Your home will probably be your biggest investment. If you experience damage or a loss, it can be devastating – both emotionally and financially. Home insurance is a way to protect your home and your possessions against financial loss if they are damaged, lost or stolen. Most insurance policies contain terms that are hard to understand, and policies are often written in a confusing manner. Taking the time to understand your homeowners’ policy is well worth the effort. Besides providing coverage, policies also assign certain responsibilities to you, the insured. In this article, we give a home insurance policy breakdown and explain each section of your contract so that you will have a better understanding of your homeowners’ policy.
What is an insurance policy?
An insurance policy is a legal contract between you and your insurance company. When you purchase a home insurance policy, you agree to pay premiums, and the insurance company agrees to pay for certain losses if they occur. It is crucial that you are clear on what it is that you are agreeing to in the contract. Reading your policy helps you verify that the policy meets your needs and that you understand your and the insurance company’s responsibilities. Unfortunately, many people purchase their policy without fully understanding what is covered, the exclusions that take away coverage, and the conditions that must be met in order for coverage to apply when a loss occurs.
6 parts to your home insurance policy
Every home insurance policy has five parts: declarations, insuring agreements, definitions, exclusions and conditions. Many policies contain a sixth part: endorsements. When reviewing your policy, it is wise to use these sections as guidelines – each section has its key provisions and requirements:
1. The Declaration Page
The Declarations or ‘dec page’ is usually the first page of the policy. It summarizes key information specific to your policy. It also shows the sections and coverage that you have purchased:
Section 1 describes insurance that may be purchased for your property.
Section 2 describes the insurance for your legal liability to others because of bodily injury and property damage.
An insurance declaration page should include:
- The policy number
- Name and address of the policyholder
- Whom and what is covered
- The insurer name, address, and contact info
- The type of coverage the policy includes
- Limits and deductibles
- Endorsements
- How long the policy is valid for
- Discounts and surcharges
- Cost of the insurance, often divided into payments
- Other named insureds, such as banks
- Limits of liability
All of the things you asked for or agreed to when accepting your new policy should be on the dec page. Any errors can make it hard to file a claim. If you find any, contact your broker to have them fixed.
2. The Insuring Agreements
The Insuring Agreements are typically the main part of the policy. The insuring agreements specify what the insurance company has agreed to pay for or to provide you in exchange for the premium you are paying. Your policy contains a section clearly marked insuring agreements, however there may be additional agreements buried in the policy. Policies also call insuring agreements supplemental, additional, or extended coverages.
There are two basic forms of an insuring agreement:
- Named–perils coverage: Under which only those perils specifically listed in the policy are covered. If the peril is not listed, it is not covered.
- Comprehensive or “All–risks” coverage: Under which all losses are covered except those losses specifically excluded. If the loss is not excluded, then it is covered. Life insurance policies are typically all-risk policies.
Insuring Agreements will give you a broad overview of the scope of coverage, then narrow it down in the ‘Exclusions and Definitions’ sections. It’s important to read these three sections together for a clearer picture of precisely what is—and isn’t—covered so that you know you have the coverage you expect.
3. Definitions
Insurance policies contain many common words that have special meaning within the context of insurance. The policy identifies these words usually by bold print or quotation marks. Most policies contain a section entitled definitions where they explain the special meaning of the designated words. Since definitions may restrict or limit coverage, it is essential that, as the policyholder, you read each definition carefully and seek clarification whenever a definition is unclear.
4. Exclusions
In insurance, exclusions serve as a way to clarify the coverages granted by the homeowners’ policy. Exclusions take coverage away from the Insuring Agreement. In addition, they serve to outline whatever is not covered under your insurance policy, like perils, types of property, or actions by the insured:
- Excluded perils: Causes of a loss, like fire, water, hail, or theft.
- Excluded property: Coverage may apply to some types of property but not others. For example, a home insurance policy may not jewelry.
To ensure that your jewelry has the proper coverage, click here to learn about available jewelry endorsements.
- Excluded actions: Coverage will not be available for any loss if it was due to an intentional or fraudulent act.
Different types of insurance policies can vary in the amount of exclusions they include. When an insurance policy excludes something, it means you have no coverage for that particular item. If you make a claim for it, the claim will be denied. A named perils policy covers all the perils it lists specifically and excludes all other perils. However, a comprehensive policy covers everything except what it lists as excluded. While there is likely a section in your policy labeled “Exclusions,” other exclusions may appear anywhere in your policy. Insurers use exclusions to manage their risk and keep premiums affordable.
5. Conditions
Conditions are provisions inserted in the policy that qualify or place limitations on your insurer’s promise to pay or perform. Your insurer will impose certain requirements or conditions, such as premium payment or duties, to follow after you report a loss. You are contractually obligated to fulfill your side of the policy, just as your insurer is. If the policy conditions are not met, your insurer can deny a claim.
Common conditions in a policy include:
- The requirement to file a proof of loss with the company
- To protect property after a loss
- To cooperate during the company’s investigation or defence of a liability lawsuit
- Allowing the insurer to inspect a fire damage claim before you begin repairs
Be sure to take note of language that’s absolute (such as “always” or “never”) or inclusive (“and” or “or”) in your policy.
6. Endorsements
A homeowners’ policy protects your home and property from various types of damage. This can include perils, such as fire, lightning, theft or vandalism. But there are some things your insurance won’t cover. This can include water damage from a plumbing backup or protection for your home business. Fortunately, most major insurers offer optional coverage add-ons, called endorsements.
Here are some key points about what an endorsement is:
- It is a change or addition to an insurance contract that alters the terms or scope of the original policy.
- It can be issued during your policy term, at the time of purchase, or at renewal. It’s a legally binding amendment to a contract.
- Endorsements remain in force until your policy ends. They may renew under the same terms as the rest of your policy.
- Endorsements can replace the current policy or be added to it.
- They cover a range of situations, including taking insureds off a policy, changing addresses, or adding coverage for specific items.
For a list of useful homeowner endorsements to help you save on your monthly premiums, please click here.
Final thoughts on what’s in your home insurance policy
Insurance policies provide peace of mind that your home and belongings have protection in the event of a loss. Understanding your home insurance policy is essential to ensure that your premium covers what you expect it to. Being clear about your policy is vital so that you can avoid any coverage gaps. Knowing the six parts of an insurance policy can increase your overall understanding of your individual coverage. When in doubt, your isure representative can review your policy’s intricacies with you so that you can fully comprehend it and make any adjustments necessary.
