Home insurance

In the United States

In the United States, most home buyers borrow money in the form of a mortgage loan, and the mortgage lender often requires that the buyer purchase homeowners insurance as a condition of the loan, in order to protect the bank if the home is destroyed. Anyone with an insurable interest in the property should be listed on the policy. In some cases the mortgagee will waive the need for the mortgagor to carry homeowners insurance if the value of the land exceeds the amount of the mortgage balance. In such a case even the total destruction of any buildings would not affect the ability of the lender to be able to foreclose and recover the full amount of the loan.

Home insurance in the United States may differ from other countries; for example, in Britain, subsidence and subsequent foundation failure is usually covered under an insurance policy. United States insurance companies used to offer foundation insurance, which was reduced to coverage for damage due to leaks, and finally eliminated altogether. The insurance is often misunderstood by its purchasers; for example, many believe that mold is covered when it is not a standard coverage. Further complicating matters is that the homeowners insurance industry is largely regulated at the state level rather than nationwide.

History

Modern home insurance is a 20th-century phenomenon, but insurance against damage to one’s home is centuries old. The first predecessors of modern home insurance were fire insurance policies, which protected against what was then the most common peril to befall buildings. Fire insurance was created by Nicholas Barbon, who opened an insurance firm in London in 1681, in the aftermath of the Great Fire of London of 1666, which had made property owners acutely aware of the risk of fire, initially insuring 5,000 homes. In the wake of his success, many other insurance firms, such as the Hand in Hand Fire and Life Insurance Society (founded 1696), were created. The Sun Fire Office, created in 1710, is the oldest still existing insurance company in the world.

The first homeowners policy per se in the United States was introduced in September 1950, but similar policies had already existed in Great Britain and certain areas of the United States. In the late 1940s, US insurance law was reformed and during this process multiple line statutes were written, allowing homeowners policies to become legal.

Prior to the 1950s there were separate policies for the various perils that could affect a home. A homeowner would have had to purchase separate policies covering fire losses, theft, personal property, and the like. During the 1950s policy forms were developed allowing the homeowner to purchase all the insurance they needed on one complete policy. However, these policies varied by insurance company, and were difficult to comprehend.

The need for standardization grew so great that a private company based in Jersey City, New Jersey, Insurance Services Office, also known as the ISO, was formed in 1971 to provide risk information and it issued simplified homeowners policy forms for reselling to insurance companies. These policies have been amended over the years.

Modern developments have changed the insurance coverage terms, availability, and pricing. In particular, rising premiums has led to many homeowners significantly under-insuring their properties. Homeowners insurance has been relatively unprofitable, due in part to catastrophes such as hurricanes as well as regulators' reluctance to authorize price increases. Coverages have been reduced instead and companies have diverged from the former standardized model ISO forms. Water damage due to burst pipes in particular has been restricted or in some cases entirely eliminated. Other restrictions included time limits, complex replacement cost calculations (which may not reflect the true cost to replace), and reductions in wind damage coverage.

Types of homeowners insurance policies

According to a 2018 National Association of Insurance Commissioners (NAIC) report on data from 2016, 73.8% of homes were covered by owner-occupied homeowners policies. Of these, 79.52% had an HO-3 Special policy, and 13.35% had the more expensive HO-5 Comprehensive. Both of these policies are "all risks" or "open perils", meaning that they cover all perils except those specifically excluded. Homes covered by an HO-2 Broad policy accounted for 5.15%, which covers only specific named perils. The remaining 2% includes the HO-1 Basic and the HO-8 Modified policies, which are the most limited in the coverage offered. HO-8, also known as older home insurance, is likely to pay only actual cash value for damages rather than replacement.

The remaining 21.3% of home insurance policies were covered by renter's or condominium insurance. 14.8% of these had the HO-4 Contents Broad form, also known as renters' insurance, which covers the contents of an apartment not specifically covered in the blanket policy written for the complex. This policy can also cover liability arising from injury to guests as well as negligence of the renter within the coverage territory. Common coverage areas are events such as lightning, riot, aircraft, explosion, vandalism, smoke, theft, windstorm or hail, falling objects, volcanic eruption, snow, sleet, and weight of ice. The remainder had the HO-6 Unit-Owners policy, also known as a condominium insurance, which is designed for the owners of condos and includes coverage for the part of the building owned by the insured and for the property housed therein. Designed to span the gap between the coverage provided by the blanket policy written for the entire neighborhood or building and the personal property inside the home. The condominium association's by-laws may determine the total amount of insurance necessary. E.g., in Florida, the scope of coverage is prescribed by statute – 718.111(11)(f).

Collateral protection insurance

If a home can not be insured, obtaining a mortgage on it is difficult or impossible. If the homeowners insurance is canceled after a mortgage agreement is in force, and the home judged to be uninsurable, a standard mortgage contract that compels homeowners insurance allows the lender to purchase collateral protection insurance, (sometimes called "force-placed insurance") and charge the premiums to the homeowner via escrow. CPI's pay off the balance owed on the mortgage if the homeowner defaults on mortgage payments, and some will cover damage to the home that impacts the resale value. This repair coverage can benefit the homeowner, but by design the contractual benefits flow to the mortgagee. If the structure is deemed uninsurable, the homeowner also benefits from not having the mortgage called in by the lender - without CPI the homeowner would be in serious breach of his contractual obligations.

Causes of loss

According to the 2008 Insurance Information Institute factbook, for every $100 of premium, in 2005 on average $16 went to fire and lightning, $30 to wind and hail, $11 to water damage and freezing, $4 for other causes, and $2 for theft. An additional $3 went to liability and medical payments and $9 for claims settlement expenses, and the remaining $25 was allocated to insurer expenses. One study of fires found that most were caused by heating incidents, although smoking was a risk factor for fatal fires.

Claims process

After a loss, the insured is expected to take steps to mitigate the loss. Insurance policies typically require the insurer to be notified within a reasonable period. After that, a claims adjuster will investigate the claim, and the insured may be required to provide various information.

Filing a claim may result in an increase in rates, nonrenewal, or cancellation. In addition, insurers may share the claim data in an industry database (the two major ones are CLUE and A-PLUS), with Claim Loss Underwriting Exchange (CLUE) by Choicepoint receiving data from 98% of U.S. insurers.

Cost impact of weather disasters

According to data from the National Oceanic and Atmospheric Administration (NOAA), damages from weather-related disasters in the United States amounted to approximately $92.9 billion in 2023. Over recent years, these events' increasing frequency and severity have impacted the insurance industry.

From 2020 to 2023, insurance costs rose by 13 percent, influenced by several factors. Notably, areas frequently affected by disasters have seen higher insurance premiums. A key contributor to these rising costs is increased reinsurance expenses. Reinsurance, which is insurance purchased by insurance companies to mitigate their own risk, saw its costs double from 2017 to 2023. For the fifth consecutive year, these companies have incurred more in payouts than they collected in premiums. In 2023, insurers disbursed $1.11 in claims for every dollar received in premiums, indicating a financial strain within the home insurance sector.

According to Swiss Re, global insured losses due to natural disasters are expected to reach $107 billion in 2025.

In the United Kingdom

As in the US, mortgage lenders within the United Kingdom (UK) require the rebuild value (the actual cost of rebuilding a property to its current state should it be damaged or destroyed) of a property to be covered as a condition of the loan. However, the rebuild cost is often lower than the market value of the property, as the market value often reflects the property as a going concern, as opposed to just the value of the bricks and mortar.

A number of factors, such as an increase in fraud and increasingly unpredictable weather, have seen home insurance premiums continue to rise in the UK. For this reason, there has been a shift in how home insurance is bought in the UK—as customers become a lot more price-sensitive, there has been a large increase in the amount of policies sold through price comparison sites.

In addition to standard home insurance, some 8 million households in the UK are categorized as being a "non-standard" risk. These households require a specialist or non-standard insurer that would cover home insurance needs for people that have criminal convictions and/or where the property suffers subsidence or has previously been underpinned.

In Canada

As in other countries, mortgage lenders in Canada require properties be covered by active home insurance policies throughout the lifetime of the loan repayment. Home insurance in Canada can be divided into three subcategories: homeowners insurance, which includes both building and contents coverage; tenant insurance, which excludes building coverage; and condo insurance, which includes coverage requirements unique to owners of condominium units. Providers in Canada offer all-risk home insurance policies, commonly called “comprehensive.” These cover all losses that are not specifically excluded by the policy.

Home insurance pricing in Canada has been impacted by an increased frequency of destructive natural disasters within the past decade. Wildfires and floods have caused tens of billions of dollars in insured damage since 2013, which has necessitated increases in insurance premiums.

Around the world

Premium volume by country (2013)

Building and contents coverage

Countries such as China, Australia, and the United Kingdom use a more straightforward approach to home insurance, called "building and contents coverage" commonly referred to as "home and contents insurance". Relative to the insurance policies of the United States, building and contents coverage offers a very basic level of coverage. Most standard policies only cover the most basic perils listed below:

• Storm or flood
• Fire
• Lightning or explosion
• Falling trees or branches
• Subsidence, drag or landslip
• Breakage of glass or sanitary fittings
• Damage from escaped water or oil
• Shock caused to the house by animals, vehicles or aircraft

Building coverage

Building covers both the primary structure as well as detached structures such as garages, sheds, and back houses that are on property. However, different insurers may not cover things like boundary walls, fences, gates, paths, drives or swimming pools, so it is important to check the specific policy language. This is an equivalent of both Coverage A and B in homeowners insurance policies in the United States.

Contents coverage

Contents insurance covers personal effects such as furniture, clothes, electronics, jewelry, etc. Most policies limit the individual amount of money paid out for each category of items. Individual policies can vary in the amount of coverage they provide. The option to schedule personal property is readily available.

Liability coverage

Liability is typically bundled together with building and contents coverage. Injuries and damage on premises would be covered by building coverage liability while any offsite occurrences would be covered under contents coverage.

Common exclusions

As with most insurance policies, there are always exclusions. The most common are:

• General wear-and-tear maintenance
• Faulty workmanship
• Mechanical or electrical breakdown
• Any amount over the limits shown on the policy schedule or in the policy
• Restricted cover when the home is empty or is let to tenants