A Glossary of Home Insurance Terms
With home insurance required by lenders across the U.S., it’s a good idea to familiarize yourself with the terms in use within the industry. Understanding these important terms can help you decide on which home insurance coverage options are right for your unique needs, as well as what factors play into determining your premium amounts and the payout for any claims you might file in the future.
Glossary of home insurance terms
Accident: Any event that causes damage or loss to a home, personal possessions, or an individual on the property.
Act of God: A weather event or other act of nature that destroys or damages a home. Examples include floods, earthquakes, and hurricanes.
Actual cash value: The value of a home and property taking into account current cost and subtracting any depreciation in its value.
Additional Living Expenses (ALE): Insurance companies reimburse homeowners up to 20% of the dwelling coverage amount when they must temporarily abandon the home for repairs following an accident. ALE pays for temporary housing, food, and other living expenses while homeowners and their families are living away from home.
Adjusted basis: The value of property after adding the value of any home improvements minus any depreciation in value.
Adjuster: The adjuster, employed by the insurance company, determines how much the company pays out for any claims. The adjuster does this by inspecting the damage to the home and by interviewing any witnesses.
Agent: The person from the company who sells insurance and deals with the public.
A.M. Best: A rating agency that gives scores on insurance companies detailing the company’s overall financial stability. This rating lets customers know the ability of the insurance company to pay on claims.
Application: The form customers fill out when applying for a home insurance policy. The insurance company uses the application form to decide whether or not to issue a policy and how much the policy costs.
Appraisal: When a home is damaged in an accident and a dispute occurs, an appraisal process takes place. During the appraisal process, the homeowner and the insurance company hire separate appraisers. In addition, a third appraiser is chosen by both parties to act as an umpire. The appraisers review the claim, with the umpire ruling on any disagreements. Any decisions the umpire makes on the loss amount are binding on all parties. The parties work together to come to an agreed-upon resolution to the claim dispute.
Binder: A temporary insurance policy that is put into place to provide coverage until a homeowner signs a permanent policy.
Cancellation: Cancellation is the termination of a homeowner’s home insurance policy before the renewal date by the homeowner or the insurance company.
Claim: When damage happens to the home or personal belongings within that home, a homeowner files a claim.
CLUE report: Insurance companies use a CLUE report to help determine which interest rate they give homeowners when they buy a house. The CLUE report contains a record of all of the claims homeowners and anybody living in their household have filed over the past seven years.
Contract: Homeowners sign a contract with the insurance company for the coverage they want. Also known as an insurance policy, the contract renews every year.
Declarations page: The declarations page shows all of the pertinent information dealing with a particular policy, including the name and address of the homeowner, the life of the policy, the premium amount, and what type and the amount of coverage the policy provides.
Deductible: The deductible represents the amount a homeowner must pay on a claim before the insurance company provides payment on a claim.
Depreciation: Depreciation represents the reduction in value of a property due to wear and tear over time.
Dwelling coverage: This is the main section of a home insurance policy. Dwelling coverage covers the home against damage or destruction from named perils within the policy, usually weather-related damage, fire, vandalism, and theft.
Earthquake insurance: Separate insurance bought to protect a home against earthquakes, which is usually an uncovered peril in a standard homeowners policy.
Effective date: The date on which a home insurance policy takes effect.
Endorsement: Any agreement attached to a policy that expands or limits the coverage or benefits provided by the policy. Also called a rider.
Exclusion: An exclusion represents a provision in a home insurance policy that limits or denies coverage for certain people, locations, or perils.
Expiration date: Whenever a home insurance policy is set to expire is known as the expiration date. Most policies last for a year and renew upon the expiration date.
First-party claim: When a homeowner files a claim against their policy, it is known as a first-party claim.
Flood Insurance: Separate insurance coverage bought to protect a home against flooding, a common non-covered peril in a standard insurance policy.
Grace period: A period of time during which a home insurance policy remains in force after the premium is due. The policy lapses on the day payment is due, but policyholders usually have 31 days to pay the premium amount before the policy is cancelled.
Inflation protection: Inflation protection automatically increases the home insurance policy limits to account for any changes in the cost to repair or rebuild the home due to inflation.
Insurance policy: Protection homeowners buy to protect their home. Homeowners pay a set amount in premiums for specified perils. Most insurance policies also include personal belonging protection and liability coverage for the property.
Insurance-to-value: How much of a percentage of the home’s value that the insurance policy pays for. As an example, if a home is worth $100,000 and the insurance policy only covers $80,000 of that value, then the policy has 80% insurance-to-value coverage.
Insured: The insured is the homeowner, also known as the policyholder. The home insurance protects the insured in the case of a claim or loss.
Lapse: A policy lapses when the premium is not paid by the end of the grace period. A lapse in coverage can result in policy cancellation.
Liability coverage: Liability coverage pays for bodily injury or property damage that occurs to another person—not the family occupying the home—or their personal belongings while they are on the property.
Limit of liability: The most an insurance company pays for a liability claim. Many policies have both a maximum amount of coverage per person and event that the policy pays out.
Loss: The amount an insurance company pays homeowners on a claim they file.
Loss history: The number of previous claims filed by a homeowner represent their loss history. Loss history serves as an indicator of the likelihood a homeowner will file a claim and plays a part in determining if an insurance company renews a specific home insurance policy.
Market value: The value of a home, including land, after taking depreciation into account.
Medical payments coverage: Insurance coverage that pays for the medical costs of anyone injured on the property. These payments happen automatically and don’t require the homeowner to cause the injury or for the injured person to sue the homeowner.
Named perils: Named perils include any perils listed as covered by the home insurance policy. For perils not named in the policy, homeowners need to purchase separate insurance for those perils. The most common non-covered perils include earthquakes and floods.
Non-renewal: Non-renewal happens when an insurance company decides not to renew a home insurance policy.
Other structures coverage: This section of the home insurance policy states the coverage for structure other than the home on the property, such as a detached garage, shop, or barn. Most often this coverage is limited to 10% of the total value of the policy.
Partial loss: Damage that occurs to the property, including possessions, that doesn’t result in a total loss. If the homeowner claims less than the limit on the policy, then they are only claiming a partial loss.
Peril: A peril represents a specific risk or loss covered by a home insurance policy. Home insurance policies cover specific perils, such as fire, windstorm, or theft. Many polices also include non-covered perils excluded from coverage under the policy.
Personal property: Any item that the homeowner owns that is either temporary or movable, including furniture, electronics, or other items.
Policy: The policy represents the contract between the homeowner and the insurance company.
Policyholder: The policyholder represents the homeowner who holds the individual home insurance policy. In addition, the policyholder pays the premiums on the policy and is the only person who can make changes to that specific policy.
Policy period: The length of time a policy is in force, extending from the effective date to the policy expiration date.
Proof of Loss form: The form homeowners fill out when making an insurance claim is called a Proof of Loss form. Insurance companies impose deadlines on the filing of this form, so homeowners should make sure to fill out the form before the deadline expires.
Property damage: Damage to the home or property.
Renewal: Insurance companies usually renew a policy upon its expiration date unless the homeowner or the company cancels the policy.
Replacement cost: The amount a home insurance policy pays to replace a structure or personal property damaged in an accident without taking into account depreciation. Insurance policies do have a maximum dollar amount they pay out, limiting this amount.
Return premium: The amount of the premium returned to a policyholder if the policy is cancelled or amended.
Risk: Risk represents the chance of loss from perils for a specific property, usually determined by geographical location.
Scheduled personal property coverage: Home insurance policy owners need to purchase scheduled personal property coverage to insure high-value items, such as works of art and jewelry. This insurance coverage is bought in addition to the normal personal property coverage of a home insurance policy.
Sprinkler insurance: Specialized insurance designed to protect the home or personal items if a sprinkler system installed in the home accidently goes off.
Third-party claim: A claim filed by an individual or company against another individual’s home insurance policy.
Total loss: A home is declared a total loss when the amount to repair the home is more than its current value.
Umbrella liability policy: An umbrella liability policy helps protect the home and personal belongings when the homeowner’s claim is more than their policy pays. Homeowners must purchase an umbrella liability policy separate from their main home insurance policy.
Underwriter: An employee of an insurance company who decides if an application from a homeowner is accepted. They also determines the premiums the homeowner must pay for the policy.
Underwriting: The process used by the insurance company to decide whether to accept or reject a policy based upon the amount of risk involved in insuring the property.
Understanding the above terms can help you purchase the home insurance you need. It can also assist you in determining whether you need additional coverage, such as earthquake or flood insurance, scheduled personal property coverage, or an umbrella liability policy.