Homeowners insurance is the same everywhere you shop. Find the cheapest price and move on. If your home catches on fire or blows away, you’re protected right? What else do you have to worry about?
There is so much about the paragraph above that is wrong. Price is important until you have claim. To the person who has loss, their insurance becomes real, concrete. Let’s uncover what a homeowners policy protects and the differences in policies. This is the foundation to homeowners insurance. This is your castle for goodness sakes!
Quick Guide
- What Does Your Homeowners Insurance Cover?
- What is the Difference Between Basic, Broad, and Special Form?
- Two Types of Special Form Policies
- Comparing Basic, Broad, and Special Form [Graph]
- Buying Back Exclusions
- Is Special Form the Same as Replacement Cost Coverage?
- The Long and the Short of It
What Does Your Homeowners Insurance Cover?
You spend more time trying on new shoes than you spend protecting your largest purchase. That’s not your fault. Society puts such an emphasis on saving money that we forget to take time to really understand what we’re buying. Your bank requires you to carry insurance since you have a loan – so you do what is asked, you buy insurance.
The other road block people run into when it comes to their home insurance, they don’t know what to ask. Most people don’t read the booklet their insurance company sends them. I get it, most people don’t geek out on insurance like me. That’s ok. You don’t know what you don’t know. You may have the cheapest insurance policy in town, but what does it cover?
There is a good chance your homeowners insurance policy may not be identical to your neighbors.
Home insurance policies come in 3 types – Basic, Broad, and Special. These are known as Forms. One thing you will find in common with home insurance companies is they all offer at least one if not all of these types of policy Forms. The policy Forms make up your home insurance policy (that thick booklet burried in your basement). These Forms define what is (or isn’t) covered at the time of a loss.
Basic
A Basic Form policy is a named peril policy. In other words, the policy will state what it will cover.
Broad
A Broad Form policy is also a named peril policy. It also states what is covered.
Special
Special Form policies cover all perils unless they are excluded from the policy.
What is a Peril? Merriam-Webster defines it as an “exposure to the risk of being injured, destroyed, or lost.” A Peril is the cause of loss that triggers a claim.
What is the Difference Between Basic, Broad, and Special Form?
The orange box below is a 30,000 foot view of the different types of homeowners insurance policies.
Column two – Dwelling & Other Structures Coverage, is referring to the structure of your home and any structures detached from your home (i.e. garage, shed, fence, gazebo, etc).
Column three – Personal Property Coverage, applies to your personal belongings inside of your home, garage, and shed. This could be your furniture, clothing, dishes, tools, electronics, etc.
Homeowners Form Type
Basic Form | HO-1
Broad Form | HO-2
Special Form | HO-3
Special Form | HO-5
Dwelling & Other Structures Coverage
Basic Form
Broad Form
Special Form
Special Form
Personal Property Coverage
Basic Form
Broad Form
Broad Form
Special Form
Now let’s get a little more granular. Let’s dig a little deeper on the differences between Basic, Broad, and Special Form homeowners insurance policies. Understand, each policy will have its own limitations and exclusions.
Basic Form Homeowners Policy
A Basic Form insurance policy is just that – basic. This type of policy does not have many bells and whistles. If a peril is not listed in the policy, the poilcy does not provide coverage. For coverage to apply, the peril must be listed in the policy. That applies to your home, any detached buildings, and your personal belongings.
Here are the most common coverages you will find in a Basic Form homeowners policy:
- Fire
- Lightning
- Windstorm or hail
- Explosion
- Smoke
- Riot or civil commotion
- Vandalsim or malicious mischief
- Vehicles
- Aircraft
- Volcanic action
- Sinkhole collapse
Basic Form policies are also known as an HO-1.
CLAIM EXAMPLE 1
A water pipe in your basement bursts while you’re on vacation causing extensive damage.
- Basic Form: No coverage
- Broad Form: Covered
- Special Form: Covered
Broad Form Homeowners Policy
A Broad Form homeowners policy provides more coverage than a Basic Form policy. A Broad Form policy is also a named peril policy, meaning the peril must be listed in the policy for coverage to apply.
All of the perils in a Basic Form policy are carried over to be included in a Broad Form policy. Plus you’re covered from the following threats in a Broad Form policy:
- Weight of snow and ice
- Water damage
- Falling objects
- Glass breakage
- Building collapse
- Freezing plumbing
Broad Form policies are also known as an HO-2.
CLAIM EXAMPLE 2
It’s pouring rain and the wind is blowing. The wind doesn’t disturb your shingles, but it does blow the rain at just the right angle that it finds its way into your home. Enough water accumulates inside causing significant damage. What type of policy would provide coverage?
- Basic Form: No coverage
- Broad Form: No coverage
- Special Form: Covered
Special Form Homeowners Policy
Special Form homeowners insurance policies are different from Basic and Broad Form. A Special Form protects your home from all perils unless the policy specifically excludes them. So, if your policy doesn’t exlude coverage for said loss, it is covered.
Special Form is the most common type of homeowners policy.
Here are the more common exclusions you will find in a Special Form policy…understand each insurance company may have additional exclusions in their policy.
- Earthquake
- Flood
- Power failure
- Ordinance or law
- Government action
- Intentional acts
- Nuclear hazard
- War
- Neglect
Special Form policies may also be referred to as an HO-3 or an HO-5.
CLAIM EXAMPLE 3
Your child leaves the front door of your home open for a matter of minutes when a random dog runs inside. The dog jumps on your furniture. Gnawing at pillows, tearing couch cushions, knocking over lamps, your TV, and mud everywhere.
- Basic Form: No coverage
- Broad Form: No coverage
- Special Form: Covered
Two Types of Special Form Policies
There are two types of Special Form policies; an HO-3 and HO-5. If you refer to the orange box above, you will notice the coverages for your home are the same (Special Form). The difference is how your contents (i.e. personal belongings) are protected.
An HO-3 will provide Broad Form coverage to your personal property. If you recall from above this is named perils…Only hazards in this section of the policy will cover your belongings.
On the other hand, an HO-5 insures your contents on a Special Form, like the structure of your home. Everything is covered unless it is excluded.
Comparing Basic, Broad, and Special Form
Let’s take a different vantage point and compare the differences between Basic, Broad, and Special Form.
What’s the difference between Basic, Broad, and Special Form?
PERIL | BASIC | BROAD | SPECIAL |
|---|---|---|---|
| Fire | |||
| Lightning | |||
| Windstorm or Hail | |||
| Explosion | |||
| Smoke | |||
| Riot or Civil Commotion | |||
| Vandalism | |||
| Aircraft or Vehicles | |||
| Sprinkler Leakage | |||
| Volcanic action | |||
| Sinkhole Collapse | |||
| Water Damage | |||
| Falling Objects | |||
| Weight of Ice or Snow | |||
| Glass Breakage | |||
| Collapse | |||
| Risk of Direct Physical Loss |
Buying Back Exclusions
There are some excluded coverages you have the opportunity to buy back.
Earthquake coverage is excluded from most homeowners policies. Generally you will have the ability to buy this coverage back.
This doesn’t apply to all exclusions.
Be sure to ask your insurance agent what extras or enhancements you can add to your policy.
Is Special Form the Same as Replacement Cost Coverage?
No, Special refers to the type of policy. You may have a Basic, Broad, or Special type of home policy. For instance, coverage for fire or lighting would be included in your policy.
What you receive at the time of a loss is based on the valuation method; do you have Replacement Cost or Actual Cash Value as a loss settlement? Replacement Cost refers to the valuation method used at the time of a loss. You will either have Replacement Cost or Actual Cash Value.
Replacement Cost versus Actual Cash Value
Replacement Cost
Billy had a kitchen fire. Once the dust settled it will cost $50,000 to replace his kitchen. Billy has Replacement Cost on his home policy. He has a $2,000 Deductible. Billy will be responsible for the first $2,000 of the loss (i.e. his Deductible). His insurance company will take care of the remaining $48,000.
Actual Cash Value
On the flip side, Actual Cash Value would take the Replacement minus depreciation minus your Deductible.
Here’s how Investopedia explains Actual Cash Value:
“Actual cash value is computed by subtracting depreciation from replacement cost while depreciation is figured by establishing an expected lifetime of an item and determining what percentage of that life remains. This percentage, multiplied by the replacement cost, provides the actual cash value.”
The Long and the Short of It
I wish I could tell you this is black and white, but the reality is we live in a gray world.
There is a constant push and pull between saving money and being protected for the what-ifs life throws at us.
Know, this is an overview – you have to refer back to your policy (or talk with your agent) for specifics.
Another thing to note; Basic and Broad Form policies won’t necessarily be less expensive because they offer less coverage than a Special Form.
