Homeowners Insurance Terms & Definitions to Understand
Key Facts
- It’s essential to understand homeowners insurance terms so you can tailor your policy to your needs.
- Depending on where you live, additional coverage may be crucial.
- Additional living expenses (ALE) coverage may cover hotel and food costs if you have to leave your home after a covered event while repairs are being done.
- The Fair Access to Insurance Requirements Plan offers some protection to high-risk homeowners.
Understanding key homeowners insurance terms is crucial because these terms impact your coverage and financial security. Making a mistake can cost you money, so make sure you understand as much as possible about the process ahead of time.
For example, knowing what actual cash value versus replacement cost means can help you make informed decisions regarding your coverage. With solid information, you can tailor your policy to your needs, avoid coverage gaps, and confidently select the best insurance for your property.
The Top 10 Most Important Home Insurance Terms to Know
Familiarity with these essential home insurance terms can help you navigate the complexities of insurance policies so you can find the right coverage to protect your home and assets.
Top 10 Home Insurance Terms to Know | |
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Premium | The amount you pay for your insurance policy, typically on a monthly or annual basis |
Deductible | The amount you’re responsible for paying before your insurance coverage kicks in |
Claim | A formal request made to your insurance company for compensation for covered loss or damage |
Personal property coverage | Insurance for your belongings inside the home, such as furniture, clothing, and electronics |
Peril | A specific event or circumstance that can cause damage or loss to property, such as fire, theft, or vandalism |
Actual cash value (ACV) | An item’s depreciated value, which is determined by its age, condition, usefulness, and value on the open market |
Replacement cost | Covers the cost of replacing damaged or destroyed property with identical items of similar kind and quality |
Liability coverage | Provides protection in case someone is injured on your property or if any of your activities cause injuries or damage to other people or their properties |
Dwelling coverage | Protection for the structure of your home and any permanent attachments, such as an attached shed or carport, against covered perils, such as fire and wind damage |
Endorsement/riders | An add-on to insurance policies that provides extra coverage for items or events not covered under your standard policy |
Complete List of Homeowners Insurance Terms and Definitions
A
Actual cash value (ACV): The actual cash value is an estimate of the fair market value (FMV) of your home and belongings before the loss occurred. It also takes depreciation due to your home’s age and condition into consideration.
Additional coverage: This is an option to add on extra insurance coverage or a small additional policy to increase the coverage of a homeowners insurance policy. Lisa Koosis, a former claims specialist, says, “Additional coverage may seem like nothing more than a nice option. However, in some areas, additional coverage can be crucial. For example, if you live in an area with a lot of seismic activity, adding on earthquake coverage can provide financial protection against damage that may occur in a quake.”
Additional living expense (ALE): ALE is often included in a homeowners policy. If you have this coverage and need to leave your home while repairs are being done to fix the damage caused by a covered event, ALE may cover the costs of hotel or food to a degree.
Adjuster: An adjuster works for the insurer or a third-party company, and they assess your liability for your claim.
Appraisal clause: The appraisal clause lets either party or both parties request an independent appraisal if there’s a discrepancy or question about the value of a covered item. The two appraisers then try to reach a satisfactory agreement.
B
Binder: This type of insurance is temporary and designed for use before permanent coverage is issued, such as when you’re buying a house.
C
Carrier: An insurance carrier is another term for the provider or company responsible for underwriting your insurance policy.
Catastrophic loss: If there’s widespread damage in your area due to a major disaster, such as a storm or terrorist attack, it may be considered a catastrophic loss for insurance purposes.
Claim: A claim is the demand you make for your insurance provider to cover your losses.
Coinsurance: Coinsurance refers to the percentage of the costs of damages the insured is responsible for. For example, some insurance companies may pay only 80% of the damages, leaving the insured responsible for the remaining 20%.
Concurrent causation: This refers to any situation where more than one problem or event contributes to a single loss or claim.
D
Declarations page: The declarations page of your insurance policy provides a brief overview of your entire policy, highlighting the most important parts, including the premium you pay, how often you’ll need to pay it, and what’s covered.
Deductible: Your deductible is the amount you must pay before your insurance company begins to pay.
Depreciation: This denotes a decrease in property value due to age, wear, or other issues.
Dwelling coverage: Dwelling coverage covers the cost of repairing or rebuilding your home if covered damage occurs. In some cases, it may also cover attached structures.
E
Endorsement: An endorsement is an add-on to your homeowners insurance policy that offers additional coverage.
Escrow account: This account is where overage from your mortgage payments is held for the purposes of making lump sum payments toward expenses related to your property, such as homeowners insurance.
Excess and surplus lines insurance: This type of policy covers the costs of damage to specialty items or property that may be at high risk of damage and may not be covered through the average insurance policies.
Excluded losses: Not all damage to property will be covered, depending on how it happens. This term identifies the types of events or damage that won’t garner a payout from insurance.
F
Fair Access to Insurance Requirements (FAIR) Plan: This program is run by the state. It offers some level of insurance protection to homeowners who have been deemed high-risk by the insurance industry.
Floater: If you own expensive jewelry or high-value electronics, you may need a floater to give you enough coverage to ensure you can replace your valuables should any covered damage occur.
H
Home inventory: This is a detailed list of everything you own and its estimated value. It’s designed to provide a guideline for reimbursement in the event of a covered loss.
Homeowners Association (HOA) insurance: If you live in a neighborhood or building with common areas, such as a playground or pool, and you pay for an HOA to help manage it, this insurance will help to make sure those areas are covered in the event of damage or loss.
Homeowners insurance policy: This wide-ranging document provides homeowners with financial protection if they incur damage or loss to their home or its contents due to a covered event. It may also cover the costs of injuries to others that happen on the property.
I
Indemnity: This is a contractual obligation for the carrier to reimburse the policyholder for covered damages or losses that’s meant to restore their financial status.
Inflation guard: An inflation guard helps ensure your insurance policy continues to cover the true value of lost items and property damage despite inflation that occurs between the signing of the document and the loss.
Insured: This term refers to you, the policyholder.
L
Liability coverage: Having liability coverage covers you if you’re legally (but not intentionally) responsible for the injury of another person or damage to their property, such as if they’re injured on your property.
Loss assessment: This applies to those who live in condos or communities that have an HOA. If any losses occur specifically in common areas beyond what’s covered in the basic policy, such as liability claims, this add-on can help cover those costs.
Loss of use coverage: Loss of use coverage reimburses homeowners for costs, such as living expenses, incurred while their residence is being repaired.
N
Negligence: This occurs if reasonable care isn’t exercised in a given situation. This can result from doing or not doing something that would have prevented injury or damage.
P
Peril: A peril is a specific event that leads to damage warranting a claim, such as a fire, flood, or vandalism.
Personal property coverage: This covers your personal property, such as clothing, furniture, and other items.
Policy term: Your policy term is the amount of time your insurance policy is valid and you’re fully covered. In most cases, homeowners insurance has an annual term, but in some situations, it may be shorter or longer.
Policyholder: This term refers to the owner of the insurance policy and all the items identified for coverage.
Premium: Your premium is the amount your insurance company charges to keep your policy active.
Premium payment plan: How often you pay your insurance bill, such as monthly or annually, and how much you pay are noted in the premium payment plan.
Premium surcharge: This extra fee may be added to your premiums due to factors that may increase the likelihood of filing a claim, such as prior claims history and construction materials used, etc.
Public adjuster: A public adjuster is an independent adjuster who can help advocate for the policyholder if necessary. However, the public adjuster will still be fair to both parties.
R
Replacement cost: This is the amount it costs to replace or restore the damaged property to the state it was in prior to the damage.
Rider: Riders are additional coverage added to your policy.
S
Scheduled personal property: High-value items, such as jewelry, art, or collectibles, can be added to a policy to ensure they’ll be fully covered in the event of loss or damage.
Subrogation: This is the process by which your insurance company will get reimbursement from a third party who’s responsible for the damage that triggered your claim.
T
Term: The term is the amount of time your coverage lasts.
U
Umbrella insurance: Umbrella insurance is additional insurance that covers the cost of damages that go over and above what your basic policy will pay out.
Underwriting: This term describes the process taken by an insurance company to determine your level of risk and how much they’ll charge you for coverage.
V
Vacancy clause: A vacancy clause may decrease the amount of coverage you’re eligible for if your property is left vacant for an extended period of time.
Valuation: Insurers use a valuation to decide how much your property is worth and how much they’ll pay in the event of loss. It can be defined as actual cash value or as replacement cost.
W
Waiting period: This refers to the amount of time you have to wait after you purchase insurance coverage before that coverage will be in effect and eligible for use.
Sources
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Home Policies: Replacement Cost or Actual Cash Value? (March 2021). Texas Department of Insurance.
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Basic Homeowners Insurance. North Carolina Department of Insurance.
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Home Insurance Guide. (August 2023). Texas Department of Insurance.
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What Is HOA Insurance? (November 2022). Forbes.
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What’s an Umbrella Policy? (December 2022). National Association of Insurance Commissioners.