Property insurance is a broad term for a collection of policies that provide property owners with either property protection coverage or liability coverage. Property insurance compensates the owner or renter of a structure and its contents in the event of damage or theft, as well as a person other than the owner or renter who is injured on the property.
It can include homeowners insurance, renters insurance, flood insurance, and earthquake insurance. A homeowners or renters policy will usually cover personal property. The exception is high-value and expensive personal property, which is usually covered by purchasing a “rider” to the policy. If a claim is filed, the property insurance policy will either reimburse the policyholder for the actual cost of the damage or the replacement cost to repair the problem.
How Does Property Insurance Work?
Property insurance typically covers certain weather-related calamities, such as damage caused by fire, smoke, wind, hail, the impact of snow and ice, lightning, and more. Property insurance protects against vandalism and theft by covering the structure as well as its contents. Property insurance also covers liability if someone other than the property owner or renter is injured on the property and decides to sue.
Property insurance policies typically exclude damage caused by a variety of events, such as tsunamis, floods, drain and sewer backups, seeping groundwater, standing water, and a variety of other water sources. Mold is not usually covered, nor is earthquake damage. Furthermore, most policies will not cover extreme events such as nuclear events, acts of war, or terrorism.
Property Insurance Explained
Property insurance comes in three varieties: replacement cost, extended replacement costs, and actual cash value.
- The cost of repairing or replacing property of the same or equal value is covered by replacement cost. The coverage is based on the replacement cost of items rather than their cash value.
- If construction costs have increased, extended replacement costs will pay more than the coverage limit; however, this will usually not exceed 25% of the limit. When you purchase insurance, the limit is the maximum amount of benefit that the insurance company will pay for a particular situation or occurrence.
- Actual cash value coverage reimburses the owner or renter for the cost of replacement minus depreciation. If the destroyed item is ten years old, you will receive the value of a ten-year-old item rather than a new one.