Homeowners insurance. You know you should probably have it, and if you have a mortgage, you’re required to have it. But how much do you know about it beyond that – what it covers (and does not cover), the types of policies, how much coverage you need? What happens in case of minor damage from a storm, or even something as rare as fire damage? If you’re not familiar with these things, you may very well be overpaying and/or be underinsured. To help you out, we’ve put together this homeowners insurance guide for homebuyers in New Jersey.
Homeowners Insurance Overview
Homeowner’s insurance is a safety net. It will “compensate you if an event covered under your policy damages or destroys your home or personal items. It will also cover you in certain instances if you injure someone else or cause property damage.”
The three main functions of this insurance are to…
- “Repair your house, yard and other structures.
- Repair or replace your personal belongings.
- Cover personal liability if you’re held legally responsible for damage or injury to someone else.”
There are three basic levels of coverage with homeowner’s insurance – actual cash value, replacement cost, and extended replacement cost/value. In addition, “[p]olicy rates are largely determined by the insurer’s risk that you’ll file a claim.” This risk is assessed on the basis of “past claim history associated with the home, the neighborhood, and the home’s condition.”
Types of Policies
There are several types of homeowner’s insurance (also called “policy forms”), with some providing more coverage than others. The most common policy types are . . .
HO-1 AND HO-2
The least popular policies provide the least amount of coverage and “payout only for damage caused by issues listed in the policy.” These are known as named peril policies, meaning if a specific cause of damage isn’t mentioned, it’s not covered. Together, these two types—HO-1 and HO-2—account for only about 8% of all homeowners insurance coverage nationwide, largely due to their limited protection and flexibility.
HO-2 insurance, the more common of the two, typically covers your house and belongings for damage caused by 16 specifically listed perils, such as fire, theft, vandalism, and certain types of water damage. While more comprehensive than HO-1, it still leaves gaps in coverage—any issue not explicitly listed won’t be covered, which can lead to unexpected expenses. It’s a step up from basic coverage but may not be enough for homeowners with unique risks or high-value properties.
HO-1, which isn’t widely available anymore, is the most bare-bones type of homeowners insurance. It only covers losses from a limited number of perils—usually around 10 or fewer—and often doesn’t include coverage for personal belongings or liability. Because of its restrictive nature, many insurers have phased it out in favor of more robust policy options. While the low premium might seem appealing at first glance, the lack of protection can end up costing you much more in the event of serious damage or loss.
HO-3
“HO-3 insurance policies, also called ‘special form,’ are by far the most common,” accounting for almost 80% of coverage on owner-occupied homes. “If you have a mortgage, your lender is likely to require at least this level of coverage.” HO-3 policies strike a balance between broad protection and affordability, making them a go-to choice for most homeowners. They typically provide open peril coverage for the structure of your home, which means you’re protected from all types of damage except those specifically excluded in the policy—common exclusions include floods, earthquakes, and neglect-related damage.
However, when it comes to your personal belongings—furniture, electronics, clothing—HO-3 policies usually offer more limited protection. In most cases, these items are only covered under a named peril basis, meaning the damage must be caused by one of the 16 specific events listed in the policy (like fire, theft, or windstorm) for a claim to be approved. Fortunately, homeowners can enhance this coverage with endorsements or by upgrading to an HO-5 policy, which extends open peril protection to personal belongings as well. It’s important to read the fine print and discuss coverage options with your insurance provider to ensure you’re not underinsured in areas that matter most to you.
HO-5
Also known as comprehensive form or premier coverage, this type of policy provides the broadest and most extensive coverage available to homeowners. “It pays for damage to your home and belongings from all causes except those the policy excludes by name.” This is referred to as open peril coverage, meaning unless a specific risk is listed as an exclusion—such as flooding, earthquakes, or intentional damage—it’s covered. That level of protection offers significant peace of mind, especially for homeowners with high-value properties or expensive personal belongings.
Because of its generous coverage terms, HO-5 insurance is typically reserved for well-maintained homes located in low-risk areas. Insurers often have stricter underwriting guidelines for these policies, and not every insurance company offers them. Homeowners who qualify, however, benefit from fewer coverage gaps, higher personal property limits, and faster claims processing. Many HO-5 policies also come with replacement cost coverage by default, meaning you’re reimbursed for the full cost to replace damaged items rather than their depreciated value. While the premiums are generally higher than standard HO-3 policies, the added protection can be well worth it for those seeking maximum security and fewer surprises when filing a claim.
Replacement Cost, Actual Cash Value, and More
You also need to be aware that “[i]fyour home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your payout could differ depending on the cost to rebuild and the coverage you chose – and much of it will be paid directly to contractors rebuilding your home, in many cases.”
Concerning this, here are some things you need to consider when deciding on coverage:
REPLACEMENT COST
This is coverage that will pay however much it takes to rebuild your home(and that may exceed your policy limits). “This situation may arise, for instance, if construction costs have increased in your area while your coverage has remained level.”
ACTUAL CASH VALUE
“Actual cash value coverage pays the cost to repair or replace your damaged property, minus a deduction for depreciation. Most policies don’t use this method for the house itself, but it’s common for personal belongings.”
FUNCTIONAL REPLACEMENT COST VALUE
This type of coverage will pay to repair damage to your home, but possibly with cheaper materials than the original. For example, damage to plaster walls may be repaired with drywall, which is cheaper.
REPLACEMENTCOST VALUE
“Replacement cost value coverage pays to repair your home with materials of ‘like kind and quality,’ so plaster walls can be replaced with plaster. However, the payout won’t exceed your policy’s dwelling coverage limits.”
EXTENDED REPLACEMENT COST VALUE
This type of coverage “will pay out more than the face value of your dwelling coverage, up to a specified limit, if that’s what it takes to fix your home.” This limit is typically a percentage or a dollar amount, but in either case, it provides “a cushion if rebuilding is more expensive than you expected.”
Guaranteed Replacement Cost Value
“Guaranteed replacement cost value coverage pays the full cost to repair or replace your home after a covered loss, even if it exceeds your policy limits.” The catch, though, is that this level of coverage isn’t offered by all insurance companies.
Determining Amount of Coverage Needed
Now, you need to determine exactly how much coverage you need from your homeowner’s insurance. You’ll need enough coverage to rebuild/repair your home in the case that is destroyed or severely damaged. You can estimate the cost to rebuild by multiplying your home’s square footage by per-square-foot local construction costs. YourNew Jersey agent can also provide some guidance here. Just call(908) 320-7995 to find out more.
What you shouldn’t do is “focus on what you paid for the house, how much you owe on your mortgage, your property tax, or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.”
When it comes to your belongings, your personal property, “you’ll generally want coverage limits that are at least 50% of your dwelling coverage amount, and your insurer may automatically set the limit that way.” You can, however, lower the limit or purchase more coverage if you need to/
With respect to the liability limit, experts advise having a “limit at least high enough to cover your net worth,” including “savings, investment accounts, and other assets, minus auto loans, credit card balances, and other debts.”
Cost of Homeowners Insurance
So what does homeowner’s insurance cost? The national average is about $1,600 per year, but this is an average and individual prices can be much higher or lower. In addition, your credit score can also affect the cost of your insurance.
And then there’s the deductible – the amount you have to pay out of your pocket before the insurance kicks in. Here are the two main things to keep in mind when choosing your policy’s deductible:
- A higher deductible will reduce your premium, but you’ll pay a lot more when you file a claim.
- With a lower deductible, you’ll pay a higher premium, but will pay a lot less out of your pocket for a claim.
When It’s Time to Buy
Ultimately, homeowners insurance isn’t a luxury – it’s a necessity. But there are so many influencing factors and available options, it’s difficult to know what kind of policy and coverage is right for you. An experienced New Jersey agent can provide valuable assistance in many of these areas. We suggest that New Jersey home buyers trying to untangle the homeowner’s insurance puzzle, contact us today at (908) 320-7995.