Having trouble figuring out what all that legal lingo in your homeowners insurance policy means? This glossary of insurance terms will help you understand what’s covered, what’s not covered, and what your insurance company is really saying in its policy.
A company that rates the financial condition of insurance companies. Your insurance company’s rating helps you determine if they can afford to pay claims.
An unexpected or involuntary event that causes harm, injury, damage, or loss.
Act of God
Something that is beyond human control that damages or destroys your home or possessions – such as a hurricane or tornado.
Actual Cash Value(ACV)
For property insurance, the market value of your home before and after your loss.
For possessions, what it would cost to replace your items minus how much value they’ve lost since you bought them (for example, because the item is used, or suffers wear and tear).
Usually, a policy offering ACV costs less to buy than replacement-cost insurance and pays you less after a loss.
Additional Living Expenses
The cost of housing and feeding your family after your home is damaged by something your homeowners insurance covers. Usually limited to 10% to 30% of your policy value (if you have a $100,000 policy, your potential reimbursement would be $10,000-$30,000).
What a property is worth after you add the value of any improvements you’ve made and then subtract any value it’s lost.
The person who works out the details of your claim. An adjuster can work for anyone. Staff adjusters work for the insurance company. Public adjusters are hired by and paid by homeowners. Independent adjusters work for whomever hires them – insurance companies or consumers.
All Risks Coverage
A homeowners policy that covers you for losses caused by anything that’s not specifically listed as being excluded (see exclusions, open perils, and named perils). You pay extra for all risks coverage.
What the local tax assessor says your home is worth. The assessed value of your home is used to determine your property taxes. You can appeal your home’s assessed value if you think it’s too high.
The smallest (and often cheapest) policy you can buy in your state. Usually mentioned in liability policies.
An improvement you make after you move into your home. Applies mostly to condominiums. Some condominium policies only insure your condo unit as it was when you bought it. If you improve your unit, the improvements (betterments) aren’t covered. If you live in a condo, ask your agent to explain what the building policy covers and what it says about betterment.
A short summary of the insurance policy you’ve agreed to buy. You use the binder to prove to your lender that you have homeowners insurance. Check your binder to make sure these facts are correct:
- The type of insurance you’re buying.
- Your home’s address.
- How long the policy lasts.
- The policy’s price.
- Any riders or additional coverage you’re buying.
An insurance policy that covers more than one property.
Insurance that covers the cost when you, or a family member, injure people or property.
A record of the claims you’ve filed, plus all the claims filed by people living in your house over the past seven years. Insurance companies check your CLUE report before they give you a homeowners policy. Make sure your CLUE report is correct because mistakes can raise your rate.
Insurance companies want you to buy insurance to cover the full actual cash value of your home. They include in their policies a “coinsurance clause” that says if you buy a policy for less than 80% of what your home is worth, they can reduce any claims.
For example, assume your home is worth $100,000 and you insure it at $70,000 or a value of 70%:
- If a fire completely destroys your home, the insurance company would pay you $70,000 because that’s your policy maximum.
- If a fire causes $10,000 in damage, the insurance company would pay $7,000 (70% of $10,000).
The land, buildings, and amenities owned by a homeowners association, community association, or condominium association. They’re called common areas because they’re owned and paid for by all the homeowners. Usually, common areas include everything your condo association owns other than the individual units. The association’s insurance policy covers common areas. Your homeowners policy covers what’s inside your unit.
Typical common areas include:
- Tennis Courts.
- Fitness facilities.
- Roof decks.
The part of your homeowners insurance that protects you if your possessions are damaged or destroyed. The contents coverage is based on the size of your overall homeowners insurance policy.
For example, if you have a contents coverage limit of 50% and you have a $100,000 homeowners policy, then you have 50% contents coverage. If a fire destroys all your possessions, the policy would pay $50,000.
To make it easier to file a contents claim, compile a home inventory.
Usually the first page of your insurance documents, it’s a one-page summary of:
- The company providing the insurance.
- What the policy covers.
- How much the property is covered for.
- What you’re paying for coverage.
- The time period you’re covered.
The percentage you’ll have to pay for damage or loss to your home or possessions. When paying a claim, your insurance company subtracts the amount of your deductible from what it owes you.
This measures the wear and tear on your house. Your home’s effective age can be more years or fewer years than the actual age of your home.
Endorsement (also called rider)
A written change that adds, deletes, or alters your policy.
Things that your insurance policy does not cover. Insurance policies can exclude risks (like damage from a nuclear war), locations (cliff-side homes), or possessions (a $1 million painting).
Circumstances and situations commonly make the exclusions list in homeowners policies, too, for example, losses that you cause likely aren’t covered.
Always read the list of exclusions in your policy so you know what’s not covered. If you want insurance for something your homeowners policy excludes, talk to your insurance agent. There may be a rider, endorsement, or separate policy you can buy that will give you the coverage you want.
That’s when you sue your own insurance company if your insurer says you aren’t covered in certain instances and you believe you are. For example, if your home is damaged in a hurricane and your insurance company says the damage was due to flooding (uncovered by your policy) but you believe the damage was due to wind (covered).
Additional insurance that covers a possession wherever you take it, such as a grand piano.
Homeowners insurance doesn’t cover flooding. Only a flood insurance policy covers flooding.
Force Placed Insurance
If you have a mortgage, you must keep your home insured. If you can’t or won’t get homeowners insurance, your lender will “force place” a policy – meaning it will buy an insurance policy for you and then send you the bill for the insurance. Force placed insurance is more expensive and provides less coverage than a regular homeowners insurance policy.
How long you can go without paying your insurance premium before getting canceled.
When you have a group of items whose values, when added together, are more than your policy limit, you can buy a higher “group limit.” For example, if you have a policy that insures up to $2,500 in jewelry, but you own five necklaces worth $1,000 each, you need a higher group limit to cover your $5,000 group of necklaces.
Another name for homeowners insurance. Lenders often refer to homeowners insurance as hazard insurance.
If you lie on your insurance application, your insurance company can deny your claim. However, there’s a time limit – usually two years – for the insurance company to deny your claim because you lied. Incontestability is basically a statute of limitations on getting caught for falsehoods you have on your application (see also material misrepresentation).
When you buy inflation protection, then your dwelling coverage automatically goes up to match inflation. That’s true whether you opt for replacement value or actual cash value.
Insurance to Value
The amount your policy covers compared to the replacement value of your home. For example, a $75,000 policy on a $100,000 home has 75% insurance-to-value coverage. Many insurance companies require you to have 80% insurance-to-value in coverage (see also coinsurance).
When you don’t pay your insurance bill by the end of the grace period and you lose your coverage.
Liability Coverage/Liability Insurance
The part of your homeowners insurance policy that covers you when you cause an injury to someone or damage someone’s property.
Limit of Liability
The maximum amount your insurance company has to pay for a liability claim.
Loss Assessment Coverage
When a condominium has an insurance loss, all the individual unit owners sometimes have to pay a portion of the loss. If you buy loss assessment coverage, it pays for the assessment your condominium charges for your share of a loss.
When you apply for a new policy or renew your current policy, the insurance company looks at all the claims you’ve filed, plus all the claims that have been filed by anyone who lived in your house over the past seven years. This loss history, tracked in a CLUE report, can raise your premiums or prevent you from getting insurance.
Loss of Use Coverage
This coverage pays your living expenses when you can’t live in your home because it’s damaged or destroyed by an event your insurance covers (such as a fire). It is sometimes limited to a set percentage of your overall policy limit (see also additional living expenses).
Manufactured/Modular/Mobile Home Insurance
You can buy homeowners insurance for a manufactured, modular, and mobile home two ways:
- As a regular homeowners policy with a written change (see also endorsement) that specifically includes your manufactured home.
- As a stand-alone homeowners policy.
Watch out for stripped-down policies that don’t provide much coverage for liability, medical payments, and other homeowners insurance benefits.
What your home would sell for in the current market.
If you lie to an insurance company, you make a misrepresentation. When that lie is significant enough, the insurance company can cancel your policy or refuse to pay your claim. Each state decides which type of misrepresentations are so important (material) that the insurance company doesn’t have to pay your claim.
Medical Payments Coverage
Coverage that pays the medical costs for people who are injured at your house. You don’t have to have caused the injury for this coverage to pay the bill and the person injured doesn’t have to sue you.
Mortgage or Mortgagee Clause
This is an agreement in your insurance contract that says:
- Your insurance company can tell your mortgage lender if you cancel your homeowners policy (see force placed insurance).
- Claim payment checks can be made out to your mortgage lender.
- If it’s determined that you intentionally destroyed your own home (say you burned it down on purpose), the insurance company will pay the mortgage lender (but not you).
A policy that covers your losses when they’re caused by specific “named” perils that are listed in your policy, for example, an earthquake policy only covers you for one named peril, earthquakes (see all risks coverage).
When your lack of care causes injury to another. The liability portion of your homeowners policy covers negligence.
When your insurance company refuses to give you insurance for another year.
Something that causes a loss.
A homeowners policy that covers you for losses caused by anything that’s not specifically listed as being excluded (see exclusions, all perils, and named peril).
Other Structure Coverage
The part of your homeowners insurance policy that covers the buildings on your property other than your home, such as a detached garage or a barn. It’s usually limited to 10% of your policy, so if you have a $100,000 policy, the other structure coverage would pay for $10,000 in damage or losses to your outbuildings.
When your property or possessions are not completely destroyed, you have a partial loss. When your claim is for less than the limit on your policy, that’s also called a partial loss.
Something that can cause a loss by damaging or destroying your home or possessions. In a named perils policy, you get a list of perils that are covered. In an open perils policy you’re covered against all perils except those specifically excluded.
Personal Liability Protection Coverage
This part of your homeowners insurance policy covers you if you’re responsible for injuring someone or damaging their property. It pays claims won against you, up to the limit of your policy (see also umbrella liability policy).
The typical homeowners insurance policy includes $100,000 in personal liability protection. To get more coverage, purchase an umbrella liability policy.
Personal Property Coverage
Insurance companies refer to your possessions as “personal property.” If you can move it, it’s personal property – furniture, televisions, clothing, and sports equipment.
Personal property coverage is usually set at 50% to 70% of your dwelling coverage. For example, if you have $100,000 in dwelling coverage, your personal property coverage would be $50,000 to $70,000.
You can opt for coverage that pays for new items (see replacement value) or pays you what your stuff is worth after wear-and-tear (see actual cost value).
Proof of Loss
This is the form you fill out and sign to make your insurance claim. There’s probably a deadline for getting it to your insurance company.
If you don’t pay your premium by the end of the grace period, it lapses. To get it reinstated, you have to pay the insurance premium you skipped (possibly with interest).
When you buy replacement value coverage, the insurance company guarantees to replace what was lost or damaged. This policy usually costs more than actual cash value — coverage which pays you what the home or possession is currently worth.
Someone who works on or in your home, for example, your gardener, your nanny, or even a child you pay to baby sit your children. It doesn’t mean an independent contractor or someone who works for you in a business you run from your home.
Your homeowners insurance personal liability and medical payments provisions cover residence employees as long as their injury happens on the job and they aren’t covered by worker’s compensation.
If people work for you in a home-based business or you have domestic employees, talk to an insurance agent to see if your state requires you to buy a separate workers compensation policy for them.
A written change that adds, deletes, or alters your policy (see also endorsement).
Scheduled Personal Property
When you own expensive items, such as jewelry, a stamp collection, or antiques, the typical homeowners insurance policy limits may not be high enough to cover the cost of replacing them (see also group limits).
You can pay an additional premium to have them covered as scheduled personal property. If they’re lost or destroyed along with other possessions, you typically don’t pay a separate deductible for scheduled personal property. If you have a group of valuable items to insure, you may want insure those using a group limit.
Single Interest Insurance
Property insurance that protects just one party. For homeowners, single interest insurance usually protects your mortgage lender, not you.
This covers you if your fire sprinkler system goes off accidentally, or if it leaks and causes damage. Most homeowners policies cover sprinkler system leaks, but if you have a system be sure to ask if your policy covers accidental discharge.
If your loss was caused by someone else, your insurance company may sue them for the loss. If it wins, the recovered money may go toward repaying you for your deductible. That process is called subrogation.
For example, suppose the wiring in your microwave is faulty and causes a fire that destroys your home. Your insurance company sues the company that made the microwave to get back what it lost paying your claim.
Subrogation might also come into play if you do something that causes a problem for a neighbor. For example, if you live in a townhouse and your plumbing repair error floods your unit and the home on the other side of your joint wall.
Total Loss (also called constructive total loss)
When it would cost more to repair your home than it’s worth.
Umbrella Liability Policy
This insurance policy protects you when you have a claim that’s more than your homeowners insurance pays.
Umbrella policies usually cover:
- Personal injury and property damage caused by your family (and pets) when you’re not at home.
- Injuries on your property.
- Vehicle protection when your auto policy is exhausted.
- Protection against slander, libel, wrongful eviction, or false arrest.
- The costs of defending you from lawsuits and claims filed against you involving issues that your insurance covers, such as an injury on your property.