Homeowner Insurance: What's Covered, What's Not, and How Much You Need

The Insurance Question You Must Get Right

Your lender requires homeowner insurance before you can close. But most buyers just pick the cheapest policy and call it done. That's a mistake. An underinsured home or the wrong type of coverage can cost you tens of thousands of dollars if something goes wrong.

A house fire. A liability lawsuit. A broken pipe flooding your basement. A hurricane destroying your roof. Homeowner insurance exists to protect you from these catastrophes. But you need to understand what you're actually covered for.

What Homeowner Insurance Covers (The Basics)

Standard homeowner insurance (called HO-3 in most states) includes four main types of coverage:

Coverage A: Your Home Structure

This covers the physical structure of your home—walls, roof, floor, built-in appliances. If a fire destroys your house, Coverage A pays to rebuild it (up to your policy limit). If a tree falls through your roof, Coverage A covers the repair.

This is the biggest piece of your policy. The amount you carry should equal the replacement cost of your home, not the market value. A home worth $350,000 might cost $400,000 to rebuild (because labor and materials cost more than land value). Your Coverage A limit should be $400,000, not $350,000.

Coverage B: Other Structures

This covers detached buildings on your property—a garage, shed, guest house, pool house. It's usually limited to 10% of your Coverage A limit.

Coverage C: Personal Property

This covers your belongings—furniture, clothes, electronics, etc. If a thief steals your TV or a fire destroys your furniture, Coverage C covers it (up to your limit).

Important: There's usually a limit on certain items. Jewelry might be covered up to $1,500. Electronics up to $2,500. Watches up to $500. If you have valuable items, you need to schedule them separately or buy additional coverage.

Coverage D: Loss of Use

If your home becomes uninhabitable due to an insured event (fire, hurricane, etc.), Coverage D pays for temporary housing—hotel rooms, rental apartments, etc.—while your home is rebuilt. This is crucial and often overlooked.

Coverage E: Personal Liability

If someone is injured on your property and sues you, or you accidentally damage someone else's property, liability coverage pays for their medical bills and legal fees (up to your limit). Standard limits are $100,000-$300,000, but you should consider $500,000-$1,000,000 if you have significant assets.

Coverage F: Medical Payments

This covers medical bills if someone is injured on your property, regardless of fault. It's usually $1,000-$5,000. It prevents small accidents from turning into lawsuits.

What Homeowner Insurance Does NOT Cover

This is where most people get surprised—and poor.

Flood Damage

Standard homeowner insurance does not cover flooding—not your home, not your belongings. Flood insurance is separate and must be purchased separately (especially if you're in a flood zone). Your lender may require it. Even if you're not in a flood zone, you should probably have it. Flooding is the #1 cause of home damage claims.

Earthquake Damage

In earthquake-prone states, earthquake insurance is separate. Standard homeowner insurance won't cover it.

Maintenance-Related Damage

Your roof has a 20-year lifespan. If it fails at Year 21 and rain gets in, that's maintenance, not an insured event. Homeowner insurance covers sudden, accidental damage—not gradual failure. A tree branch puncturing the roof is covered. A roof failing from age and neglect is not.

Neglect or Intentional Damage

If you let your house fall apart and then it collapses, insurance won't cover it. If you intentionally cause damage (or your family member does), it's not covered.

Water Damage from Gradual Leaks

A sudden pipe burst is usually covered. A slow roof leak over months that you ignored is not. Insurance covers accidents, not neglect.

Damage from War, Nuclear Hazard, or Utility Failure

These extreme events are excluded from standard policies.

Most Home-Based Business Equipment

If you run a home business, your business equipment is usually only covered up to $2,500. Professional photographers, for example, need separate business insurance for their cameras and gear.

How Much Coverage Do You Actually Need?

For your home structure (Coverage A): Get replacement cost coverage, not actual cash value. Replacement cost pays to rebuild your home at today's prices. Actual cash value deducts depreciation, which is brutal. A 10-year-old roof has depreciated significantly, so insurance companies often pay much less under actual cash value.

Your coverage limit should equal the cost to rebuild your home, not the market value. Ask your agent to do a "replacement cost estimate." Many agents under-insure homes because the owner wants a cheaper premium. This is a mistake.

For personal property (Coverage C): Standard coverage is usually 50-70% of your Coverage A limit. If your home is worth $400,000 to rebuild, your contents coverage might be $200,000-$280,000. That might not be enough. Take a video of your belongings and add them up. If you have expensive items (jewelry, art, collectibles), you probably need more coverage or scheduled items.

For liability (Coverage E): The industry standard used to be $100,000. Today, $300,000 is standard, $500,000 is smart, and $1,000,000 is not unreasonable if you have assets to protect. Liability is cheap—going from $100,000 to $500,000 might cost $50-100/year more.

For loss of use (Coverage D): Make sure this covers at least one year of your mortgage, property taxes, utilities, and living expenses. If you're displaced for 12 months while your home is rebuilt, this coverage pays for temporary housing.

Special Coverage You Might Need

Flood Insurance

Absolutely get this if you're in a flood zone. Even outside a flood zone, consider it if you're near water, in a low-lying area, or in an area with heavy rain patterns. Flood damage is devastating and expensive.

Umbrella Liability Insurance

This is cheap insurance (usually $100-300/year for $1 million in coverage) that covers you for major liability claims exceeding your homeowner insurance limit. If someone is injured at your house and sues for $2 million, your $300,000 homeowner liability doesn't cover it. An umbrella policy does.

Scheduled Items Coverage

For jewelry, art, collectibles, or high-end electronics, get them scheduled (listed individually) on your policy. This removes the sub-limits and covers full replacement cost.

Earthquake Insurance

If you're in California, Washington, or other earthquake-prone areas, seriously consider it. Standard homeowner insurance won't cover earthquake damage.

From the Thrive Team: Three Pro Tips Based on 450+ Transactions

Pro Tip #1: Don't Cheap Out on Coverage to Save on Premiums

We've seen buyers choose the cheapest insurance policy to save $30/month on their payment. Then a house fire happens, and they realize their coverage was $100,000 too low. The savings disappear—and they're out tens of thousands of dollars. Homeowner insurance is one of the cheapest protections you have. Spend the extra money. The $30/month difference is less than the cost of one month's mortgage. It's worth it.

Pro Tip #2: Update Your Coverage When You Make Major Updates

You replace your roof, add a deck, or finish a basement. Your home's replacement cost just went up, but many homeowners don't update their insurance. Years later, a fire happens, and their coverage limit is $50,000 short. Call your agent when you do significant work and get your coverage limits re-evaluated. It takes 5 minutes and costs nothing.

Pro Tip #3: Bundle Home and Auto Insurance—and Keep Shopping

Bundling usually saves 15-25% on your total premiums. But don't assume one insurer is the best. Shop every 2-3 years. Insurance companies change rates constantly. What was the cheapest option two years ago might be the most expensive now. Getting multiple quotes takes 30 minutes and can save you hundreds per year.

Bottom Line: Insurance Is Not a Luxury

Your home is your biggest investment. Insurance protects it and protects you from catastrophic liability. Most people carry adequate insurance on their car (which is worth $20,000-$40,000) but under-insure their home (which is worth $300,000+). That's backwards.

Get proper coverage. Yes, it costs money. But not having it costs way more.