What Should a Homeowner Insurance Policy Cover?

nice house homeowners insurance article background

Contractual Agreement

The first thing to know about an insurance policy is it is a contractual agreement between an insured and an insurer. The insured agrees that by paying a payment known as a premium deposit he will receive fair settlement on losses covered by the insurance policy. The insurer agrees upon receiving payment by the insured to bind itself to stipulations found in the insurance policy. Most states use the New York Standard form commonly referred to as standard fire policy as the basis for homeowner insurance policies today. This form was initially written in 1943 and is generally referred to as the 165 Line form. Though each state may dictate provisions and limitations for their customized contract, by law the contract may not be issued with any less limits than found in the 1943 New York Standard form policy.

Considerable effort has been put into spelling out in the insurance agreement to make clear who is eligible to receive the insurance benefits described in the policy. Some of those benefits provided to the insured are

  •  authorization to act on behalf of all insureds with respect to giving or receiving notices
  •  receiving refunds
  • agreeing to or making any changes in the policy. 

It is also common practice to use the first named insured as the recipient of payments from claim settlements along with names of others who have an interest in settlement of claims.

It is also part of the insurance agreement to identify the party who will provide the insurance described in the policy and the Declarations paid for by the premium of the insured. This is generally the name of the company issuing the insurance policy.

Early in the makeup of the insurance policy terms like “we,” “us,” and “our” means the name of the insurance company, i.e. Hartford, Allstate, State Farm, New York Life, Farm Bureau Mutual, etc. The terms “you” and “your” mean a person named in the Declarations, the insured and that person’s spouse if a resident of the same household. “You” and “your” also refer to a trust named in the Declarations as an insured. “You” and “your” do not include an additional named insured, such as a lessor, trustee, or landlord.

A very important part of the agreement is a statement that “by acceptance of this policy, you agree that the Declarations indicate the coverages you purchased and this policy booklet, the Declarations, and applicable endorsements, constitute your policy.” (This will be discussed in detail later in the article.)

Scope of Coverages

After defining parties to the insurance contract, definitions applicable to the policy are delineated. The intent of these definitions is to put boundaries around what constitutes a homeowner insurance policy. It is to make clear this policy is very limited in what business exposures are includable in a homeowner setting. 

Following these definitions a section spelling out general conditions governing the policy could be discussed. Some of the more common general conditions would include explanation of 

1) Abandonment of property

2) Arbitration

3) Assignment 

4) Changes

5) Concealment or Fraud 

6) Cooperation of Insured

7) Death

8) Deductible Clause 

9) Nonduplication of Insurance Benefits 

10) Policy Period

11) Policy Termination

12) Subrogation–Our Right to Recover Payment 

13) Suit against Us 

14) Waiver or Change of Policy Provisions 

This is not a full list of general conditions–see your individual policy for those applicable to you.

Property Insurance

The explanation of property covered in the policy generally states structures, personal property, and loss of use, with an explanation that the insured covers property insured for direct physical loss caused by specific perils. It explains most coverages, the applicable perils, the limit of liability, and deductibles. The specific dollar amounts are indicated on the Declarations page attached to the issued policy. Also, an explanation of some coverage may be in the policy booklet or an applicable endorsement.

Explanation of Insured Perils

Most policies marketed today are for All Perils where an insured may have a financial loss, subject to certain perils excluded by the policy. Some wanting only to be insured for whatever loss they feel they may encounter can have policies stripped of all perils except fire or windstorm. Rarely are these policies in force anymore due to the company’s actuarial computations for establishing rates, limited peril coverage reserved for less desirable structural exposures, and less interest in the marketplace for those policies.

The actual policy enumerates the perils covered, while the Declaration page shows the actual dollar amount designated for specific structures, personal belongings and loss of use.

In an attempt to remove the misunderstandings which may arise by calling a policy an all perils policy, some companies issue a policy with a Special Form section stating, “…we insure for direct physical loss to the property insured, except for any loss excluded below.” This puts the insured on notice that the policy does include some items which are not insurable perils. Some of those excludable events include damage caused by flood, governmental activities, maintenance issues, and inherent deterioration.  These again are only representations of some excludable perils. You should carefully examine your policy for specifics. 

To Be or Not To Be

Earlier in this article this paragraph was referred to…”By acceptance of this policy, you agree that the Declarations indicate the coverage you purchased and this policy booklet, the Declarations, and applicable endorsements, constitutes your policy.” No unwritten nor implied coverages, no insurable perils not included in the aforementioned documents nor agent interpretation of coverages could override the actual set amounts established by the policy. This very common famous comment from Shakespeare’s Hamlet soliloquy “to be or not to be” has some application to present day interpretations of what is and what isn’t covered under a homeowner policy. 

In many instances, it seems the legal profession has determined that since the contract is penned in legal jargon, the insured may not have sufficient knowledge of that jargon to have made a reasonable choice when agreeing to the terms of the contract; therefore, it remains open to interpretation at the time of loss. Since at the very beginning of a claim settlement, insurers have access to legal counsel, insureds should have no less assistance. In fact some legal firms advertise that such should be the case.

In an attempt to mitigate this accusation, many insurance companies have revised their contract language to be more buyer friendly using more commonly used words and phrases in place of the legal jargon of referencing one section to another paragraph, section, verse, etc. Even though this may be the case, there are plenty of circumstances which leave their interpretation in question. 

There is also the conflict between the insurers needing to have sufficient reserves to handle claims and to be profitable–and the legal profession wanting to get as much out of a settlement as they can so they also can make a profit while making sure the insured is getting what they paid for. In this regard, it seems to be common practice for a law firm to cast disparaging comments related to the integrity of the insurance company in settling a claim favorably, thereby establishing the reason for an insured to use their services. When legal counsel is involved, an additional 30%-40% can be expected in future settlement so it is definitely to the interest of the insurer to settle a claim on a timely basis and as fair monetarily as it can be.

What Should a Homeowner Insurance Policy Cover?

The answer to the question lies within the purpose of an insurance policy to begin with–and that is, at the time of loss put the insured back into the same financial position they were in prior to the claim, nothing more and nothing less. 

The insurance concept was never intended to be a money making proposition for those involved, but it was intended to be a way for financial disaster to be averted in the event of an untimely financial loss. Both the insurance company and the legal profession need to recognize that the insureds are really in the end the ones who pay for settlements. It is not some external benefactor who steps in when a loss occurs but those who have paid a premium to assist others in their time of loss or paid a premium which along with the premium of others helps alleviate the trauma of their time of need.

So what’s to be and what’s not to be provided can be dealt with through 

  • the literal interpretation of the policy contract
  • a common consensus between the insured and a claims adjuster 
  • arbitration of an agreed upon settlement by mutually agreed upon representatives of the insured and the insurer 
  • or litigation through the court systems using legal firms chosen by the opposing parties. 

The policy contract still has to be honored as a sacred bond between the insured and the insurer for it is the basis for all relationships of the insured and the insurer.