Key Homeowners Insurance Terms

Homeowners insurance is essential for protecting your home and belongings. But if you’re shopping for a new policy, you’re likely to come across industry jargon that can make finding the right coverage tricky. 

Learning these key terms will help you become fully prepared to make the right financial choice for you and your family. We’ll break down the most important terms so you can feel confident about what you’re getting. 

Deductible

The annual amount the policyholder must pay out of pocket before the insurer provides reimbursement for damage to your home. A smaller deductible results in a higher premium that you have to pay for coverage. 

Premium

The monthly or annual amount that you pay to keep your homeowners coverage active. The amount of your premium can vary based on a range of factors, including your home’s value, coverage limits, location and the deductible for your policy. 

Underwriting 

The process of determining your financial risk to the insurance provider. When you apply for homeowners coverage, the carrier looks at a variety of factors—including your home’s location, age and replacement value, as well as your claims history—to determine whether it will offer you coverage and at what price. 

Coverage limit 

This is the maximum amount that the insurance company will pay for a covered loss. Each policy has separate limits for dwelling coverage, personal property, liability, loss of use and medical payments. 

Liability coverage

Coverage that reimburses you if someone is injured on your property and you’re found legally responsible. It covers legal fees, medical bills and settlements if the courts determine that you’re responsible for the accident.

Personal property coverage

The part of your home insurance policy that protects your belongings—including furniture, clothing, appliances and electronics—from damage due to a covered loss. Personal property coverage extends to items both inside and outside your home.

Dwelling coverage

Coverage that protects the physical structure of your home, including the roof, walls and foundation. In order to reimburse your costs, the repair or replacement must be caused by a covered event, such as a fire, storm or vandalism.

Dwelling coverage is usually set at 100% of the home’s replacement cost, which is the total cost of rebuilding your home with similar materials and quality. 

Loss of use coverage 

Coverage for any extra costs you may incur when living away from your home after a covered loss. For instance, if your home is significantly damaged in a fire, your loss of use coverage would help pay for a hotel stay, up to the limit of your policy.

Also known as additional living expenses (ALE) coverage. 

Exclusions

Specific events or damages not covered by your home policy. Examples include floods or earthquakes, which require you to purchase separate coverage. Other common exclusions include sewer backups, termite and rodent damage and mold. 

Endorsement (rider) 

An optional add-on to your policy that provides additional coverage for certain types of loss, including floods, earthquakes and water backups. You can also get a rider for scheduled personal property that covers high-value items such as artwork, collectibles and jewelry. Each endorsement you obtain adds to your premium. 

Actual cash value (ACV)

The value of damaged or stolen property, accounting for depreciation. It’s a method of reimbursing the policyholder that takes factors in the age, as well as any wear and tear, from the item. Therefore the actual cash value (ACV) is typically less than the replacement cost value (RCV). 

Replacement cost value (RCV)

The cost to replace damaged or stolen property with a new item of similar kind and quality, without subtracting depreciation. The reimbursement from a policy that pays the replacement cost value is higher than that of a policy that pays the actual cash value (ACV), although your premiums may be higher. 

Flood insurance

A separate policy needed to cover flood damage, which is not included with a standard homeowners insurance policy. Flood insurance covers damage to your home and personal belongings caused by rising water from heavy rainfall, storm surges, overflowing rivers and fast-melting snow. 

“Flood insurance” refers to building property coverage that protects the structure of your home as well as personal property coverage that safeguards personal items like electronics and furniture. You can purchase these policies through the National Flood Insurance Program (NFIP) or from private insurers, which often has higher coverage limits. 

Hazard insurance

Another term for homeowner’s insurance. It includes coverage found in standard home policies as well as separate endorsements that cover events such as floods and earthquakes. 

CLUE report

A record of claims filed on your home (or vehicle) over the past seven years. Insurance companies typically review your CLUE report during the underwriting process to help determine the likelihood that you’ll file future claims. 

When you file a homeowners claim, the insurance companies record information such as the date of loss, the loss type and the amount paid on the claim. Insurance companies can report information to CLUE whenever you file a claim. 

Subrogation

The process by which an insurance company recoups costs from a third party that was responsible for a claim they covered.