowners policies exclude both.

How the premium is calculated

Insurance companies use several factors to set your rate. The replacement cost of your home — what it would cost to rebuild it from scratch — is the largest driver. A $300,000 house costs more to insure than a $150,000 house. The company estimates this based on square footage, construction type, and local building costs, which vary by region.

Your location matters significantly. Homes in areas with high theft rates, frequent storms, or older fire infrastructure pay more. If you live in a flood zone or wildfire zone, your rate will be higher even if you decline flood coverage. Your age and claims history also factor in — if you filed two claims in five years, insurers see you as higher risk and charge more.

The condition of your home affects the rate too. A house with an old roof, outdated electrical wiring, or a poor foundation costs more to insure because the risk of damage is higher. Some insurers will not insure homes over 40 years old without an inspection, or will charge substantially more.

Dwelling coverage and how much you need

Dwelling coverage pays to repair or rebuild the structure of your home — the walls, roof, foundation, built-in appliances, and permanent fixtures. It does not cover the land itself, which does not burn or flood.

You should insure your home for its replacement cost, not its market value. A house worth $400,000 might cost $350,000 to rebuild if the land is valuable but construction is cheap in your area. Conversely, a $250,000 house might cost $300,000 to rebuild if labor and materials are expensive. Your insurance agent or a contractor can estimate the true replacement cost.

If you underinsure — say you insure a $300,000 replacement-cost home for only $200,000 — and a major fire destroys it, the insurer will pay only a portion of the repair bill, not the full amount. This is called coinsurance, and it penalizes you for underinsuring. Most policies include an inflation adjustment that raises your dwelling coverage each year to keep pace with construction costs.

Personal property coverage and limits

Personal property coverage pays to replace your belongings — furniture, clothing, electronics, kitchen items — if they are damaged or destroyed. The policy typically covers up to 50 to 70 percent of your dwelling coverage limit. If your home is insured for $300,000, personal property coverage might be $150,000 to $210,000.

This limit is often too low for people with valuable collections, jewelry, art, or electronics. Most policies also have sub-limits — lower caps on specific categories. Jewelry might be capped at $2,500, cash at $500, and firearms at $2,500, even if your total personal property limit is much higher. If you own items worth more than these limits, you can purchase a scheduled personal property rider that lists high-value items and insures them separately.

When you file a claim for personal property, the insurer typically pays actual cash value — what the item was worth used, not what you paid for it. A five-year-old television worth $300 new might be worth $75 used. Some policies offer replacement cost coverage for personal property, which pays what it costs to buy a new item, but this costs more.

Liability coverage and umbrella policies

Liability coverage pays if someone is injured on your property or if you accidentally damage someone else's property, and they sue you. A standard policy includes $100,000 to $300,000 in liability coverage. If a guest slips on your icy driveway and breaks their leg, or your child accidentally breaks a neighbor's window with a baseball, liability coverage pays the medical bills or repair costs and any legal fees.

For many homeowners, the standard liability limit is too low. A serious injury lawsuit can result in a judgment of $500,000 or more. If the judgment exceeds your policy limit, you are personally responsible for the rest. This is where an umbrella policy comes in. An umbrella policy provides an additional $1 million or more in liability coverage and costs $150 to $300 per year. It sits on top of your homeowners policy and kicks in when your homeowners liability limit is exhausted.

If you have significant assets, a swimming pool, a trampoline, or a dog breed that insurers consider high-risk, an umbrella policy is worth the cost. It protects your savings, retirement accounts, and future wages from a lawsuit judgment.

Deductibles and how they affect your premium

The deductible is the amount you pay out of pocket when you file a claim. Common deductibles are $500, $1,000, $2,500, and $5,000. If you have a $1,000 deductible and file a claim for $8,000 in damage, you pay $1,000 and the insurer pays $7,000.

Raising your deductible lowers your premium. A $5,000 deductible might save you 15 to 25 percent on your annual premium compared to a $500 deductible. The trade-off is that you pay more out of pocket if you have a loss. Choose a deductible you can actually afford to pay if you need to file a claim. If you cannot cover a $5,000 deductible without hardship, a lower deductible makes sense even if the premium is higher.

Some policies have a separate deductible for specific perils like wind or hail. In areas prone to hurricanes or hail storms, insurers may apply a percentage-based deductible — say 5 percent of your dwelling coverage — instead of a flat dollar amount. A 5 percent deductible on a $300,000 home is $15,000, which is substantial.

Floods, earthquakes, and what standard policies exclude

Standard homeowners insurance does not cover flood damage, even if the flood is caused by a hurricane or heavy rain. Flood coverage must be purchased separately through the National Flood Insurance Program (NFIP) or a private flood insurer. NFIP policies are available through most insurance agents and cost $500 to $2,000 per year depending on your flood risk zone and the coverage amount.

If your home is in a flood zone and you have a mortgage, your lender requires you to carry flood insurance. If you are not in a flood zone, flood coverage is optional but worth considering if you live near a river, in a low-lying area, or in a region with heavy rainfall. Flood damage is expensive — a foot of water in your home can cost $25,000 or more to repair.

Earthquake coverage is also excluded from standard policies. In earthquake-prone states like California, you can purchase an earthquake rider or a separate earthquake policy. These are relatively inexpensive — often $100 to $300 per year — but have high deductibles, typically 10 to 20 percent of the dwelling coverage limit.

Filing a claim and what to expect

When damage occurs, contact your insurer as soon as possible. Most companies have a 24-hour claims line. You will need to describe what happened, when it happened, and what was damaged. The insurer will assign an adjuster to inspect the damage and estimate the cost of repairs.

Before the adjuster arrives, take photos and videos of the damage and make a list of damaged items. Do not throw anything away or make repairs until the adjuster has seen the damage. If you make emergency repairs to prevent further damage — like tarping a roof after a storm — keep receipts; the insurer will usually reimburse you.

The adjuster will provide an estimate of the repair cost. If you disagree with the estimate, you can hire your own contractor to provide a second estimate and submit it to the insurer. If the estimates differ significantly, you and the insurer can agree to hire a neutral third party, called an appraisal, to settle the dispute. The cost of the appraisal is usually split between you and the insurer.

Frequently Asked Questions

Does homeowners insurance cover roof replacement?

It depends on the cause of damage. If a tree falls on your roof during a storm, the policy covers it. If the roof is simply old and leaking, that is considered wear and tear and is not covered. Most insurers will not cover roof replacement if the roof is over 20 years old, or will pay only a percentage of the cost.

What happens if I do not have homeowners insurance?

If you have a mortgage, your lender will buy a policy for you and add the cost to your loan balance. This forced-placed insurance is usually more expensive and provides less coverage than a policy you buy yourself. If you own your home outright, you are not required to carry insurance, but you are taking a huge financial risk — a fire or lawsuit could wipe out your savings.

Can my insurance company drop me or refuse to renew?

Yes. Insurers can choose not to renew your policy if you file too many claims, have a poor claims history, or if the home is in poor condition. They must give you notice, usually 30 to 60 days. If you are dropped, you may be able to find coverage through your state's insurer of last resort, though the rates will be higher.

How often should I review my homeowners policy?

Review your policy annually or whenever you make major home improvements, add valuable items, or make changes to your property. Home improvements like a new roof or updated electrical system may lower your premium. Adding a swimming pool or trampoline may raise it. Updating your coverage ensures you are protected if something happens.

What is the difference between replacement cost and actual cash value?

Replacement cost is what it costs to buy a new item today. Actual cash value is what a used item is worth — the replacement cost minus depreciation. If your five-year-old laptop is damaged, replacement cost might pay $1,000 for a new one, while actual cash value might pay $400 for a used one of similar age. Replacement cost coverage costs more but pays more when you file a claim.