Most mortgages contain a requirement that the collateral property carry adequate insurance to cover repayment of the mortgage in the event of a loss. However, Edward Martinez, a technical trainer in CoreLogic's Insurance & Spatial Solutions department, writes in the company's Insights blog that what satisfies a lender may not be the best solution for the homeowner.
The required insurance, generally called homeowner's insurance, is a package policy that covers both damage to property and legal liability for any injuries or property damage a homeowner, family members, or household pets may cause to other people.
Martinez explains that there are eight levels of homeowner insurance. The most basic is HO-1 which covers only specific named perils; HO-8 is designed for older homes and usually does not cover full replacement cost. It provides for actual cash value reimbursement minus depreciation for any of the perils listed in the policy. In between are policies designed specifically for owners of mobile or manufactured homes (HO-7) and condo policies (HO-6) which usually cover only the interior of the unit and the owner's personal possessions. HO-5, the "open peril" policy offers the broadest coverage and is popular with those who own high-value possessions.
The most common policy is HO-3. It provides the minimum coverage required by most mortgages, covering all perils except those specifically excluded in the policy. The most common excluded perils are flood, earthquake, and maintenance issues. While this type of insurance covers any direct damage to the house or other structures on the property by non-excluded perils, it only protects personal property for named perils.
Martinez says the key to knowing if you have the right kind of policy is to understand what perils are covered and what restrictions to coverage there might be. Many people who live in areas prone to hurricanes, mudslides, earthquakes, or floods may not realize that their standard homeowner policies do not cover what could be ruinous losses from these perils. Separate insurance is usually available to cover these events, of course the higher the risk of an occurrence, the more expensive the insurance will be. Many mortgages, especially those that are federally insured, require homeowners living in high risk flood areas to carry flood insurance
The author says that technology today allows homeowners to gather good information about weather related events to determine what hazards they are dealing with in their area. He advises consumers to deal only with qualified companies and individuals that can certify their knowledge about their product, "because; it is always better to have [insurance] and not need it than to need it and not have it!