Navigating HO-3 Homeowners Insurance

• Published Feb 4, 2024 • Reviewed and Fact Checked Our content is reviewed and fact-checked by unbiased insurance professionals to ensure the accuracy, quality and reliability of the information we provide. by Stephanie A. Makowski • 4 cited sources

Your home is one of the most expensive things you’ll ever purchase. To protect your investment, it’s essential to purchase homeowners insurance coverage.

Homeowners insurance increases financial security by ensuring you don’t have to bear the burden of rebuilding or replacing damaged property/personal belongings after a covered event.

If you’re looking for comprehensive coverage, consider purchasing an HO-3 policy. Also known as a special form policy, HO-3 coverage is the most popular option available [1].

Key Facts

  • HO-3 homeowners insurance covers all perils that aren’t specifically excluded by your policy.
  • Each HO-3 policy includes dwelling coverage, other structures coverage, personal property coverage, loss of use, liability coverage, and medical payments.
  • The cost of an HO-3 policy depends on factors such as the age of your home, its location, and the value of any improvements.

What Is an HO-3 Policy?

HO-3 coverage protects you from all perils that aren’t specifically excluded from your policy. This is known as “all-risk” coverage. Core protections include dwelling coverage, personal property coverage, and liability coverage.

Core Components of an HO-3 Policy

Each HO-3 policy includes five types of coverage. Here’s how each one works.

Dwelling Coverage (Coverage A)

Dwelling coverage applies to your home’s structure. It doesn’t include your land or the personal property you keep in your home. Your insurance company may not cover structural damage caused by mold, vermin, or insects. Additionally, an insurer may deny your claim if structural damage occurs due to poor maintenance.

Foundations and crawl spaces also fall under Coverage A, particularly if they need to be repaired due to cracking, lifting, or sagging.

Other Structures (Coverage B)

Many people have barns, gazebos, storage sheds, pool houses, in-ground pools, and detached garages. If a covered event damages one of these structures, Coverage B may pay for the damage. To qualify for coverage under this component of an HO-3 policy, the structure must be separate from your dwelling.

Personal Property (Coverage C)

Personal property coverage, also known as contents coverage, is for the items inside your home. These are some of the most common examples:

  • Furniture
  • Jewelry
  • Clothing
  • Electronics
  • Books
  • Physical media
  • Appliances

Note that many insurance companies limit the amount of coverage available for specific items. For example, it’s common for an insurer to limit jewelry coverage to $1,500 [2]. One way to overcome these low limits is to purchase a personal article floater, also known as a scheduled personal property endorsement (PPE).

A PPE typically covers furs, jewelry, firearms, computers, and other items that exceed your personal property coverage amounts [3]. Your PPE may even cover accidental losses, giving you better coverage than your standard HO-3 policy provides.

Loss of Use (Coverage D)

In some cases, the damage to your home is so severe that you can’t live there until a contractor finishes making repairs or cleaning up from a severe storm. The loss of use part of your HO-3 policy pays for your temporary living expenses while your home is uninhabitable [4].

Note that homeowners insurance typically doesn’t cover ordinary living expenses. For example, if you spend $300 per week on restaurant food when you normally spend $150 per week on groceries, your insurer may only reimburse you for the $150 difference.

Liability Payments (Coverage E)

If someone injures themselves on your property, you may be held legally liable. Liability coverage protects you in these circumstances. For example, your insurance company may pay to defend you against a lawsuit or pay damages to the injured party. Here are a few examples of when you may need to use your liability insurance:

  • A visitor trips on one of your steps, causing them to fall forward and crack a rib on your deck.
  • Someone sprains their ankle by stepping in a hole in your yard.
  • Your dog bites a repair person or a neighbor.

Note that your insurer may not cover every injury that occurs on your property. For example, if you have an aggressive dog breed, your policy may not cover dog bites or scratches. Check the terms of your policy for more details.

Medical Payments (Coverage F)

If someone gets injured on your property, Coverage F pays for their medical bills. This type of coverage applies when you’re legally responsible for a guest’s injuries. Medical payment coverage won’t pay your medical bills or the medical bills of anyone in your household. Your medical payment coverage may be limited to $5,000 or $10,000. It depends on the terms of your policy.

Understanding Policy Limits and Deductibles

To better understand your HO-3 coverage, you need to know how coverage limits and deductibles work.

Explanation of Limits

Every homeowners insurance policy has a coverage limit, which is the maximum amount of money your insurer will pay out on each type of claim. For example, you may have dwelling coverage worth 100% of the replacement cost of your home, but your liability coverage may be limited to $100,000.

Other structures coverage is typically limited to 10% of your dwelling coverage. If you have $500,000 worth of dwelling coverage, then you’d have $50,000 in other structures coverage. Your insurer may also set your personal property limit as a percentage of your dwelling limit.

Role of Deductibles

Your deductible is the amount of money you need to pay out of your own pocket on a claim. For example, if you have a $2,000 deductible and a $10,000 repair bill, you have to pay the first $2,000 of the claim. Assuming your claim is approved, your insurer should pay the remaining $8,000.

Perils Covered by an HO-3 Policy

As explained previously, an HO-3 policy includes all-risk coverage. To understand this type of coverage, you need to know the difference between open perils and named perils.

Open-peril coverage means you’re covered for any event that isn’t specifically excluded from your policy. This typically includes fires, hailstorms, falling objects, and vandalism. Named-peril coverage only covers issues that are explicitly listed on the coverage and declarations form of your policy. Theft, fires, vandalism, explosions, and civil commotions are some of the most common named perils in an HO-3 policy.

Policy Exclusions and Limitations

An HO-3 policy offers broad coverage, but it doesn’t cover everything. For example, floods and earthquakes are often excluded from standard homeowners insurance policies. If you’re concerned about these risks, consider purchasing a separate flood policy or an endorsement for earthquakes and landslides.

Selecting the Right HO-3 Policy

To choose the right HO-3 policy, make sure you consider your individual needs. If you have plenty of cash in the bank, for example, you may want to choose a high deductible in exchange for a lower premium. You may also need to purchase a PPE if you have more jewelry, furs, electronics, and other expensive items than your policy covers.

When you’re ready to choose an insurance provider, look for a company that has an excellent service record. If possible, review each insurer’s Moody’s or AM Best rating to better assess its financial stability.

Cost of an HO-3 Policy: Premiums and Savings

Several factors influence the cost of an HO-3 policy. The most common are the age of your home, the condition of your home, and your location. All three factors affect the cost of repairing or replacing damaged items. Insurance companies also make underwriting decisions based on your claims history. If you’ve filed multiple homeowners insurance claims, you may have to pay a much higher premium than expected. You may also need to pay a higher deductible to offset the increased premium.

To save money on your HO-3 insurance premium, find out if you’re eligible for any of these discounts:

  • Bundle discount: If you buy your homeowners and auto insurance policies from the same company, you may qualify for a bundle discount.
  • Paid-in-full discount: Many insurance companies offer a discount if you pay for a year of coverage instead of paying monthly or quarterly.
  • Loyalty discount: If you’ve been using the same insurance company for years, ask if you qualify for a loyalty discount.
  • Claim-free discount: If you haven’t filed a claim in a long time, your insurance company may reward you with a claim-free discount.
  • Protective devices discount: You may qualify for this discount if you have fire sprinklers, a centralized fire alarm, leak sensors, or other security features.
  • Mitigation discount: Your insurer may offer a discount if you fortify your home against certain hazards. For example, it’s common to offer a discount to customers who install hurricane-resistant windows or stormproof shingles.

Conclusion: Making Empowered Insurance Choices

HO-3 policies come with five types of coverage, making them extremely comprehensive. To ensure you have the right amount of coverage, review your policy regularly. If you make any improvements, you may need to increase your policy limits to account for an increase in your home’s value.

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Reviewed by Stephanie A. Makowski

Stephanie A. Makowski has over 20 years of experience in the insurance industry. She began her insurance career working for a large independent retail agency within their personal lines department. She then crossed over to the commercial lines department working with the construction and agriculture sectors.