What Is An HO-2 Policy?

Owning a home is one of the life moments many adults look forward to. It’s not just the American Dream; it’s a fairly universal goal of many. However, the thought that one event like a fire, theft, or even a natural disaster could turn that dream into a nightmare.

There is a solution, and understanding the variances between an HO-1, HO-2, and HO-3 home insurance policy can mean the difference between being covered and having to pay out of pocket to rebuild.

In my seven years of experience, I’ve seen many families relieved to know their homes are covered because they have the right protection in place. It begins with understanding which policy you need for the home you have.

All standard HO-2 policies cover your home and your personal belongings. It has six basic coverage parts. They break down like this:

• Coverage A – Coverage for your home’s structure.
• Coverage B – Coverage for detached garages and sheds.
• Coverage C – Personal property protection such as clothing and electronics.
• Coverage D – Property loss of use.
• Coverage E – Personal liability protection against injuries and accidents that occur on your property.
• Coverage F – Medical payments for those who may become injured on your property due to a third party.

What Does An HO-2 Policy Cover?

A U.S. Census Bureau study revealed that one in thirteen homeowners lack insurance. Reasons vary from lack of income to not feeling the need for it. However, a claim can happen to anyone, it isn’t discriminatory. Insurance is designed to protect your investment and to get your home back to what it was before your claim.

An HO-2 policy is called a broad form because it covers the HO-1 ten basic perils plus six additional perils:

• Fire or Lightning
• Windstorm or Hail
• Explosion
• Civil Commotion (Riot)
• Damage caused by aircraft
• Damage caused by vehicle
• Smoke damage
• Vandalism
• Theft
• Volcanic Eruption
• Weight of snow and Ice
• Accidental overflow of water or stream
• Plumbing or A/C freezing
• Bulging/Cracking by sudden accidental event
• Falling objects
• Accidental electrical current causing damage

An HO-2 policy is also a ‘named peril’ policy. This means that it will only pay for damage caused by one of these events. If it’s not on this list, and you do not have an endorsement that includes an event, you will not be covered.

When one experiences a covered event, their policy will cover:

Dwelling Coverage

Dwelling coverage protects your home and other structures on the property. This can include a detached garage, shed, gazebo, greenhouse, or even a doghouse. The fence that surrounds your property is also included in this list.

Personal Property

This can be your furniture, electronics, collectibles, and clothing. However, if you have expensive items, there are limits. If you own valuables, you may want to purchase additional insurance to ensure you are covered.

Loss Of Use

This is also known as Additional Living Expenses. If your home is considered unlivable due to your loss, your insurance can pay for living expenses elsewhere. This can include food and mileage. There are usually daily coverage limits.

Medical Payments

If you have a visitor and they are injured on your property, your insurance will pay up to its limits for their injuries. It doesn’t matter who is at fault.

It can also pay out if you cause injury to someone while you’re away from your home, in some circumstances. This would not apply in the event of an auto accident.

Personal Liability

This helps if you or anyone in your household injures someone or damages their property. However, PL will not pay for criminal activity or acts of intention. It will pay if you were on a walk with your pet and they hurt someone away from your home.

What Does An HO-2 Policy Not Cover?

As with all insurance, there are perils policies will not cover, even with the broadest of homeowners insurance policies, including an open peril policy such as an HO3. Many of these are either natural disasters or can be caused by a natural disaster.

• Earthquake
• Flood, Sewage Backup, Water seepage
• Power Failure
• Neglect
• War and Nuclear Hazard
• Intentional Loss
• Government Act
• Theft During Construction
• Vandalism to Vacant Home
• Mold and Fungus, unless it is accidental
• Wear and Tear
• Mechanical Breakdown
• Smog, Rust, and Corrosion
• Agricultural and Industrial Operations
• Pollutant Seepage
• Foundation Settling or Shrinking
• Rodent or Insect Damage
• Pet Damage

Homeowners can purchase separate coverages to mitigate some of these perils, such as Flood Insurance and Earthquake Insurance. In some areas of the county that are prone to hurricanes, Wind Insurance can be a benefit.

Is HO-2 Enough For Me?

There are eight different home insurance types. We’ve spoken of HO-1 and HO-2. Here are the others:

HO-3

An HO3 policy is called an ‘open perils policy’. This means that the policy will cover all perils UNLESS it is named in the policy. However, if a home is in a high-risk area, it could have exclusions. Also, your personal property is still limited to the 16 named peril list.

With an HO-3 policy being ‘cash value’, home owners may still have to pay out of pocket if they experience a total loss to rebuild; they would not be replacing the home by today’s financial standards, they would be receiving what the home is worth in today’s market, counting depreciation.

HO-4

This is the technical term for Renter’s Insurance. It covers the same as an HO-2, except it doesn’t have coverage for the dwelling.

HO-5

An HO-5 policy is identical to an HO-3 policy. The difference is that HO-3 policies are paid on an ‘actual cash value’ basis and an HO-5 policy is paid on a ‘replacement cost’ basis. HO-5 policies can also have added coverage for high-dollar items.

HO-6

Condo Insurance. This is similar to a Renter’s policy, only it covers the walls, floors, and ceilings. It can sometimes be referred to as a “Walls In” policy. Anything that is outside of the condo would be the responsibility of the complex or association.

HO-7

Mobile Home Insurance. These home insurance policies are the same as HO-3 insurance, only for manufactured homes.

HO-8

This specialty homeowner insurance is for older homes that are built to a less strict code of standards. Registered landmarks often have this type of policy.

Choosing the right policy would depend on where you live, the home’s value, and if you own valuable possessions. Also, consider add-ons such as Earthquake, Flood, and Wind insurance if you live in disaster-prone areas as these perils are not included in standard insurance policies.

HO-2 Vs HO-3

Both HO-2 and HO-3 protect a homeowner against loss. It’s how they work that’s the difference. An HO-2 has a list of covered events, and what’s not covered. An HO-3 policy has a list of exclusions, pretty much everything else is covered.

An Insurance Information Institute study reveals that from 2017-2021, 39 percent of losses were due to wind and hail causing an average of $12,913 in damage. However, fire and lightning affected 25 percent of losses but caused an average of $83,519.

HO-1 Vs HO-2

An HO-1 and an HO-2 policy are nearly the same. Only an HO-2 policy has added peril protection. Since it has more named perils, it will be more expensive than an HO-1 policy. If price is your main drive when purchasing a homeowner’s policy, an HO-1 may be better for you.
The primary ten both insurance policies cover are:

• Fire and lightning
• Wind and hail
• Explosion
• Riot and civil commotion
• Damage caused by aircraft
• Damage caused by automobile
• Smoke Damage
• Damage caused by Vandalism or Malicious Mischief
• Theft
• Volcanic Eruptio

The other six differences between the two:

With the dangers that lie with excluding some coverages, some insurance companies have stopped selling HO-1 policies. It’s important to weigh the risk versus the cost in the long run.

How Much Does An HO-2 Policy Cost?

Many factors go into the cost of homeowners insurance. This includes the area of the country you live in and what a state’s natural disasters pose. While California’s rates seem low, you are in the middle of earthquake country.

California has regulations restricting how insurance companies rate risk for homeowners. Yet, If your home is damaged as a result of an earthquake, your HO-2 policy will not cover you fully. Here, purchasing an Earthquake policy or endorsement would be wise and affordable.

Texas sees a great deal of natural disasters. From tornadoes to hail, and a hurricane or two, the risk to a home is greater than in most other states. They even have earthquakes and have had a rise in wildfires as of late. Paying so many claims to so many drives up insurance costs.

Who Needs An HO-2 Policy?

An HO-2 policy is generally considered middle-of-the-road. If you desire less coverage, or can’t afford much, at least consider an HO-1, which is basic coverage.

If you desire higher coverage, an HO-3 policy would be a better fit. The key is finding the balance between your budget and your home’s risks. Ask these questions:

• Am I at risk of experiencing these types of damages to my home? If you feel you may have to file a claim due to one of the 16 perils, especially if you live in an area prone to extreme cold, snow, or perhaps you have expensive electronics in your home; the surge protection is on an HO-2, but not an HO-1 policy.
• Does my mortgage company require minimum amounts of coverage? You may be required to carry a minimum amount of home coverage by your lender. Check your contract for details.
• What will my budget allow me to pay for home insurance? If you can afford an HO-2 policy, select it over an HO-1. If you are able, an HO-3 or an HO-5 will be more comprehensive and will include the option for replacement cost on your personal items.

When you finally own your home, the demands from lenders may no longer exist, but the threat to your home remains. This is because as a home ages, its value will decrease, yet the cost to replace it will remain high. Keep this in mind should you consider decreasing your protection level.