If you are getting ready to buy a house, you probably have to purchase homeowners insurance as a condition of your mortgage. However, many new homeowners don’t realize that home insurance is not a one-size-fits-all policy. There are several different policies available that provide varying levels of coverage.
One of the more common kinds of home insurance is called HO-2 insurance. An HO-2 policy offers limited coverage compared to an HO-3 policy, but it’s one of the cheaper forms of home insurance on the market. If you are shopping for home insurance, here’s a closer look at what HO-2 insurance covers, and whether this policy is right for you.
What is an HO-2 Insurance Policy?
An HO-2 insurance policy is a type of home insurance that protects your dwelling and personal property from a list of named perils. It’s also called a broad form policy.
With an HO-2 policy, the physical structure of your home and your personal belongings inside, like clothing, furniture, and appliances, are covered against 16 specific losses (perils). If you experience a loss that is not listed in your policy, it’s not covered. That means you are responsible for making the repairs out-of-pocket.
Most HO-2 policies reimburse policyholders for dwelling and personal property losses based on actual cash value, which factors in depreciation. However, you’re often able to upgrade your policy to replacement cost coverage, which provides a bigger payout after a claim.
In terms of cost, HO-2 insurance is one of the more affordable types of home insurance. It’s more expensive than HO-1 home insurance (which is rarely available), but less expensive than HO-3 home insurance, which is the most common type of home insurance.
According to a report by the NAIC released in January of 2021, the average cost of HO-2 insurance was $1,131 in 2018, which is the last year this formal data was made available.
However, keep in mind that home insurance premiums are personalized. In addition to the type of insurance you buy, your state, city, age, credit score, and claim history will also impact your rate.
What does an HO-2 policy cover?
Broad-form home insurance provides coverage for 16 named perils that are listed in your insurance policy documents. Here are the losses that are covered:
- Damage from lightning, fire, and smoke
- Damage from hail and windstorms
- Damage from falling objects
- Damage from aircrafts
- Damage caused by cars
- Damage caused by frozen pipes
- Volcanic eruptions
- Damage from the weight of snow or ice
- Sudden and accidental water damage from plumbing or HVAC systems
- Damage caused by electrical currents
- Damage caused by water heaters
In addition to these named perils, HO-2 insurance also includes personal liability insurance, medical payments coverage, and loss of use insurance. Here’s what these policies cover:
- Personal liability insurance: Liability insurance helps pay for your legal defense if you get sued for accidental bodily injury or property damage. It also provides compensation for the third-party who accuses you of the claim, whether or not you are found responsible.
- Medical payments: If someone gets injured at your home or on your property, medical payments coverage will help pay for their injuries, regardless of who was at fault.
- Loss of use: Loss of use coverage, also called additional living expenses, will pay for temporary housing, meals, parking, and other essential costs if your home is damaged in a covered peril and you have to temporarily move out.
What does an HO-2 policy not cover?
HO-2 home insurance policies are pretty comprehensive. However, there are a variety of perils that are not covered. Keep in mind that most home insurance policies do not offer coverage for these losses, even if you buy a policy with more coverage.
Here’s a look at some of the losses that are excluded from an HO-2 home insurance policy:
- General wear and tear
- Mold, rust, and mildew
- Damage from animals
- Pests and infestations
- Ordinance changes
- Vacant homes
If you need coverage for one of the perils that broad-form home insurance excludes, you may be able to get an endorsement. For example, many home insurance carriers sell separate flood insurance and earthquake insurance policies if you live in a high-risk area.
Similarly, if you want to insure a second home that sits empty for most of the year, you can typically find insurance policies to protect the property while you're not there. Most home insurance policies also provide limited coverage for valuable items, but you can purchase a scheduled personal property add-on if you need higher limits.
What is the difference between HO2 and HO3?
The most popular type of home insurance is called an HO-3 policy, or special form coverage. The biggest difference between an HO-2 and HO-3 home insurance policy is that an HO-3 policy provides more coverage for the structure of your home.
With an HO-3 home insurance policy, your dwelling is covered on an all perils basis, which means you are not limited to the 16 named perils. An all perils policy provides coverage for any loss that is not explicitly excluded in your policy.
Other structures on your property, like an in-ground pool, fence, or gazebo, are also covered on an all perils basis. However, both HO-2 and HO-3 home insurance policies cover personal property on a named perils basis.