For homeowners who want basic protection, an H03 policy will suffice. But for homeowners looking for the most protection and the highest coverage limits, a premium H05 policy is the best bet.
With most home insurance, such as an H03 policy, you are required to prove that your personal property claim happened due to one of the named perils (insurance-speak for specific dangers) listed on your policy. However, with a premium policy, such as an H05, the onus is on the insurance company. The only way you won't get reimbursed for personal property damages is if the peril is specifically exempted from your policy.
- The difference between the H03 policy and the H05 policy for homeowners is what perils or dangers to your home are covered.
- A basic H03 policy covers all risks to the building structure, including the outside of the building; personal property, including everything in your home, is only covered if it falls under the policy's named perils.
- With a premium H05 policy, all risks to the building structure and personal property are covered, but all personal property, or everything in your home—unless it falls under the list of perils that are specifically excluded.
- H03 policies are less costly than H05 policies because they cover less, and put the burden of proof of a claim on the homeowner.
- For most homeowners, H03 policies are sufficient. HO5 policies benefit those with a lot of high-value belongings and expensive personal property.
Basic H03 Policy vs. Premium HO5 Policy
The most common sort of homeowners insurance, an HO3 policy, regards all risk to the actual building structure of your home, meaning you'd be insured for any peril that could happen to the outside of your home.
Peril, in terms of insurance coverage, is defined as something that could destroy or cause damage to your property. A burst pipe, fire, hurricanes, or tornadoes are all perils.
Named perils mean the perils you are covered for that are specifically mentioned in your insurance policy contract. If you are covered for all perils except those mentioned as exemptions, you are getting an open perils policy. All risk is also called "open peril," because unless a specific peril is excluded you are covered. However, your personal property, the contents of your home (i.e., your stereo, computer, and furniture) are only covered by named perils in an H03 policy.
It's common in H03 policies for personal property to only be covered for its cash value—its current worth, as a used or depreciated item—and not its replacement value, the cost of a new, comparable item.
In an HO5 policy, both personal property and your home are covered under an open perils policy. Thus, if you have a claim due to anything that causes damage to your personal property within your home, you wouldn't have to prove that it happened because of a named peril. For instance, if your roof develops a water leak and your property is damaged, you do not have to prove that it happened based on a reason covered by your policy, such as hail. If the peril is not specifically excluded, you are covered.
Perils Covered With an HO3 Policy
There are 16 named perils that are generally insured against in a typical H03 (traditional) policy. This covers most incidents that can happen and is good enough that most people end up with this policy in order to avoid higher insurance premiums. Some of the perils that may be included in H03 are vandalism, damage from thawing ice, mold, theft, and volcanic eruption.
Types of HO3 Coverage
Coverage by HO3 insurance policies usually falls into five basic categories: A, B, C, D, and E.
- Coverage A: This refers to the actual physical building you live in and any attached structures, like a porch, deck, or garage. Your home is usually covered on an open peril basis.
- Coverage B: This covers other structures on your property, such as things that are unattached to your home: detached garages, sheds, fences, swimming pools, and tennis courts. Typically, these other structures are insured for up to 10% of your Coverage A amount, though you can increase it.
- Coverage C: This applies to the contents of your home—your furnishings, appliances, and other personal property. Unlike your home, which is covered for open perils, your contents are covered for named perils only—occurrences specifically listed on the policy. If it’s not listed, it’s not covered.
- Coverage D: Commonly referred to as "loss of use" coverage, this applies if your home becomes uninhabitable. It covers the costs of staying in a hotel and any additional living expenses you incur. This coverage is usually on a named peril basis and is either limited to a certain period of time or 10% of Coverage A.
- Coverage E: This is the personal liability portion of your policy—protecting you if something happens to someone else or someone's property, or other situations where you’d be deemed at fault. Typically, it covers any legal fees or court costs paying the damages you’re responsible for.
Reasons to Get an HO5 Policy
H05 policies do tend to be more expensive than the more standard H03. If you have fantastic credit and the difference in price is relatively small, the investment may be worth it though.
First, HO5 policies give you no fuss, no muss insurance; they are inclusive rather than exclusive coverage for your property and goods. When making a claim, you don't have to jump through hoops to prove you're covered; rather, the burden of proof's on the insurance carrier to say you aren't.
A more specific benefit of an HO5 is that you are covered in additional circumstances and for the maximum amount (i.e., replacement value) for damage to your personal property. So it is especially invaluable if you own a lot of high-value items.
How to tell if an HO5 is worth it? Go around your home with a pad and paper and write down everything you own. Then, write down what you think each item is worth. Then, go online to find the replacement cost if you had to buy that same item new, today. Total the values and now that you know what your stuff is worth, you can decide whether you need an HO5 policy.
Insurance policy names can vary from state to state, so if you are looking for an HO5, explain to the insurance agents or brokers that you want a policy that includes all risks, or open peril coverage, for personal property.
Before you become a complete convert to the HO5 policy, there are some caveats to consider.
One is that you may not qualify. HO5 policies tend to be for newer homes, or those located in low-risk neighborhoods (nothing in a flood zone or landslide-prone area). High property values help too.
Also, while HO5 policies are more comprehensive, even they don't cover everything. In fact, there are several common exclusions, as they're called, including damage due to:
- Earth movement
- Ordinance or law
- Water damage from outside: flood, sewer backup
- Power failure
- Nuclear hazard
- Intentional loss
- Government action
- Theft if the structure is under construction
- Vandalism or malicious mischief if the home is vacant more than 60 days
- Mold, fungus, or wet rot (with some exceptions)
- Neglect, wear and tear, and deterioration
- Mechanical breakdown
- Smog, rust, and corrosion
- Smoke from agricultural smudging and industrial operations
- Discharge, dispersal, or seepage of pollutants
- Settling, shrinking, bulging, or expanding of your home’s foundation
- Infestation of birds, vermin, rodents, or insects
- Animals you own
Questions to Ask About Any Policy
No matter whether you choose an HO3 or an HO5 homeowner's policy, you should ask your agent or broker these questions:
- What are the exact exemptions? Even if you have an HO5 policy, you could have exemptions—things or situations not covered in your policy—as noted above.
- Is replacement value or cash value covered? If you are covered for replacement value instead of cash value, you are paid enough to buy the item new instead of what the item is worth at the time it is damaged.
The Bottom Line
HO5 policies protect you from your insurance company not reimbursing for certain types of personal property damage. However, opting for this more expensive coverage policy depends on how much your possessions are worth, and if you can afford the additional premium. No matter what insurance policy you choose, ask specific questions about what items are not covered. You don't want to shell out the extra cash for an HO5 policy and then discover that what damages your property is the one thing that is not covered.
What Are HO4, HO6 and HO8 Insurance Policies?
An HO4 insurance policy, popularly known as renters insurance, provides coverage of personal property for tenants—those who lease (rather than own) their residence.
An HO6 insurance policy is the most common type of coverage for condominiums, cooperatives, and townhouses. Commonly called Condo Insurance or Townhouse Insurance, it generally doesn't cover the overall building structure.
An HO8 insurance policy refers to the most basic homeowners coverage, typically protecting only against catastrophic losses. Designed for older homes, it specifies only 10 named perils (versus 16 in other policies).
What Are the 16 Named Perils?
The 16 named perils are events or things cited in a homeowners insurance policy; the damage or destruction they cause will be covered by that policy. Standard across most carriers, these perils include:
- Fire and lightning
- Windstorm and hail
- Volcanic eruption
- Weight of ice and snow
- Falling objects
- Accidental discharge or overflow of water or steam
- Freezing of household appliances, plumbing, heating, air conditioning, or fire sprinkler systems
- Accidental cracking, burning, tearing, or bulging of plumbing fixtures, HVAC systems, or fire sprinklers
- Sudden and accidental damage due to short-circuiting
What Are the 3 Basic Levels of Coverage That Exist for Homeowners Insurance?
Homeowners insurance offers three levels or tiers of coverage for the residence and personal property.
Replacement value covers the replacement cost of your home and possessions—the current prices you pay for new, comparable things, so you're able to repair or rebuild your home up to the original value. Of course, you can't spend more than the overall amount of insurance you've taken out.
Guaranteed or extended replacement cost/value is inflation-buffer coverage that pays for whatever it costs to repair or rebuild your home—even if it's more than your policy limit. Certain insurers offer an extended replacement, meaning it offers more coverage than you purchased, but there is a ceiling; typically, it is 20% to 25% higher than the limit.