Pundits have said it many times – buying a home is the biggest purchase you’ll make in your life. Depending on valuation, you’ll put up tens of thousands of dollars as a down payment. Over the life of a mortgage, you’ll shell out hundreds of thousands of dollars.
But that’s not the end of it. Should anything unforeseen happen to your property, you’ll be on the hook. Burglaries, lost roofs, burst pipes – the costs of these events can ruin you financially. Home insurance isn’t just a good idea – it’s a necessity.
No lender will work with homebuyers unwilling to purchase homeowner’s insurance. If they did, even a small increase in loan defaults would torpedo their business.
However, many different types of insurance exist in the open market. Which policies make economic sense, and which can you decline safely? In this report, we’ll break down each variant and give you our honest opinion.
Which home insurance policy is best for my needs?
Shopping for homeowner’s insurance can be confusing and overwhelming, especially for first-timers. It’s easy to fall for your broker’s sales pitch, and end up buying more coverage than you need. Others may push a sheet a paper in your face, urging you to sign.
Home insurance policies differ dramatically in coverage and price, depending on the type. Below, we’ll break down each in simple terms, so you can understand what you’re buying.
Basic Form (HO1)
A basic form home insurance policy does what it says on the tin – it covers basic needs. Specifically, it includes the ten named perils, which are as follows:
• Damage from aircraft
• Damage from vehicles
• Riots/civil insurrection
• Volcanic eruptions
Of all the policies, HO1s are the cheapest. However, we cannot recommend them. Why? First, they leave you with considerable gaps in coverage. Basic forms do not cover personal liability – if someone slips on your icy walk, they can sue you for an enormous sum. They also don’t include personal property losses. The theft coverage mentioned above only pays for damage caused by thieves, not the objects they took.
Secondly, basic forms are poor value compared to other types of home insurance. You can acquire HO2s and HO3s for only nominally more than an HO1 policy.
Finally, most brokers don’t even offer basic form home insurance anymore. Their scope of coverage is so small that providing them would expose them to too much financial risk.
Broad Form (HO2)
True to its name, broad form home insurance covers a broader scope of perils. An HO2 policy covers everything an HO1 does, plus:
• The freezing of climate control systems (AC/heating)
• Damage caused by falling objects (like a piano falling on your car)
• Damage caused by an accidental discharge of water or steam
• Damage caused by the weight of accumulated ice/snow/sleet
• Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems
• Sudden and accidental damage from an artificially generated electrical current
If you’re looking to save money, a broad form policy may work for you. Most cover personal property, meaning the policy will pay for stolen goods if a burglar makes off with them. Some even offer personal liability – check the wording of your contract carefully.
However, like HO1s, HO2s is named peril policies. Anything not explicitly mentioned is uninsured – be sure you understand what your needs are before signing any contract.
Special Form (HO3)
HO3s are by far the most popular home insurance policy on the market. Unlike HO1s and HO2s, they are open peril policies. Most unintentional loss/damages are covered, except for named exclusions.
Most special form policies do NOT cover loss/damage arising from the following causes:
• Water damage (unless the release is sudden and accidental)
• Ordinance or law (e.g., the cost of bringing a building up to code)
• Earth movement (e.g., earthquakes, mudslides)
• Intentional loss (e.g., you set your house on fire to collect an insurance payout)
• Power failure
• Nuclear hazard
• Government action (e.g., civil asset forfeiture)
• Wear and tear
• Settling, expanding, bulging, or shrinking foundation
• Loss/damage caused by birds, vermin, insects, etc
• Loss/damage caused by animals owned by the homeowner
This list is only partial in scope – you should carefully examine any HO3 policy you consider. Note that you can purchase coverage for some exclusions (notably, floods and earthquakes) as a supplement.
While special form policies cost more than HO2s and HO1s, we recommend them as they provide excellent value. However, to reiterate, read the fine print carefully to ensure a particular policy meets your needs.
Comprehensive Form (HO5)
For all their benefits, HO3 policies have one notable downside. When an insurer pays an HO3 claim, they do so on an Actual Cash Value (ACV) basis. That is, it pays for the value of a lost/damaged item, minus depreciation. Also, while HO3s are open peril policies, this only applies to your actual house. These agreements only cover losses caused by the 16 named perils (see HO1 and HO2 above).
Comprehensive form policies (HO5s) pay claims on a replacement cost value (RCV) basis. Whatever it costs to replace your home or personal property, they’ll pay it. Also, HO5 policies cover personal property under open peril rules. Unless it falls under a specific exclusion, you’re good.
The biggest drawback of an HO5, unsurprisingly, is its cost. However, the price difference may be small if you’re buying in a low-risk area (e.g., low crime, high property value area, etc.) In this case, you may be able to justify its purchase.
Condo Form (HO6)
Your condo board may have a master policy, but typically, it only covers the structure and common areas. Loss or damage that happens inside your unit is your responsibility. A condo form, or CO6, covers damage to interior structures such as cabinets, loss/damage to personal property, personal liability, etc.
While getting a CO6 may be mandatory, policies will differ in exclusions from one provider to another. Read your contract thoroughly before signing to avoid nasty surprises later.
Mobile Home Form (HO7)
Virtually the same as HO3s, HO7s cover mobile homes and other dwellings that don’t meet conventional home criteria. These include:
• Mobile homes (both traditional and double-wide trailers)
• Travel trailers, including fifth wheels
• Manufactured/modular homes
• Recreational vehicles (RVs)
As always, go over a contract carefully before agreeing to it.
Older home form (HO8)
Buyers of old homes often get a rude awakening when it comes time to insure their purchase. Before they can qualify for an HO3 policy, they need to fix the electrical, plumbing, etc. However, if the property is over 40 years old, you could purchase an HO8 or an older home form.
This policy allows you to bypass improvements in return for limited coverage. Similar to an HO1, these policies only cover your property against the ten perils. Also, claims are paid out on an ACV basis.
If you are buying a heritage home with restrictive renovation covenants, an HO8 can save a lot of cash. Just be sure to purchase supplemental personal liability and personal property coverage, as many plans lack these provisions.
When you get a mortgage, your broker will require the purchase of title insurance. Why do they do this? Every real estate transaction they make is fraught with financial risk. For instance, if a property has a bad title (e.g., the past owner didn’t pay their property taxes), it cannot legally be sold.
If this happens, the buyer can walk away from their property. This situation can leave a lender on the hook for hundreds of thousands of dollars. For this reason, virtually all brokers require that you purchase title insurance. In the event a bad title issue arises, this protects brokers from financial ruin.
It is a good idea for owners to acquire title insurance as well. In the event of a bad title, this policy reimburses them for their losses (e.g., down payment).
Even the most comprehensive homeowner’s insurance policy does not cover issues arising from wear and tear. In the eyes of insurers, when your air conditioner dies on a hot night, that is a foreseeable occurrence.
To you, it isn’t. It is an unexpected, inconvenient, and costly disruption to your life. Fortunately, home warranties cover the gaps left by home insurance companies. Also known as home service contracts, they cover repairs/replacements of appliances/home systems. Like home insurance, you pay a monthly premium, plus a deductible whenever technicians perform work.
However, they aren’t always good value. Owners of new homes can do without, as premiums outweigh maintenance costs for at least the first decade. Also, coverage caps and exclusions vary widely from one provider to the next. Some firms offer a great deal, while others take your money while providing minimal coverage.
At the risk of beating a dead horse: always read the fine print.
Top providers of home/title insurance, and home warranties
Now that you know what coverage best meets your needs, it’s time to find a broker. Let’s examine the homeowner’s insurance first.
In this crowded marketplace, dozens of companies are vying for your business. A good yardstick to compare one firm against another is their J.D. Power & Associates score. This measure evaluates the customer service a provider offers its customers.
Many major insurers, like Allstate, score a 3/5 on J.D. Power’s scale – acceptable, but not great. However, providers like Amica and USAA (United Services Automobile Association), nailed
their coveted 5/5 rating.
What about title insurance? This market doesn’t do many B2C transactions, so reviews are less common. However, First American has gotten recognition in business publications for its focus on the customer.
2018 was a good year for FirstAM. They won the Best Title Insurance Underwriter award from the New York Law Journal for the sixth year running. When you put together a streak like that, people stand up and take notice.
As for home warranties, you can find the best reviews online. While some are inevitably rough, several firms score well. Total Home Protection stands out with a Trustpilot score of 8.9/10 on the strength of 132 reviews.
First American also does home warranties. FirstAM’s home warranty, while ranking below Total Home Protection, still ranks a respectable 7.9/10 with over 2,300 Trustpilot reviews. If you’re looking for one-stop shopping, they offer homeowner’s insurance as well. Don’t hesitate to take a better deal elsewhere if you find one, though.
Protect yourself, but don’t go overboard
Given the sentimental and financial value of your home, it’s crucial to protect this investment. However, don’t go all-in on an expensive policy based on a passionate sales pitch from your broker. Know your needs, do your research, and bargain for the best deal possible.