As the real estate market continues to recover after the COVID-19 pandemic, the United States Census Bureau has released homeownership statistics for the first quarter of 2021. The Bureau’s April 27, 2021, report states that 65.6% of Americans own their homes.
Naturally, these homeowners want to protect their biggest investment from potential damage or complete destruction. A thoughtfully written homeowners insurance policy can act as a safety net. Because each homeowner’s situation is different, their policy will reflect these differences.
With that said, however, it’s important to gain a good basic understanding of how homeowners insurance works. Heath Ritenour, chairman and CEO of the Insurance Office of America (IOA), explains several key concepts that apply to homes of every type, size, and value.
Why Homeowners Insurance Is Important
Homeowners insurance serves two important functions. First, it protects the homeowner’s investment. If the home is damaged or lost in a fire or other covered disaster, the policy pays for repair or replacement within the coverage limits. The insurer’s intention is to make the policyholder “whole” again.
When someone is purchasing a home, and they apply for a mortgage, the lender requires proof of homeowners insurance before completing the transaction. Objectively speaking, the mortgage company is loaning funds to the buyer, and the company wants to protect its investment in the event the home is damaged or lost.
How Much Coverage is Required?
Generally speaking, the lender will require the homeowner to purchase hazard coverage that matches the amount of the loan. For example, a buyer with a $200,000 loan will likely be required to maintain $200,000 of coverage on the property.
However, the home’s location and age may create exceptions to this rule. The lender may compare the home’s replacement cost with its current market value when determining the amount of required homeowners insurance.
For example, a vintage home in an older neighborhood may carry a market value of $250,000. However, rebuilding that home would cost $350,000 because of today’s higher materials and construction costs. In this case, the buyer would be required to carry insurance that is higher than the home’s market value.
Three Levels of Insurance Coverage
A homeowner can choose from three different levels of insurance coverage. A knowledgeable insurance agent can explain the advantages and disadvantages of each coverage option.
Actual Cash Value
The actual cash value coverage method is based on the cost of the home plus the value of personal possessions after deducting the applicable depreciation. In other words, this figure represents the items’ current value rather than their original cost.
The replacement cost coverage method is based on the actual cash value of the home and possessions. There is no deduction for depreciation. Therefore, the homeowner would be able to repair or rebuild the house up to its original cost.
Guaranteed Replacement Cost
The guaranteed replacement cost coverage method pays for the entire cost of repairing or rebuilding the home. This guarantee applies even if that cost exceeds the policy limit. This is the most comprehensive coverage option.
Components of a Homeowners Insurance Policy
A typical homeowners insurance policy contains three major components. Note that specific coverage details, coverage limits, and rates will vary with each policy.
For insurance purposes, the term “hazard coverage” has two different meanings, according to IOA’s Heath Ritenour. First, hazard insurance applies to the home’s structure. If the building is damaged by hail, lightning, a hurricane, a fire, or other covered disaster, hazard insurance will help to repair or rebuild the structure. The hazard coverage also applies to detached buildings such as sheds, garages, and barns.
However, the typical homeowners insurance policy does not cover damage from normal wear and tear. Flood or earthquake damage is also excluded from the policy’s hazard coverage.
Hazard coverage also applies to personal possessions that are destroyed or stolen. Examples include clothing, jewelry, furniture, electronics, and other items.
Besides receiving protection inside the home, personal property is covered anywhere in the world. For example, if the insured’s wedding ring is lost on a snorkeling trip in The Bahamas, their hazard coverage should apply.
Each policy covers personal possessions up to a certain limit. If the insured owns expensive jewelry, valuable artwork, or other higher-end items, they should consider purchasing a rider that will cover those objects. Note that a professional appraisal will likely be necessary first.
Homeowners insurance coverage can also extend to the expenses associated with property damage or bodily injury that the insured, the insured’s family, or pets cause to others. For example, Ritenour reports, if a child accidentally hits a baseball through a neighbor’s window, liability insurance often covers the window’s replacement cost.
If someone is injured on the insured’s property, whether inside or outside, liability coverage provides no-fault medical insurance. This coverage also helps to defray the cost of defending the insured in court or addressing injury-related court awards.
Homeowners who want to increase their liability coverage can do so by purchasing an umbrella policy. These policies offer varied coverage limits and premium costs.
Temporary Living Expenses
Assume the insured has experienced a covered disaster such as a fire. They (and their family) are temporarily prevented from living in the home during the repair or rebuild operation. In this situation, the homeowner’s policy may provide coverage for part of the insured’s living expenses. Each policy will have its own daily and total incident coverage limits.
If the buyer fails to purchase homeowners insurance, the lender can buy its own policy and charge the buyer for the expense. However, the lender’s insurance policy may be more expensive and may offer more restrictive coverage.
Standard homeowners insurance does not cover damage due to floods and earthquakes. If the home is located in a high-risk flood zone, the homeowner may be required to purchase a flood insurance policy.
The homeowners insurance company will usually deny coverage for damage that results from faulty or substandard maintenance. If the damage results from chronic or extreme neglect, that coverage will be denied as well.
Mold-related damage may also have coverage limitations. The policy may also contain language about coverage related to certain dog breeds that reside on the property.
Limits and Deductibles
Each homeowners insurance policy comes with specific limits. This refers to the maximum dollar amount the insurer will pay for a covered claim, according to Heath Ritenojur. The homeowner should carefully consider their assets’ value, and their financial resources, before choosing their insurance coverage.
Most insurance coverages also have built-in deductibles. For each covered event, a deductible is the amount the homeowner must pay before the insurance benefits will apply.
Factors that Impact Insurance Rates
Several different factors help to determine a typical homeowners insurance rate. Some factors may be weighted more heavily than others.
First, the insurer evaluates the applicant’s perceived risk. This relates to the likelihood that the applicant will file an insurance claim.
To make this decision, the insurer reviews the homeowner’s past insurance claims (if any). If the property’s previous owner submitted an insurance claim, the insurer will also consider that incident.
The insurance claims frequency and severity are also key factors. Finally, multiple claims relating to a single issue (such as water damage) may be a red flag for the insurer. As a result, they may raise the premiums or decline to insure the property altogether.
Materials and Construction
The insurance company may consider several construction-related factors when determining the homeowners insurance rates and coverage. Ritenour points out that xamples include the home’s building materials, roof type, and construction methods.
In some cases, the home’s overall condition may play a key role in the insurer’s decision. If the home has not been well maintained, or has significant structural or other major problems, the insurer may raise the rates or decline to provide the insurance coverage.
Several external variables may also affect homeowners insurance rates. The surrounding neighborhood’s characteristics, along with crime rate statistics, may influence the insurer’s coverage and rate decisions.
In areas with higher natural disaster risks, insurers may mitigate these risks by assigning higher premiums to those policies. For example, homes in hurricane-prone areas may see higher insurance rates. For homes further inland, the insurer may determine rates on a case-by-case basis.
About Heath Ritenour
Heath Ritenour is the chairman and CEO of the Insurance Office of America (IOA). He has extensive expertise with personal and business lines of insurance, risk management, and numerous types of specialty market coverage. Whether working with individual clients or consulting with companies, Ritenour’s impressive command of insurance principles and practices shines through.
In 1996, Heath Ritenour joined his father John Ritenour’s company as an intern. He chose not to rise through the ranks based on his name, but rather spent 12 years making cold calls and building a business book full of satisfied clients. Named the company’s CEO in 2008, Heath Ritenour has grown IOA to the United States’ 11th largest privately held insurance agency.
With an eye toward innovation, Heath Ritenour and his team are designing products that help to make the insurance application and approval process more efficient. At the same time, Ritenour is focused on maintaining the human touch for which IOA has become known.
Along with his CEO role, Heath Ritenour maintains a strong commitment to his faith and family. He also serves as the IOA Foundation’s President. In this capacity, he supports diverse health, education, entrepreneurship, and empowerment efforts in the local community.
In the midst of his upward trajectory, Heath Ritenour faced a major challenge. In 2015, he was diagnosed with cancer. While undergoing a difficult chemotherapy regimen, he chose to continue working and share his challenges with his co-workers. He also used the opportunity to learn more about himself.
Today, Heath Ritenour embraces every aspect of every day. He is also a strong work-life balance proponent who emphasizes the importance of staying healthy and fit.
About Insurance Office of America
John Ritenour, Heath Ritenour’s father, established the Insurance Office of America (IOA) in 1988. While previously working as a life insurance salesperson, he had become dissatisfied by agents’ income limitations and agencies’ micromanagement.
Ritenour envisioned a different kind of insurance agency. From the beginning, IOA placed a priority on its employees and customers, creating a harmonious corporate culture.
At the same time, the company regarded its agents as entrepreneurs. Each agent owned an equity position in their book of business and was given autonomy in several areas. This top-down support encouraged ongoing achievement and income growth.
In 2021, it’s easy to see why Insurance Office of America has become one of the top independent insurance agencies in the United States. This innovative company is well positioned for continued expansion.