What are the differences between HO-3 and HO-5 Insurance Policies? Why is one preferable for the client, and is an HO-5 policy really that much better? (YES!)

Not all insurance policies are created equal.  I don’t know how many times I have had a conversation with a potential client about how you can’t just compare insurance quotes at face value or put two declaration pages against one another and consider it an “apples to apples” comparison.

Insurance companies use different forms with different language to distinguish their policies from one another.  The truth is that homeowner’s insurance policies can be vastly different, although they may appear identical.  This is clearly demonstrated when comparing an HO-3 and an HO-5 homeowner’s insurance policy.

The HO-3 policy is both the most widely available policy form as well as the policy that meets the minimum coverage required by most mortgage companies. These factors have helped it to become the homeowner’s standard insurance policy since the 1950’s. Unfortunately, although It covers a broad range of property types, it offers only a very limited coverage for personal belongings. The risks that the insurer will cover are clearly listed. Therefore, when property damages occur that are caused by a peril outside of those explicitly listed in the policy, the insurer will deny responsibility for the loss. Although HO-3 policies do vary by company, a standard HO-3 homeowners insurance policy commonly includes the following sixteen named perils:

  • Fire or Lightning
  • Windstorm or Hail
  • Explosion
  • Riot or Civil Commotion
  • Aircraft
  • Vehicles
  • Smoke
  • Vandalism or Malicious Mischief
  • Theft
  • Volcanic Eruption
  • Falling Objects
  • Weight of Ice, Snow, or Sleet
  • Accidental Discharge or Overflow of Water or Stream
  • Sudden & Accidental Tearing Apart, Cracking, Burning, or Bulging

The HO-5 policy provides Open Perils Coverage (a.k.a. Special Coverage) for personal property.  With Open Perils coverage, the insurance company provides a specific list of perils that are excluded from the policy.  Therefore, any cause of loss not specifically excluded by the list will be covered.  The burden of proof for any denial of a claim lies with the insurance company, who must show clear evidence that the loss was caused by an excluded peril listed within the homeowners insurance policy.  This eliminates any uncertainty when initiating a claim or documenting the evidence of a loss.

The HO-5 Policy can vary by company, but a standard HO-5 policy typically includes the following exclusions:

  1. Earth Movement
  2. Ordinance or Law (most companies will give you a limited amount of coverage)
  3. Water Damage – Flood, Water Backup Through Sewers & Drains, Sump Pump Failure (most companies offer water backup & sump pump failure coverage by endorsement; a flood insurance policy can be purchased separately)
  4. Power Failure
  5. Neglect
  6. War
  7. Nuclear Hazard
  8. Intentional Loss
  9. Governmental Action
  10. Theft in or to Dwelling Under Construction
  11. Vandalism or Malicious Mischief (when home has been vacant for a certain # of days)
  12. Mold, Fungus, or Wet Rot (some companies will give you a limited amount of coverage)
  13. Wear & Tear, Deterioration
  14. Mechanical Breakdown (some companies are offer this by endorsement)
  15. Smog, Rust & Corrosion
  16. Smoke from Agricultural Smudging & Industrial Operations
  17. Discharge, Dispersal, Seepage of Pollutants
  18. Settling, Shrinking, Bulging, or Expanding
  19. Birds, Vermin, Rodents, Insects
  20. Animals Owned by Insured

The HO-5 form removes many of the limitation of the standard HO-3 homeowner’s insurance policy, and adds additional coverages not afforded under the HO-3. The HO-5 expands on coverages in the HO-3 form such as higher limits for jewelry items and business personal property. Additionally, several common provisions that may be added to the HO-3 by specific endorsement at an additional cost are included automatically in the HO-5.

It is important to note, however, that because the HO-5 provides broader coverage, the underwriting guidelines can be more restrictive. Many insurance companies limit HO-5 coverage to newer and/or well maintained homes that are in an area protected by a fire department. If an owner has an older home, the owner would need to have made updates to satisfy minimum standards.  These conditions would include, but are not limited to, newer roofing and updated plumbing, electrical, and HVAC systems.

Where the HO3 and HO5 Insurance Policies Stop

Although the HO-5 homeowners insurance policy is one of the broadest policies available, there are a few areas where the HO-5 and HO-3 insurance policies both lack coverage. The two largest areas are:

  1. Flood – despite being one of the best home insurance policies available, this policy still will not cover flood. Flood insurance coverage is rarely included with a standard HO-5, and typically cannot be endorsed onto the policy. FEMA, a government organization, sells flood insurance policies to those who are interested. Most insurance agents are also licensed flood agents, and can write both a flood and home insurance policy for you.
  2. Earthquake – despite being one of the broadest home insurance policies available, this policy still will not cover damage as a result of an earthquake.  Earthquake insurance is rarely included with a standard HO-5 or HO-3 insurance policy, and earthquake insurance coverage typically cannot be endorsed onto the policy.

Which policy should you choose?

Assuming that you qualify for both forms, the HO-5 is the homeowners insurance policy of choice. The HO-5 not only provides broader coverage, but can also simplify the claims process. While the HO-5 insurance policy may initially cost more than the HO-3, in the long run the total costs of an HO-5 are generally lower.  Homeowners who qualify for an HO5 policy should take advantage of the additional benefits it offers.

The differences between the HO-3 and HO-5 forms may not seem as evident when comparing quotes side by side.  The devil is in the details of understanding the language used in the actual policy. It is important that you know the differences between good, bad, and average policies. Don’t wait until you have a claim to learn about your coverage.

Contact the Schneiderman Insurance Agency today at (818) 322-4744 to speak with a licensed insurance agent about your personal insurance needs.

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