After finding your dream home, it is now time to protect it and all of your belongings that will be in the new home. Not all home owners insurance policies are created equal though and the language can be pretty confusing. The following is a guide on what to look for and how to understand the coverage that you will receive.

The Basics of Home Owners Insurance

There are many aspects that influence whether your home owners insurance or condo insurance policy is the best policy for you, but the most important thing you need to know is that your insurance policy is only as good as the contract and the wording. As consumers most people tend to focus on the price of the insurance, rather than the value. Because the clauses and language in a homeowners insurance policy can be complicated it can be difficult to understand exactly what kind of coverage you are getting. Insurance company policies all contain limitations and clauses that can either enhance the coverage they provide, which equal bigger claim payments; or limit coverage which equal lower claim payments.
First and foremost, find an agent that you trust to help guide you through the process of finding the best coverage options. If this is your first time buying home owners insurance, research agents online and check out their reviews or get referrals from friends and family. Having an agent that puts your needs first will ensure that yo get the coverage that you need for your particular situation.
The general coverage offered to you is often defined via policy form. These are listed in different levels based on your needs.

Difference Between Home Owners Insurance Levels

1. HO-1 — basic form

A basic form homeowners policy is just that — basic. It will usually financially safeguard against 10 named perils:

Fire or smoke
Explosions
Lightning
Hail and windstorms
Theft
Vandalism
Damage from vehicles
Damage from aircraft
Riots and civil commotion
Volcanic eruption

You can sometimes get coverage for the belongings inside your home in addition to the structure itself, but the items you want coverage for generally must be specified at the time you purchase your policy. Floods and earthquakes aren't typically covered, and neither is your personal liability if you're sued by someone who gets injured on your property.
HO-1 policies aren't offered much anymore due to the affordability of other types of coverage that tend to offer more. Note: mortgage companies don't always consider this type of policy sufficient coverage for a home.

2. HO-2 — broad form

A broad form policy is a more common type of homeowners coverage. It covers all the perils in an HO-1 policy, plus:

Falling objects
Weight of ice, snow, or sleet
Freezing of household systems like AC or heating
Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems
Accidental discharge or overflow of water or steam
Sudden and accidental damage from artificially generated electrical current

The HO-2 typically covers not only your home's structure, but your belongings and sometimes even your personal liability as well. It's important to note, though, that because the HO-2 is a "named peril" policy, any damage caused by events other than those listed on your policy will generally be excluded from coverage.

3. HO-3 — special form

The HO-3, or "special form," policy is the most common type of homeowners insurance, namely because of its broad range of coverage and general affordability. It covers all the perils mentioned in the HO-2, or "broad form," policy — but it also goes further than that.
Because an HO-3 doesn't limit coverage only to named perils, it often can provide more financial protection than an HO-2. That means that your typical HO-3 form can financially protect you against any and all perils unless your policy specifically mentions them in the exclusions — and if it doesn't, you're covered.
The HO-3 policy typically insures your home and attached structures (like a garage or deck), as well as your belongings and your personal liability if you accidentally injure someone or damage their property.
What you are and aren't covered for will depend on your specific policy, so it's always wise to go over everything with your insurer. Earthquakes and floods are generally excluded from coverage on most HO-3 policies.

HO-3 versus HOB

During your homeowners insurance search, you may have come across something called an HOB policy. Nearly identical to the HO-3, a HOB form typically provides more coverage against water damage for coastal areas of the U.S.
A HOB policy may also cover things like garden tractors, boat and boat trailers, lawn mowers, and other similar accessories while they're on your property.

4. HO-4 — tenant’s form (Renter's Insurance)

This policy type is specifically for renters, since it covers only belongings and personal liability — not the building structure, which the landlord buys insurance for. Belongings are typically covered against the same perils as an HO-2 broad form homeowners insurance policy.
An HO-4 policy, more commonly known as renters insurance, will also usually cover additional living expenses should you need to stay elsewhere temporarily while your apartment is getting fixed up.

5. HO-5 — comprehensive form

A comprehensive form policy is comprehensive, in that it often covers more perils than other types of policies. Just like a HO-3 form, a HO-5 is an open-peril policy form that can financially safeguard you against all perils unless your policy specifically excludes them in writing.
The following are typically excluded from coverage under a HO-5 policy:

Earth movement (like an earthquake, landslide, or mudslide)
Floods
Water damage
Damage from or infestation of birds, vermin, rodents, and insects
Neglect, deterioration, and general wear-and-tear
Settling, shrinking, bulging, or expanding of your home's foundation
Your pets and other animals
Mold, fungus, and rot
Intentional loss
War, government action, and nuclear hazard
Ordinance or law
Smog, rust, and corrosion

It's important to note that you may still have coverage for some of these events if they happen suddenly and unexpectedly. Speak with your insurer about your particular circumstances after a loss.
When it comes to your personal belongings, a HO-5 typically covers more perils than your average HO-3 policy, and your personal liability is covered up to the limits you choose. Even though an HO-5 policy is typically more expensive than a HO-3 (and may not be offered by as many insurers), it's the broadest type of homeowners insurance coverage you can get.

6. HO-6 — condo form

This type of policy is designed specifically for condo owners and financially protects belongings and personal liability. An HO-6 policy, also known as condo insurance, also typically extends to the walls, floors, and ceiling of the unit too.
The same incidents covered under a typical homeowners insurance policy generally apply to HO-6 coverage too. The rest of the condo's structure is usually covered by a policy purchased by the homeowner's association.

7. HO-7 — mobile home form

The mobile home form is essentially the same as an HO-3, but is designed specifically for mobile or manufactured homes, which don't fall under regular homeowners insurance coverage.

8. HO-8 — older home form

A HO-8 policy is designed to address specific concerns with coverage for older homes. The coverage details of a HO-8 are basically the same as a HO-3, but with special adaptations to better suit older homes, which may have different coverage needs than newer houses. Historic homes and registered landmarks usually carry this type of policy.

Digging Deeper into Home Owners Insurance Policies

Value added features

Insurance companies are just like other businesses, they have to come up with points of differentiation and will evolve by adding more options to the policy basics. You can get to the bottom of this by simply asking your insurance representative where the insurance they are quoting you is superior to their competitors.

Special Limits on Home Owners Insurance

Special Limits are clauses within your home owners insurance policy that specify areas where the coverage will be limited in the event of loss. This means that there may be a value cap that they cover or the items may not be covered at all. Read closely into the policy or ask your agent about these items.

Commonly Limited Items:

Cash, Money, bank notes, coins, precious metals like gold and silver as well as stored value cards and smart cards
Securities, accounts, deeds, evidence of debt, letters of credit, notes, manuscripts, personal records, passports, tickets and stamps
Watercraft (subject to additional limitations in policy wording) including their trailers, furnishings, equipment and outboard engines or motors
Trailers or semitrailers not used with watercraft
There is a limit on the maximum amount payable for jewelry, watches, furs, precious and semi-precious stones when lost by theft. This is probably the most commonly known limitation since people still invest in expensive watches and jewelry, the most common item being the wedding ring. Some insurance companies even offer insurance specifically for wedding rings when their values are very high in comparison with contents amounts. For example, although it is feasible that someone has a $50,000 renters policy and a $25,000 ring, it doesn't always make a lot of sense to the insurance company underwriters to insure a ring valued at half the value of a person's entire list of personal possessions. There are options available in these cases to buy separate insurance or a rider with high-value insurance companies or even jewelry specialized insurers.
Silver, gold, and platinum-ware or plated-ware when lost by theft.
Firearms and related equipment when lost by theft
For property primarily used for business, this coverage usually has two limits, one of which is "On premises" and then the other which is "off premises." The limit varies greatly but may be as low for $500 off premises. If this applies to you, you will not only want to inquire about the special limit but may also be concerned with the exclusion in the policy which does not cover you for a home based business. Running a business from your home, even a small one, may make your insurance null and void if you haven't declared it, depending on the insurance company policy on home-based businesses. Make sure and discuss this with your insurance if you have any income based on working from home. It's important because it not only is limited in property but also in your personal liability coverage.
Beware of low limits on these lifestyle items Bicycles and sporting equipment, Mobile Devices — phones, tablets, etc. As well as: Computers, Gaming Devices, Electronic devices and related software
Fine Arts, Collectibles, and collections. These items may not appear in the Special Limits of Insurance section but may be excluded or limited through other parts of the wording. If you have any kinds of antiques, fine arts or collections of any kind, speak to your insurance about what the basis of claims settlement will be and find out if coverage is limited or excluded. There are policies structured to better cover people with these items, so it is important to discuss if you have any of these to find out your options.

If you need more coverage for these types of items due to your situation you can have it added through a rider or endorsement. Speak with your agent to see what coverage options are available.

Claims Handling Policy

Once a claim is made you and your insurer essentially become adversaries. You are fighting for the biggest payout while the company is fighting for the lowest payout. Take this into consideration when choosing a provider for your home owners insurance policy. Here is a list of ratings on companies from Consumer Reports.

If you have to file a claim with a company, Keep this in mind: Leave a paper trail

The key to making claims as painless as possible is airtight documentation.

Make note of relevant phone conversations, or better yet use email to communicate since it's verifiable by both parties
Save all receipts for expenses
Insist that your contractor’s invoice be as detailed as possible, including labor charges and per-item material costs
Never pay in cash, especially for your contract work
If your policy covers living expenses, save receipts for associated costs while waiting for repairs like hotel rooms, babysitting, etc.
Document value of existing assets prior to the damage. For example, save your HDTV purchase receipt and your invoice from a flooring replacement
Obtain a copy of the police report, if applicable
For liability claims, have you and a witness write out narrative descriptions of the event in question

Insurance Features or Clauses to Ask About Before Buying Home Insurance

Does coverage apply if an item is misplaced or disappears?
What happens if your home is under insured? Is there a capped payout?
What happens if after a claim the by-laws have changed and this increases the cost of rebuilding?
How does the policy handle claims payments for items like antiques or fine arts?
Is there a waiver of deductible if the loss reaches a certain amount? Does the policy contain certain coverage that is not subject to a deductible? Waivers of deductible can be very advantageous. Having your deductible waived if a claim reaches a certain value can save you thousands of dollars.
How does your policy cover various forms of water damage?
What kind of coverage does your home owners insurance provide for your pets?

Understanding Actual Cash Value, Replacement Cost and Cash out Option

There are three kinds of possible "basis of claims settlement"

Actual Cash Value
Replacement Cost
Replacement Cost with no obligation to replace, often referred to as a cash out option.

Actual Cash Value (ACV) This actually means depreciated value

This coverage is the least desirable settlement option. Actual cash value or depreciated value is what will offer you the depreciated value of property at the time of loss. This gives you a payout based on the age and condition of the item now, not when you bought it so you will not be able o go out and buy a new one to replace it.

Understanding Replacement Cost: A Two-Step Process

Replacement Cost Insurance is the most common type of coverage and it is a fair settlement. However, keep in mind that you will not be getting a big check made out to your name so you can go out and buy all your stuff new. What you will get during the claims process is the option to provide a list of all the things you had (which should include: make, model, where you bought it and when) with an assigned value.
Then the insurance company may pay you a partial amount, sometimes half the value. When you replace the item(s), they will give you the difference. So, what does this mean? In a claim, be prepared to pay out half the value of the items you need to replace before you get fully compensated. You may get lucky and not have to do this, but in many cases, that's how the clause works. Getting compensated for your loss and replacing all your items turns into a two-step settlement process where the final payout may only happen at the end once you have replaced everything.

Replacement Value With No Obligation to Replace: The Cash-Out Option

This option is offered by high-end insurers, whose premiums often cost more than regular HO-5 home owners insurance policies These high-end policies provide higher limits and more special clauses than the standard HO-5, but they will enable you to do as you wish in the event of a claim. The claim would play out similarly to the Replacement Cost option. It's a one-step process: you declare your loss items, get the final tally of how much it will cost you to replace it all, and the check is written to your name.
This type of coverage is rather exclusive, for obvious reasons such as the potential for moral risk or hazard, insurers offer this coverage only to clients who meet insurance company underwriting criteria. It is quite likely that these types of insurers will have a minimum requirement for the home value insured, as well as review financial stability ratings of potential clients.

Get the home owners insurance coverage that best suits your needs

Home owners insurance is something that you get hoping that you will never have to use it. However if something happens you want to make sure that you will be covered. It may be tempting to go with the lowest price when it comes to coverage but that will leave you in financial ruin if you aren't covered for the things you need. Find a good agent, have an idea of what you want covered and ask questions to ensure you get the best policy for your lifestyle.

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Guide to Understanding Home Owners Insurance