According to the National Association of Insurance Commissioners, only 5% of homeowners in the US are insured under an HO-2 insurance policy. HO-2 insurance was more popular in the past decades, but recently major insurance companies have started offering two basic insurance types: HO-3 and HO-5. If your insurance company is offering an HO-2 plan, this guide will help you understand the coverage it provides you and how it compares to an HO-3 plan (the most popular homeowner insurance policy).
- HO-2 is a broad form policy covering 16 different perils.
- Not as comprehensive as standard HO-3 homeowners policies, as it provides only named-peril coverage.
- Provides more coverage than HO-1 by including personal property, loss of use, personal liability, and medical payment to others coverages
What is HO-2 homeowners insurance?
In today’s housing environment, an HO-2 policy is rarely ever implemented. It is far less utilized than the most common type of coverage, an HO-3, which is the standard policy homeowners purchase to insure themselves.
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HO-2 home insurance policies are broad form in their coverage, albeit not as broad-ranging as an HO-3 policy. The reason for this is that HO-2 policies outline the specific perils that would be covered under it.
There are two sections to the HO-2 policy: Section 1 – Property Coverages and Section 2 – Liability coverages. Under Section 1 there are five subsections: Coverage A – Dwelling, Coverage B – Other Structures, Coverage C – Personal Property, Coverage D – Loss of Use, and Additional Coverages.
Under Section 2 there are two subsections: Coverage E – Personal Liability and Coverage F – Medical Payment to Others. Below is a list of what each subsection is meant to cover.
Section 1 – Property Coverages
- Coverage A – Dwelling: covers the home’s structure itself along with anything that is built into the house
- Coverage B – Other Structures: covers detached structures meaning structures that are not the home itself nor built into the house (barns, sheds, etc.)
- Coverage C – Personal Property: covers your personal belongings within the house (jewelry, furniture, electronics).
- Coverage D – Loss of Use: covers the cost of any additional living expenses incurred as a result of damage to the home (the costs of staying in a hotel while your home is being repaired due to fire damage).
- Additional Coverages: extend the basic coverage. Examples of additional coverages are earthquake and flood insurance coverages.
Section 2 – Liability Coverages
- Coverage E – Personal Liability: covers any legal or medical bills a homeowner may be liable for if held responsible for an injury or damage to the personal property of someone else who is on the homeowner’s property.
- Coverage F – Medical Payment to Others: covers the medical payments of a guest in the home who is injured, no matter who is found to be at fault.
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What are the covered perils in an HO-2 home insurance policy?
There are 16 specifically named perils that are covered in HO-2 policies.
These are the only perils that would lead to a covered loss under the policy. They are listed below.
- Fire/lightning
- Windstorm/hail
- Explosions
- Riot/civil commotion
- Aircraft
- Vehicles
- Smoke
- Vandalism
- Theft
- Falling objects
- Weight of ice, snow, sleet
- Accidental discharge or overflow of water or stream. This could be damage caused by the sprinkler system, plumbing, water heater, etc.
- Sudden and accidental tearing apart, cracking, burning, or bulging of a built-in appliance. This could be damage to a water heater, centralized air conditioner, or other appliance.
- Freezing
- Sudden and accidental damage from an artificially generated electrical current.
- Volcanic eruption
It is important to note that if a homeowner would like something other protection that is not listed above, they would be required to purchase separate insurance coverage that insures for that specific peril or look at a different homeowner’s policy.
Another important note is that insurance companies differ in how they determine a claim was actually caused by a peril that is covered under their policy. Homeowners should understand their company’s claim process.
What do HO-2 policies exclude?
HO-2 policies generally exclude coverage of any peril that is not specifically named in the policy. For example, things like:
- Earth movement. Any damage caused by earthquakes will not be covered.
- Flood damage. Home flooding caused by sewer backups, water seeping from the ground, or storms will not be covered.
- Power failures. Accidental power failures will not be covered under HO-2 policies.
- Construction theft. If the home is stolen from while it’s under construction, the damage won’t be covered.
- Absentee vandalism. If the home is vacant for more than 60 days, vandalism and mischief damages are not covered.
- Mold or fungus. Any structural damage to the home not caused by an overflow of water is not covered.
- Rust or corrosion. Structural damage to the metal structures of the home is not covered.
- Structural changes. Any bulging, expanding, shrinking, or settling parts of the structure of the home are not covered.
- Animal damage. Any damages caused by animals such as house pets, birds, or rodents are not covered.
- Water damage from water seeping out of the ground
- Nuclear hazards.
- War
- Government Action or laws
- Wear and tear
- Animals owned by the homeowner
The list goes on and on. Only a named peril in the policy will be covered.
HO-2 Vs. HO-1 homeowners policies
The main difference between HO-1 and HO-2 homeowners insurance is that HO-2 plans provide coverage for 6 additional perils: They’re both similar in the sense that they’re ‘named-perils’ policies which means you’re only insured for the perils listed on your policy. Losses that occur outside the list of perils are not covered by the insurance company.
HO-1 Policies
- Provide dwelling and other structures coverages for 10 named perils: fire damage (lightning included too), storm damage (wind or hail), aircraft damage, explosion damage, civil disturbance/riots/protest damage, smoke damage, vehicle damage (as long as the homeowner is not at fault), robbery and theft damage, vandalism damage, and volcanic eruption damage.
- HO-1 policies usually do not include personal property, loss of use, personal liability, and medical coverages.
HO-2 Policies
- Cover your property for 6 additional perils: falling objects, water damage, snow damage, heater damage, electric current damage, and pipe damage.
- HO-2 policies include personal property, loss of use, personal liability, and medical payment to others coverages.
HO-2 policy vs. HO-3 policy
HO-3 is the most popular type of home insurance in the USA. It is used by about 80% of homeowners. Let’s compare the HO-2 policy to the more commonly used HO-3 policy.
HO-2 Policies
- Named perils policy – meaning only the specific perils listed in the home insurance policy are covered.
- The burden is placed on the insured to prove that damage to the property was caused by one of the named perils.
HO-3 Policies
- Open-peril policy – meaning that every peril not specifically excluded in the policy will be covered.
- The burden of proof is placed on the insurer to prove that damage to the property isn’t caused by one of the specifically excluded perils.
- Personal property in the home is covered against perils that are named within the policy.
Frequently Asked Questions
Does HO-2 cover floods?
No, HO-2 policies do not cover floods. Most homeowners’ policies do not cover floods. A separate flood insurance policy would have to be added on by the homeowner if they would like to be covered in the instance of a flood.
Does HO-2 satisfy lender requirements for homeowners insurance?
Possibly. Most lenders will accept the policy as satisfactory for meeting their requirements, but every lender has their own standards that they abide by. Some lenders may require at least an HO-3 policy. It is important for homeowners to check with their lender to determine which policy they would need to have.
When does it make sense to utilize an HO-2 policy?
As can be seen above, there are some major differences between the two policies. Because of the more encompassing nature of the HO-3 policy, it is by far the more popular insurance purchased by homeowners. There are instances, however, when HO-2 may make more sense. The most common example is in the case of an insured owning a mobile home.
How much does an HO-2 policy cost?
While the cost of a homeowners insurance policy can vary wildly by state and city, according to Bankrate.com, the national average cost for all homeowner’s insurance is $1,428 per year. The cost of an HO-2 policy is slightly less than that average because it is less comprehensive than the standard HO-3 policy. It is important to note that different sources report different average home insurance cost in the USA. According to data accumulated by the National Association of Insurance Commissioners in 2019, the national average cost is around $1,131 per year.
In Summary
HO-3 policies provide more protection to the homeowner, therefore making it the more common choice as the insurance policy homeowners choose. It is the standard of the industry, thus making HO-2 policies a little used insurance, but one that still serves a purpose in specific instances like the mobile home example above. The utilization of HO-2’s today is somewhere in the 5% range.
There are major differences in the coverage of each form of homeowner’s insurance. Keep in mind that an HO-2 policy is a NAMED perils policy. That means that a peril must be specifically listed in the policy in order to be covered. If it is not explicitly listed, it will not be covered if damage occurs and the company won’t pay.
It is a good idea in many cases to look at several options for homeowners insurance. HO-2 insurance may make sense for you in your circumstance. It is also important to look at options available across insurers as they may differ in cost and claims process.
