HO-3 Vs. HO-5 Homeowners Insurance: What's The Difference?

When shopping for home insurance it’s important to understand the different types. Overall, there are eight. The first five is what we will be discussing, primarily an HO-3 policy, it is the most common. A step up from the HO-3 is the HO-5, it has one difference; how it covers your personal belongings.

Which coverage is best for you will be determined by your home and what you own. I am set to use my nine years of home insurance experience to pair you up with a policy that fits your needs best.

Homeowner insurance comes in many forms. 8 in total. The first five deal with the home, and the remaining deal with condos, rentals, and older properties.

HO-1 is a basic form and only covers ten named perils. Your HO-2, called a broad form, adds a few more rounding the number to 16. Both of these are “named-peril” policies; if the peril is not listed on the policy, you will not have coverage.

When you purchase an HO-3 policy, the home is now protected on an “open-peril” basis; you’re covered for all incidents unless the policy itself excludes it. However, your personal belongings are still covered on a “named-peril’ basis.

The advanced version of the HO-3 policy is the HO-5 insurance policy. An HO-5 policy protects both the home and its belongings on an “open-peril’ basis. It also covers both the dwelling and your property at replacement cost versus actual cash value, which is standard with an HO-3 policy.

What Is An HO-3 Policy?

An HO-3 policy is also known as a “special form” policy. It is the most popular type of home insurance. As we mentioned, it is an “open-perils” policy, it covers the home in the event of most damage causes. The only exclusions will be outlined in the policy.

These are the most common exclusions:

• Earthquake
• Flood
• Power failure
• Acts of war or nuclear incidents
• Government actions
• Neglect or intentional damage
• Infestation (bird, rodent, insect)
• Pet damage
• Pollution and smog
• Rust and corrosion

Another common exclusion is wear and tear. Age will not warrant a claim against a homeowners insurance policy.

As for the other half of the policy, your personal belongings, they are on a “named-peril” basis. Only damage from these 16 perils will be covered.

• Fire or lightning
• Windstorm or hail.
• Weight of snow/ice/sleet
• Volcanic eruption
• Smoke
• Explosion
• Damage caused by an aircraft
• Damage caused by vehicle
• Vandalism
• Riot or civil commotion
• Theft
• Freezing of pipes or HVAC system
• Falling objects
• Short circuit accidental damage

Another accidental covered event is overflow of water. This is different than flood. This water would come from household appliances, heating, plumbing, or AC units. It also covers sudden or accidental tearing, cracking, or burning of these systems.

What Is An HO-5 Policy?

An HO-5 policy is a comprehensive policy. They are best for newer homes or those who own high-dollar items within their homes. It too, is an “open-perils” policy covering a home in the event of most damage causes.

The personal property coverage levels for an HO-5 policy are generally higher in the event of a claim. The policy will pay out at replacement cost instead of the actual cash value that the HO-3 pays.

HO-5 policies have stricter underwriting guidelines and not every homeowner, rather every home, will qualify. With more extensive coverage, they cost more. Also, fewer insurance carriers offer them.

An HO-5 policy will have the same exclusions as an HO-3 policy. However, some insurance companies may allow some excluded perils that would normally be listed on a policy such as sewer backup.

Actual Cash Value (ACV) Vs Replacement Cost Value (RCV)

A home insurance policy has two methods of reimbursement for personal property claims: actual cash value and replacement cost value. HO-3 policies can payout on both ACV and RCV basis. HO-5 policies generally payout on a replacement cost basis.

Actual Cash Value (ACV)

Over time the items you purchase lose their value due to use. Insurance companies take this into account when you file a claim. When they pay out after you file a claim, it will be based on the item’s current value, or actual cash value, not what you paid for the item.

Replacement Cost Value (RCV)

When you purchase an item, it loses its value over time. However, under replacement cost, an insurance company will reimburse you for the cost to replace the item at today’s value.

Named Peril Vs Open Peril

In addition to ACV and RCV home insurance policies are structured to cover certain events, or “perils.” The two different types are named and open.

Named Peril

A named-peril is an event that is listed by name within an insurance policy. Some policies have 10 named perils, others have 16. Among these are fire, theft, and civil unrest.

Open Peril

Open peril coverage means you will be covered for all perils that are not excluded by the policy. The most common exclusions are floods, earthquakes, and neglect.

Additional insurance coverage can be purchased to cover floods and earthquakes. Many companies sell both flood and earthquake riders. Although, if you live in an area prone to these natural disasters, it can be a bit costly.

Also, if you work from home and own business property, it is not covered under either an HO-3 or an HO-5 policy, a Business Property rider would need to be purchased to cover your small business property.

Which Policy Is Right For Me?

Which policy is right for you will be determined by what you are choosing to protect under your policy. Consider these things:

• Is your home new? – Newly constructed and large homes need added protection. While both HO-3 and HO-5 policies cover open-peril, if you have a new home or expensive additions to that home, an HO-5 policy will provide added coverage an HO-3 lacks.
• What do you own? – If you own expensive items and collectibles, a HO-3 policy personal property is covered under a named peril basis, an HO-5 is open peril. This gives you added protection at a higher dollar amount.
• Are you eligible? – Many HO-5 policies have qualification levels to be met or are only offered in certain areas or with certain insurance companies.
• Affordability – HO-5 policies are more expensive than HO-3 policies due to their added coverage.