Property insurance, also known as homeowners insurance is a contract between the insurance company and the client, wherein the former agrees to indemnify the latter against the financial losses incurred on account of damage to their property. The insurance company charges the client a premium, as a consideration for their promise to indemnify.
2. To fulfill the requirement of the mortgage lenderThe mortgage lenders, that are generally the banks, require that the property they are lending out loan for is insured. They wish to protect their investment, since they are the actual owners of the property till the loan is completely repaid. In the event of damage to the uninsured property, the lender will run into substantial financial loss.
§Coverage in homeowners’ insurance policy It is necessary to evaluate the packages of coverage being offered by the insurer. For example, if the damage to the property is caused due to earthquake, and the peril of earthquake is not covered in the policy, the client cannot claim for the damages.
1. Damage to the structure of the houseThe homeowners insurance generally covers losses caused to the internal and external structure of the house due to perils like fire, hurricane, civil unrest, theft, aircraft crash, missile testing, and lightning. Perils like earthquake and floods are generally excluded.
2. Damage to the personal propertyCoverage for damage to the contents of the house is also provided. The contents may be electronic appliances, jewelry, furniture, clothing etc. Reimbursement for articles lost or damaged off-site is also possible; however it may be limited up to 70% of the value of such articles.
3. Liability coverageThe homeowners’ insurance policy also covers the financial losses incurred due to the liability arising out of the damage to the insured property. For example- Bodily injury to or damage to the property of the others caused while they were present on the insured property.
4. Loss of useThe insurance policy also provides for the additional living expenses incurred while the property is being restored.
§Forms of homeowners insurance policy
i. Dwelling formDwelling form of policy covers only the structure of the house and a few perils like fire, lightening, civil unrest and explosions.
ii. Basic formBasic form covers damages to the structure of the property as well as the contents from perils like fire, lightening, civil unrest, explosions, theft and vandalism.
iii. Broad formBroad form insures the property and the contents against the perils mentioned in the basic form, as well as some additional elements like damages caused due to weight of ice, trees and other falling objects, rupture of home appliances and plumbing system.
iv. Modified coverageThe modified coverage form provides for damages against perils mentioned in the Basic form. However, this form is used to insure older properties having a lower market value and a higher cost of rebuilding.
v. Special formThis is the most popular form of homeowners’ insurance policy. It covers the structure of property against all the perils but flood, earthquake and war. The contents are insured against the perils mentioned in the broad form.
vi. Tenants formThis form is meant for the tenants staying in the rented property and only their personal belongings are insured against the perils like fire, lightening, civil unrest, explosions, theft, vandalism, weight of ice, trees and other falling objects, rupture of home appliances and plumbing system.
vii. Condominium Unit Owners FormThis form is meant for the owner as well as the occupants of a condominium unit. It insures the structure of the property and contents against all the perils mentioned in the broad form.
Thus, these are the most important features of and the options available for the homeowners insurance that one must evaluate before arriving at a purchase decision.