An insurance policy is a legally binding contract between you, the policyholder, and your insurance company. It lays out what’s covered, what’s not covered, and what events cause your coverage to kick in.
When you buy insurance, you’re actually paying for your insurance company’s promise that it will take care of certain costs should something catastrophic occur. Your insurance policy explains the details of that promise as well as your responsibilities as the policyholder. For example, insurance policies typically:
- Describe the nature of the coverage.
- Define important terms.
- Explain what perils are covered.
- List exclusions (i.e., perils that aren’t covered).
- Spell out the duties and obligations of the insured and the insurer.
Many of the insurance policies insurers use are standard forms, also called coverage forms, created by advisory organizations. That’s why you’ll sometimes hear your homeowners insurance described as an HO2 or HO3 policy. HO3 is the name of the form most insurance companies use to create a homeowners policy.
An insurance policy is also a contract of adhesion. That means it’s an agreement between two parties where one party has more power than the other. In the case of an insurance policy, your insurance company controls the terms and conditions, and you have little power to negotiate for better terms. Courts tend to look closely at adhesion contracts because of this power imbalance.
How to read your home insurance policy
Insurance policies contain a lot of information﹘and much of it is written in legalese that can be difficult to decipher. For that reason alone, most people don’t look past the declarations page. But your dec page is actually a fairly good summary of what your home insurance policy covers, including:
- Coverage limits.
- Effective date.
- Deductible.
- Premium.
- Discounts.
- Endorsements.
- Policy number.
All of that is useful when you need basic details, like when you’re filing a claim or comparing coverage before you renew your policy. However, you need to dig deeper into your insurance policy’s language if you really want to understand what it covers.
An easy way to start is to get familiar with the different sections found in most homeowners insurance policies. After the declarations page, you can usually find the following sections:
- Definitions. Insurance policies usually have a section where key terms are defined. For example, your homeowners policy most likely defines concepts like named insured, insured location, bodily injury, and property damage.
- Insuring agreement. Most homeowners policies have a broad statement that describes the agreement between you and your insurance company ﹘essentially, that it provides insurance that follows the provisions outlined in the policy in return for your premium. That statement is then narrowed down by what’s described in the subsequent sections.
- Property coverages. This section describes what property is covered and in what circumstances your policy pays claims on your dwelling, other structures, personal property, and loss of use coverages and your responsibilities as an insured. If you have an HO3 policy, then it also lists the specific perils that aren’t included.
- Liability coverages. Similar to the property coverage section, this explains the scope of Coverage E and Coverage F, what’s included and excluded, and your responsibilities as an insured.
- Endorsements. Any changes you make to your coverage typically appear on the pages towards the end of your insurance policy.
Understanding what’s in your homeowners insurance policy is key to making sure you have the coverage you need. For example, let’s say you live in a flood zone and are required to have flood coverage. You skim through the property coverages in your homeowners policy to the information on exclusions. There you discover that you aren’t covered for flooding so you decide to buy flood insurance.
