How Property Insurance Works

You can’t purchase a home until you have secured financing for it. But before you can do that you must first make sure you have homeowners insurance.

There are a few different types of homeowners insurance, each categorized based on the amount of coverage they offer. HO-1 and HO-2 are the most affordable options, but only because they come with several exclusions and focus protection on the actual property and not the individual’s belongings. HO-3 policies, on the other hand, are the most commonly purchased policies because they shield both the house and what is inside.

Knowledge is power, especially when it comes to filing a claim on your insurance. To make the most of your policy, you need to understand what sort of coverage you are afforded and how that coverage works. A deeper look into how HO-3 policies operate will help prepare you for the next time you need to make a claim.

Property Protection 

The first thing you should know about HO-3 policies is that they are broken up into 2 distinct parts: property protection and liability protection. Property protection is the more comprehensive of the two, guarding you not only against damages to the home itself, but other structures on your land as well, such as car ports or tool sheds. If your home is damaged and unlivable, property protection cover the expenses associated with living elsewhere while your home is being repaired. Some HO-3 policies are even far-reaching enough to insure your more valuable items like jewelry.

The property protection portion of your HO-3 covers damage caused by a wide variety of sources, from snow, ice and fire to incidences of theft and vandalism. Provided there are no conspicuous signs of neglect, the policy usually covers damage caused by burst pipes or other unforeseen malfunctions. However, standard HO-3 policies will not cover damage resulting from hurricanes, floods or earthquakes. This sort of coverage is provided by a different and comes at an additional cost.

Liability Protection

The other part of the typical HO-3 policy—liability protection—is just as important as property protection but often gets overlooked. Liability protection exists to cover you against claims made by people who happen to be injured on your property. For instance, if while hosting a 4th of July barbecue, one of your guests trips and is injured on your lawn, the liability portion of your homeowners insurance will cover the cost of their medical bills. But if you do not have liability insurance, or you do and they are injured because you neglect their property, your insurance will not cover their medical expenses and you will be responsible for the injuries.

Filing Claims

If there are damages to your property that are covered under your policy, you need to file a claim to receive your money. In most cases, however, the insurance company is not going to bend over backwards to pay you the full amount you are owed. They will send an insurance adjuster to assess and confirm the value of what was damaged or lost. They will offer you a settlement amount. Here we recommend both keeping thorough records—pictures, receipts, purchase dates, etc.— and seeking multiple independent estimates to prove to the insurance company they owe you the full amount you are claiming and better position yourself for negotiation.


Making sure you have the right coverage for your property is very important. Before you sign anything, be sure you know the policy limits and what is excluded from coverage. The day of a disaster is a day too late to find out.

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