Coverage A, Dwelling, attached structures coverage:
Dwelling and attached structures are included. Structures under construction as well as building materials located on the property are also covered. Though some business may take place, the dwelling must primarily serve as a residence. If liberal amounts of business take place, a business policy should be considered in order to ensure full coverage or property and equipment.
In order receive full replacement value (like kind replacement cost) for damage to the house, dwelling coverage must be equal to at least 80% of the structure’s full replacement value not including the value of the lot. For example, a $100,000 structure must be insured for at least $80,000. If coverage is adequate, the insured will receive like kind replacement cost (i.e. the insurer will pay for like kind construction) less the deductible up to the policy limit. If coverage is inadequate (i.e. less than 80% of full value), then the insurer will pay less than the full replacement cost. Most insurers will not issue policies for less than 80% of the full replacement value of the house.
Guaranteed replacement cost:
For a higher premium a guaranteed replacement cost option also exists that allows the insured to receive full replacement value even if it exceeds the policy limit. Though the previous sentence is in reference to structures, personal property (coverage C) also benefits from guaranteed replacement cost as policyholders will receive replacement cost for losses as opposed to actual cash value which is typically less due to depreciation. Some limitations and rules apply to the guaranteed replacement cost option. For example, sometimes percentage limits exist on the maximum replacement value (i.e. 150% of policy limit) and dwelling coverage must equal 100% of full replacement cost, rising as the value of the home rises. HO-5 policies automatically include guaranteed replacement cost for coverage A (dwelling, attached structures), B (other structures), and C (personal property). Keep in mind that despite the “guaranteed replacement cost” provision, policy limits (maximum caps on indemnity paid) exist. Sometimes instead of guaranteed replacement cost companies offer extended replacement cost in order to protect themselves. Be sure you fully understand your particular policy.
Functional replacement cost:
As opposed to like kind replacement, cheaper materials are used that serve the same purpose. Functional replacement cost would be used when, due to depreciation or other factors, actual replacement costs of materials or craftsmanship exceed market value of the property by a substantial margin. By agreeing to settle losses using functional replacement cost or cash value, owners of homes in this category can obtain coverage more easily and for more reasonable premiums.
Inflation guard endorsement:
An inflation guard endorsement can be added to ensure that insurance coverage keeps pace with the increasing value of the home and adequate insurance is maintained. This will help provide protection against falling below the 80% threshold and receiving less than full replacement value. Note that inflation guard can also be purchased for floater policies in order to keep pace with items that increase in value (e.g. collectibles).
The following may not be applicable in all areas of the country:
Insurance against robbery and burglary:
This option exists for individuals in certain states. Individuals living in high-risk conditions may consider this option.
Earthquake and Flood insurance:
These additional coverages are excluded from basic homeowners policies, but can be added. Earthquake insurance is usually written as an endorsement and is easier to obtain than flood insurance. In order to add flood insurance certain conditions must be satisfied in reference to local flood control. Flood insurance is provided by the National Flood Insurance Program (government program) but can be purchased through some private insurance companies.
Adds increased coverage and liability for business related incidents and damages. Most basic policies have limited coverage on home office equipment and exclusions on business related liabilities, for example.
Sewer, storm drain backup coverage:
A basic policy may not cover damages caused by a backed up sewer.
Beach and windstorm plans:
Available in certain coastal states where threat of storms and hurricanes is high and insurance is difficult to acquire or afford, primarily Florida. Coverage in this category is similar coverage in other residual insurance markets.