Easy Definitions for Home Insurance Terms

Homeowners' insurance involves an area of commerce and law with its own vocabulary. This section will introduce and explain some of the terms. It will not address business insurance and workers' compensation, which are discussed under other topics.

Who Sells Home Insurance?

There are three different kinds of entities that sell insurance to the general public:

• Stock companies are owned by shareholders and run as for-profit businesses.
• Mutual companies are technically owned by their policyholders, although they have a structure of corporate governance similar to a stock company. Mutual companies may pay dividends in years they are profitable.
• Subscription companies are not common in the United States. The most famous of these is Lloyd's of London. They are groups of investors (or names) who agree to insure against a particular risk. Subscription companies have suffered financial disasters in recent history.

Types of Insurance Policies

The contract between a customer and the insurance company (or insurer) is called a policy. There are two basic kinds of policies:

• Indemnity policies pay you if a certain event occurs. Health insurance, life insurance, and fire insurance are all examples of indemnity policies. As a homeowner, you can benefit from purchasing insurance that covers your home against hazards like fire or earthquake.
• Liability policies pay other people if you become obligated to pay them. Automobile liability, premises liability, and your title insurance policy are examples of liability policies. Some types of liability coverage will protect you when people get injured inside your home.

Some policies are combinations. Policies for homeowners and renters, for example, often contain indemnity portions for theft and liability portions if someone hurts themselves in your home.

When you purchase a policy, you pay a premium. An insurance premium is the insurer's best guess of how much it is profitable to charge you against a risk that they will have to pay a claim or a payment request. Risks that are certain, like death, have high premiums. Risks that are not as certain, like title insurance, have lower premiums.

Insurance Coverage Limits and Conditions

The list of risks that an insurer is agreeing to pay you for is called coverage. The maximum amount of coverage depends on the amount of money you're willing to pay in monthly premiums. You are covered only for what is specifically agreed to in the policy. 

Most policies include exclusions and risks for which they will not pay. Most policies for homeowners and renters, for example, exclude special causes of loss, such as damage from floods.

Most policies have conditions on types of coverage. Under most policies, for example, you must report claims immediately. You also have an obligation to cooperate with the insurer in investigating or defending your claims. You may also have to help the insurer assert its subrogation rights. 

Subrogation means that if an insurer pays you due to someone destroying your house, it obtains any legal rights you may have had against the person who did it. They can sue the person who harmed you (in some jurisdictions, in your name), and you are obligated under the policy to help the insurer.

Sometimes your mortgage lender might require you to purchase insurance that covers the market value of your home. This is to protect the lender for the time that your house secures the money you borrowed from them.

Common types of insurance products for homeowners include:

• Dwelling Coverage: Deals with rebuilding your damaged real property and potential reimbursement for additional living expenses during repairs
• Separate Structures Coverage: Protects structures that aren't physically attached to your home
• Floater Insurance: Covers specific damaged property, like collectibles
• Property Insurance for Personal Belongings: Makes you whole for personal property damaged by theft, vandalism, or negligence
• Umbrella Policy: Provides additional coverage, such as property coverage beyond your main policy limits. For example, you might purchase this to cover medical payments and medical expenses for bodily injuries to third parties on your property.
• National Flood Insurance Program: Covers property damage from floods, which is not usually a covered loss under a standard policy. It is also separate from windstorm insurance, which you might need if you live in gusty environments. Other products, such as earthquake insurance, are available for different kinds of natural disasters.

There are many other forms of insurance policies, and your insurance agent can explain them to you. Policies can range from travel insurance, renters insurance, or even trip cancellation for a single flight.

Homeowners Insurance Terms

Now that you're familiar with basic liability insurance concepts, it's easier to dive into more specific terms. Here is a bullet list of popular lingo you might come across:

• Actual Cash Value (ACV): When insurance companies need to replace something, they might value it based on ACV instead of replacement cost. That means they subtract depreciation, or the loss of value from time and ordinary wear and tear, from the replacement cost.
• Adjuster: This is a person who works on behalf of the insurance company to determine whether insurance needs to make a payout to you.
• Cancellation: If you violate your insurance policy, such as by failing to pay monthly premiums, it can be canceled before the policy period ends.
• Covered Peril Policy: Also known as named perils, these are the types of damage events that your insurance policy will cover. Examples include theft, vandalism, and natural disasters.
• Declarations Page: This summarizes your benefits under the insurance contract. It identifies the types of coverage you have.
• Deductible: The amount you pay out-of-pocket before insurance protection kicks in.
• Depreciation: This is the value that an item loses over time due to use and ordinary wear and tear.
• Personal Liability Coverage: If someone sues you personally after being injured in your home, having liability coverage makes sure your insurance pays out for their injuries or medical bills.
• Loss of Use: This is sometimes interchangeable with additional living expenses. If your home can't be used while it's being repaired, having loss-of-use coverage ensures you're reimbursed for hotel expenses and groceries.
• Policy Period: The period that insurance protection remains in effect. The policy period does not start until the stated effective date in the insurance contract.
• Replacement Cost: This is how much money insurance might reimburse you to repair or replace an item at current prices.
• Underwriting: Insurance companies use actuaries and data analysis to determine if insuring you is worth their risk. That process is called underwriting.

An Insurance Lawyer Can Help

You may be struggling to understand confusing terms or need help talking to an insurance company. Whether your homeowners' insurance company is refusing to honor your insurance claim or underpaying you instead, an insurance attorney can help resolve these issues. They can review your insurance contract and talk to insurance agents on your behalf.