Fire insurance works much like any insurance policy works. You purchase coverage, and if a fire occurs, you file a claim. If circumstances warrant it, your insurance company pays for the damage the fire caused up to the policy limits minus any deductible you selected for your policy.
How does fire insurance work?
Just about every homeowner finds fire insurance coverage in their home insurance. In those cases, fire insurance typically pays for damages to:
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Your dwelling.
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The contents of your home, such as appliances and furniture.
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Other structures on your property like sheds or gazebos.
Additionally, fire coverage in your homeowners policy may pay for additional living expenses if you can’t stay in your home (or use it optimally) during a claim. Additional living expenses come from your loss of use coverage and may include the cost of staying in a hotel while your home is being fixed or eating out if your kitchen was destroyed in a fire.
Homeowners can also purchase standalone fire coverage, sometimes called dwelling fire insurance. These can be useful for a second home (such as a seasonal residence in Florida), or if a home is particularly susceptible to fires.
What doesn’t fire insurance cover?
Like most insurance policies, fire insurance has coverage limits that are established by your insurance company when it is written. But insurers also limit coverage by adding exclusions to your policy. Fire insurance policies often exclude damage if the fire was caused by certain events or perils.
For instance, many policies don’t pay for fire damage if the fire was caused by war or nuclear radiation. Insurers also don’t pay claims if you intentionally set the fire. And some insurance companies exclude fire in hot wildfire zones (where wildfires can occur almost any time of year) and require homeowners to buy specialized wildfire protection.
Lastly, your home may not be protected if it remains vacant for more than 30 days. Most home policies limit coverage on vacant houses because empty houses invite trouble that increases the risk for a substantial loss. (Essentially, homeowners aren’t there to help mitigate losses, which can mean bigger bills if disaster strikes.)
Should you need to leave your home vacant for an extended period, talk to your insurance representative about getting second home insurance.
Does fire insurance offer replacement cost or actual cash value coverage?
It depends on the type of policy and how it’s written. For example, the HO3 policies we offer can cover the replacement cost of your home, but some policies on the market today may only insure your home for its actual cash value (ACV). For example, an HO1 policy can be written as replacement cost or ACV coverage for the home.
Understanding the difference between these two terms can be the difference between having sufficient coverage and ending up without enough money to rebuild your home.
Insuring your home for its replacement cost means your insurance company pays what it costs to rebuild your home from the ground up. It covers the exact square footage with the same type and quality of building materials. Actual cash value only covers the depreciated value of your home. ACV policies are often cheaper, but that’s because they cover less of your home’s value. People don’t always realize that their dwelling coverage limit is less than what they need to replace their home.
Do I need fire insurance?
Lenders have an insurable interest in your property, so they typically want you to get valid home insurance that includes fire coverage. Even if you aren’t required to get a policy, protecting your largest asset with insurance makes a lot of sense. The average cost of a fire damage claim is $83,991.
That’s a lot of money even for a partial loss. But if the worst happens, a total loss could set you back several hundreds of thousands of dollars to repair or rebuild. Unless you have the resources to rebuild on your own, you need fire insurance.
Remember, too, that you may actually need to purchase extra coverage. This is usually based on your area. For example, wildfires are especially prevalent in California, so insurers sometimes require you to buy extra coverage designed specifically to protect against wildfires.
