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Homeowners insurance can be an important area of expertise for real estate agents since some mortgage lenders won't release mortgage funds without proof of an insurance policy. Homeowners insurance helps pay for damage to a home and property in the event of a burglary, fire or other threat. While there are around eight different types of homeowners insurance policies in the market, in this article we'll cover the basics of HO5 and offer a comparison of the benefits of HO3 vs HO5 insurance policies.
What Is HO5 Insurance?
HO5 insurance is a premium form of homeowners insurance that covers all but a brief list of exclusions. While most homeowners insurance policies provide coverage for a list of named problems (such as losses from a burglary, fire, frozen pipes, vandalism, etc.) HO5—sometimes called a comprehensive policy—offers the broadest coverage of any homeowners insurance. It's a pricier, premium option for homeowners seeking total peace of mind.
What Does HO5 Insurance Cover?
HO5 insurance provides coverage for the following:
- The main house/dwelling: HO5 covers not only the building/structure that owners live in but also attached structures like a porch, deck, or garage.
- Other structures on your property: HO5 covers other freestanding structures on your property including detached garages, sheds, fences, pools or gazebos.
- Personal belongings: Everything inside your house including appliances, clothing, accessories, furniture etc., is covered under this category.
- Liability coverage: If someone is injured in the policyholder's home or if the policyholder is found liable for damage to someone else's property, liability coverage protects them financially.
- Medical payments coverage: HO5 pays for medical expenses if someone is injured on the policyholder's insured property.
- Loss of use coverage: The HO5 policy pays for living expenses when a policyholder must seek other accommodations (such as a hotel) while their home is being repaired from covered damage.
How HO5 Coverage Works
Homeowners insurance coverage can be categorized in two ways:
- Open perils coverage: This implies that the policy covers all losses and damage except those resulting from a fixed list of causes (exclusions usually include earthquakes, floods, war, normal wear and tear, neglect, etc.).
or - Named perils coverage: This implies that the policy only covers damage resulting from a fixed list of causes (usually fire, theft, vandalism, explosions, etc.).
HO5 is unique in that it offers broad, open perils coverage for the home and its contents.
What Are HO5 Exclusions?
While HO5 is designed to cover many problems homeowners could encounter, like other homeowners insurance policies, there are exclusions to consider.
Common HO5 coverage exceptions:
- Intentional loss
- Neglect
- Normal wear and tear
- Mechanical breakdown
- Damage caused by the policyholder's animals
- Nuclear hazard
- Ordinance or law
- War
- Government action
- Power failure
- Damage caused by birds, vermin, rodents or insects
- Vandalism if the home is vacant for over 60 days
- Collapse
- Earth movement (earthquakes)
- Mold, fungus or rot
- Smoke from agricultural or industrial operations
- Theft, specifically if the structure is under construction
- Smog, rust, or corrosion
- Settling, shrinking, or expanding related to your home's foundation
- Pollutant discharge or seepage
- Water damage from flooding, sewer problems or seepage
If your client's home is at risk for problems like earthquakes or floods, you can recommend that they get a separate policy (such as earthquake or flood insurance) or add endorsements to their HO5 insurance policy. A homeowners insurance endorsement, also called an insurance rider, is an add-on that modifies the policy, expanding it to include specific risks that homeowners may be concerned about. Insurance endorsements provide the necessary coverage without the hassle of getting a separate policy.
It's a good idea for real estate agents to understand common insurance requirements for mortgage lenders in their state. For instance, while the state of California does not mandate fire insurance for buyers, mortgage lenders may not issue a loan without it.
HO3 vs. HO5: What Agents Should Know
HO3 is the most widely used homeowners insurance in the country. These home insurance policies tend to be more affordable and offer the basic coverage that most homeowners require. Some clients prefer the broad coverage of a more comprehensive HO5 policy, but they may not need it.
Let’s review the key distinctions between HO3 and HO5 policies that agents should discuss with clients.
Personal Property Coverage
An HO3 policy provides coverage for personal property against named perils, meaning it only covers specific risks outlined in the policy. Common covered perils include fire, theft, vandalism, and certain types of water damage. In contrast, the HO5 policy offers open-perils coverage for personal property, meaning it covers all risks except those specifically excluded from the policy. This broader coverage extends to a wider range of perils, providing more comprehensive protection for a homeowner's personal belongings.
Claim Payouts
In the event of a covered loss, an HO3 policy typically pays out based on actual cash value (ACV) for personal property. This means that the insurer will reimburse homeowners for the depreciated value of their belongings at the time of the loss. On the other hand, an HO5 policy pays out based on replacement cost value (RCV) for personal property. In this case, the insurer will reimburse the homeowner for the cost of replacing their belongings with new items of similar kind and quality, without deducting for depreciation.
Eligibility Requirements
An HO3 policy is generally more widely available and may be easier to qualify for compared to HO5. While eligibility requirements can vary by insurer, HO3 policies are typically available to a wider range of homeowners. In contrast, an HO5 policy typically requires a newer, well-maintained home compared to HO3. Because of the broader coverage and higher claim payouts associated with HO5 policies, insurers may have more stringent requirements for applicants.
Cost of Premiums
Due to the difference in coverage, HO3 policies generally have lower premiums compared to HO5 policies. The limited coverage for personal property and the use of actual cash value (ACV) for claim payouts typically result in lower premiums for HO3 policies. Conversely, HO5 policies typically have higher premiums due to the broader coverage, greater claim payouts, and use of replacement cost value (RCV) for personal property coverage.
Is HO5 Right for Your Client?
While an HO5 policy offers more extensive coverage, it's usually associated with high-value homes. Consider the home your client is purchasing; does it face uncommon risks not typically covered by a HO3 policy? Is it a newer home? Can your client afford the higher premiums that accompany an HO5 policy? Are they looking for basic coverage or total peace of mind? An HO5 policy certainly provides the latter, but it comes at a cost. It's a good idea to talk to an insurance agent or specialist to find out your client's eligibility for HO5 insurance before making a recommendation.