Home Insurance 101: What's Actually Covered and Common Policy Exclusions

Understanding Home Insurance Basics

Homeowners insurance is one of the most important financial protections you can have, yet many people don't fully understand what their policy covers until it's too late. Whether you're a first-time homebuyer or have owned your home for years, knowing the details of your coverage can prevent devastating financial losses when disaster strikes.

The Six Main Components of Home Insurance

A standard homeowners insurance policy (HO-3, the most common type) includes six main coverage areas, each with specific purposes and limits.

Coverage A: Dwelling Protection

This covers the physical structure of your home, including attached structures like garages.

What's Covered:

• Damage from fire, lightning, and smoke
• Wind and hail damage
• Explosion damage
• Vandalism and theft damage to the structure
• Damage from vehicles or aircraft
• Weight of ice, snow, or sleet that damages the structure
• Water damage from burst pipes or appliance leaks

How Coverage Amount is Determined: Your dwelling coverage should equal the cost to rebuild your home (replacement cost), not its market value or what you paid for it. Many homeowners are underinsured because they base coverage on market value instead of reconstruction costs.

Coverage B: Other Structures

This covers structures on your property that aren't attached to your home, typically providing 10% of your dwelling coverage amount.

What's Covered:

• Detached garages and sheds
• Fences and walls
• Gazebos and detached decks
• Swimming pools and pool houses
• Guest houses

Tip: If you have valuable detached structures, you may need to increase this coverage beyond the standard 10%.

Coverage C: Personal Property

This covers your belongings inside your home and sometimes even when they're away from home. Standard policies provide 50-70% of your dwelling coverage for personal property.

What's Covered:

• Furniture, clothing, and appliances
• Electronics and computers
• Kitchen items and dishes
• Books, artwork, and decorations
• Items stolen from your car (note: your auto insurance covers the vehicle itself)
• Property damaged in covered perils while away from home

Important Limitations: Most policies have sub-limits for certain items:

• Jewelry: $1,500-$2,500
• Cash and precious metals: $200-$500
• Firearms: $2,500
• Business property: $2,500
• Electronics: May have specific limits

Tip: Schedule valuable items (add them specifically to your policy) or purchase riders for jewelry, art, collectibles, or other high-value items.

Coverage D: Loss of Use

If your home becomes uninhabitable due to a covered loss, this pays for additional living expenses (ALE) while repairs are made. Typically provides 20-30% of dwelling coverage.

What's Covered:

• Hotel or temporary rental housing
• Restaurant meals (above your normal food costs)
• Storage fees for belongings
• Laundry services
• Pet boarding
• Temporary relocation costs

Important: Coverage typically lasts until your home is repaired or you reach the policy limit, whichever comes first.

Coverage E: Personal Liability

This protects you if someone is injured on your property or you cause damage to someone else's property. Standard policies provide $100,000-$300,000 in liability coverage.

What's Covered:

• Guest injuries on your property (slip and fall, dog bites, etc.)
• Damage you cause to neighbors' property
• Legal defense costs if you're sued
• Court-ordered judgments up to policy limits
• Incidents caused by family members or pets

Important: Liability coverage is crucial in our litigious society. Many experts recommend at least $300,000-$500,000, or adding an umbrella policy for additional protection.

Coverage F: Medical Payments to Others

This covers minor medical expenses for guests injured on your property, regardless of fault. Standard coverage is $1,000-$5,000.

What's Covered:

• Medical bills for guests injured on your property
• Emergency treatment costs
• Medical follow-up appointments

How It Works: This coverage can help pay for minor injuries without the need for a liability claim or lawsuit. It's a "no-fault" coverage that can preserve relationships with neighbors and friends.

Common Exclusions: What Home Insurance DOESN'T Cover

Understanding what's NOT covered is just as important as knowing what is. These common exclusions catch many homeowners by surprise.

Floods

Standard homeowners insurance does NOT cover flood damage from external water sources.

What's NOT Covered:

• Rising water from rivers, lakes, or storm surge
• Heavy rain flooding
• Sewer backup (may be covered with additional endorsement)
• Water damage from failed sump pumps during flooding

Solution: Purchase separate flood insurance through the National Flood Insurance Program (NFIP) or private insurers. Don't assume you don't need it because you're not in a high-risk zone—30% of flood claims come from moderate-to-low-risk areas.

Earthquakes

Earthquake damage requires a separate policy or endorsement in most states.

What's NOT Covered:

• Structural damage from seismic activity
• Land movement, sinkholes, or soil liquefaction
• Property damage from earthquakes

Solution: If you live in earthquake-prone areas (California, Pacific Northwest, Alaska, parts of Midwest), purchase separate earthquake insurance.

Normal Wear and Tear

Insurance covers sudden, accidental damage—not gradual deterioration from age or lack of maintenance.

What's NOT Covered:

• Old roof that needs replacement
• Aging HVAC systems
• Worn-out plumbing or electrical systems
• Pest damage from termites, rodents, or insects
• Mold from long-term moisture issues
• Foundation cracks from settling

Key Principle: Home insurance covers "sudden and accidental" damage, not predictable maintenance issues.

Mold and Fungus (Limited Coverage)

Mold coverage is extremely limited in most policies, with caps of $5,000-$10,000.

When Mold IS Covered:

• Mold resulting directly from a covered peril (like a burst pipe you discovered quickly)
• Hidden mold behind walls from sudden water damage

When Mold is NOT Covered:

• Long-term moisture problems you ignored
• Humidity and condensation issues
• Mold from ongoing leaks
• Poor ventilation problems

Prevention: Address water issues immediately and maintain your home to prevent mold growth.

Water Damage (It's Complicated)

Not all water damage is covered. Insurance distinguishes between "water damage" and "flood."

Generally Covered:

• Sudden pipe bursts or appliance leaks
• Water heater explosions
• Rain entering through storm-damaged roof or windows
• Ice dam damage

Generally NOT Covered:

• External flooding (requires flood insurance)
• Seepage through foundations or walls
• Slow leaks that develop over time
• Preventable leaks you ignored

Home-Based Business

If you run a business from home, your homeowners policy likely provides very limited or no coverage for business-related losses.

What's NOT Covered:

• Business equipment and inventory (limited to $2,500 or less)
• Liability for business activities
• Loss of business income
• Client injuries related to your business

Solution: Purchase a home business policy endorsement or separate business owners policy (BOP).

High-Value Items (Under-Covered)

Even if personal property is covered, high-value items have sub-limits that may leave you underinsured.

Items With Limited Coverage:

• Jewelry and watches: $1,500-$2,500
• Fine art and collectibles: $2,500
• Firearms: $2,500
• Cash, coins, and precious metals: $200-$500
• Musical instruments: May need scheduling

Solution: Schedule valuable items individually or purchase a valuable items endorsement (also called a rider or floater).

Dog Bite Exclusions

Some breeds may be excluded from coverage or cause your insurance to be declined.

Commonly Restricted Breeds:

• Pit Bulls and Staffordshire Terriers
• Rottweilers
• Doberman Pinschers
• German Shepherds (sometimes)
• Chow Chows
• Wolf hybrids

Important: Inform your insurer about any dogs you own. Failing to disclose could result in claim denial.

Intentional Damage

Insurance doesn't cover damage you cause intentionally or damage caused by illegal activities.

What's NOT Covered:

• Damage from criminal acts
• Arson by the homeowner
• Deliberate destruction of property

Replacement Cost vs. Actual Cash Value

Understanding this distinction is crucial for adequate compensation after a loss.

Actual Cash Value (ACV)

• Pays for replacement minus depreciation
• Lower premiums
• May not fully cover replacement costs
• Example: 10-year-old roof damaged: You might receive 50% of replacement cost

Replacement Cost Value (RCV)

• Pays to replace items with new equivalents
• No depreciation deduction
• Higher premiums (typically 10% more)
• Example: 10-year-old roof damaged: You receive full cost of new roof

Recommendation: Always choose replacement cost coverage for both dwelling and personal property. The extra premium is worth it when you need to file a claim.

Additional Coverage Options to Consider

These endorsements can fill common coverage gaps:

Water Backup Coverage

• Covers sewer or drain backup
• Typical cost: $40-$100 annually
• Typical coverage: $5,000-$25,000

Service Line Coverage

• Covers repair/replacement of underground utility lines (water, sewer, electrical)
• Typical cost: $25-$75 annually
• Can save thousands in repair costs

Scheduled Personal Property (Floaters)

• Covers specific high-value items without deductibles
• Broader coverage (including accidental loss/damage)
• Cost: Typically $1-$2 per $100 of coverage

Equipment Breakdown Coverage

• Covers mechanical/electrical breakdown of appliances and systems
• Typical cost: $30-$50 annually
• Can cover HVAC, appliances, electronics

Inflation Guard

• Automatically increases coverage limits annually to keep pace with construction costs
• Prevents gradual underinsurance
• Minimal additional cost

Umbrella Liability Policy

• Provides additional liability coverage beyond home and auto policies
• Typical coverage: $1-$5 million
• Cost: $150-$300 for $1 million coverage
• Essential for high-net-worth individuals

How to Avoid Coverage Gaps

Follow these strategies to ensure you're adequately protected:

1. Review Your Policy Annually

• Check if coverage limits still match your needs
• Update for home improvements or renovations
• Adjust for new valuable items purchased
• Review deductibles and liability limits

2. Document Your Belongings

• Create a home inventory with photos or video
• Keep receipts for expensive items
• Store documentation off-site or in the cloud
• Update inventory when you make major purchases

3. Calculate Replacement Cost Accurately

• Use your insurer's replacement cost calculator
• Get professional appraisals for custom homes
• Don't base coverage on market value or purchase price
• Include costs for local building codes and upgrades

4. Understand Your Deductible

• Know your deductible amount (typically $500-$2,500)
• Some perils have separate deductibles (wind/hail may be 1-5% of dwelling coverage)
• Ensure you have savings to cover deductible
• Higher deductibles lower premiums but increase out-of-pocket costs

5. Ask Questions

• Don't assume you understand your policy
• Call your agent to clarify coverage
• Ask specifically about exclusions that concern you
• Get explanations in writing when possible

Common Claims and Coverage Outcomes

Here's how typical scenarios are usually handled:

Kitchen Fire: ✓ COVERED - Dwelling, smoke damage, temporary housing, belongings

Burst Pipe in Winter: ✓ COVERED - Water damage, repairs (if you maintained heat and didn't abandon property)

Tree Falls on House in Storm: ✓ COVERED - Tree removal (limited amount), dwelling damage, debris removal

Basement Floods from Heavy Rain: ✗ NOT COVERED - Need flood insurance

Guest Slips and Falls, Breaks Arm: ✓ COVERED - Medical payments and liability coverage

Roof Leaks from Wear and Tear: ✗ NOT COVERED - Maintenance issue, not sudden accident

Jewelry Stolen ($15,000 ring): ⚠️ PARTIALLY COVERED - May only receive $1,500-$2,500 without scheduled coverage

Mold from Ignored Leak: ✗ NOT COVERED - Maintenance issue, not sudden

The Bottom Line

Home insurance is complex, with many coverage nuances that can significantly impact your protection. The key takeaways are:

• Read your policy: Don't wait for a claim to understand what's covered
• Choose replacement cost coverage: Worth the extra premium
• Know common exclusions: Flood, earthquake, wear and tear, mold
• Add endorsements for gaps: Water backup, service lines, valuables
• Insure to replacement cost: Not market value
• Increase liability coverage: Consider at least $300,000 or add umbrella policy
• Document everything: Keep inventory and receipts
• Review annually: Update as your situation changes

Understanding your home insurance policy empowers you to make informed decisions about coverage and avoid costly surprises when you need to file a claim. Take the time now to review your policy and address any gaps—it could save you tens of thousands of dollars in the future.