Securing homeowners insurance can be a complicated process, leaving homeowners fuzzy on the details. But independent agents can eliminate that cloud of confusion by providing their clients with the expert advice they need.
A 2020 Forbes Advisor survey found that 72% of homeowners don’t understand home insurance coverage. With a thorough understanding of homeowner insurance policies, coverages, and limitations, homeowners and independent agents can work together to find the right fit.
So let’s jump into this refresher on two of the most common homeowners policies offered through the Insurance Services Office (ISO)—Homeowners 3 - Special Form (HO-3) and Homeowners 5 - Comprehensive Form (HO-5)—and what makes them different.
At a glance:
- The differences between HO-3 and HO-5 insurance policies can significantly impact the wallet.
- And just as HO-3 and HO-5 policies are different, so are insurance providers.
- To provide your clients with comprehensive coverage, check out Openly for guaranteed replacement coverage and unique inclusions.*
Types of homeowners policies
Not all homeowners policies are created equal and can vary significantly by state and provider.
Generally speaking, homeowners insurance provides financial protection against disasters, burglaries, and accidents. Most policies include the same four basic coverages:
- Personal Property
- Other Structures
Both HO-3 and HO-5 policies provide coverage for personal property and liability, but there are some key differences that may affect a homeowner’s needs.
Standard HO-3 policy basics
HO-3 policies are the most common home insurance policies available. They provide broad coverage for the home, including its structure, contents and liability protection.
An HO-3 policy offers dwelling and other structures coverage on an open-perils policy. This means that with an HO-3 plan, policyholders will need to purchase additional coverage to protect against floods, earthquakes or other natural disasters that are specifically excluded. Personal property, however, is covered on a named-perils basis.
This type of policy is typically adequate for homeowners looking for basic protection at a reasonable cost.
Standard HO-5 policy basics
If a homeowner is looking for a home insurance policy that offers more protection, an HO-5 may be the right choice.
In a nutshell, an HO-5 policy is the most comprehensive home insurance policy available. It can also be more expensive, as the coverage is typically more expansive than an HO-3 policy.
An HO-5 policy is an open perils policy that offers a broad range of coverage for different types of hazards. However, like with an HO-3, homeowners will need to purchase additional coverage to prevent against floods and earthquakes, among other exclusions.
HO-5 policies are optimal for homeowners who want to protect their home and personal property against all risks that aren’t explicitly excluded in their policy. An HO-5 policy can be a good fit for homeowners with newer homes or those who have taken steps to ensure their homes are well-maintained and secure.
What’s the difference between an HO-3 and HO-5?
There are some significant differences between HO-3 and HO-5 policies that homeowners should be advised of before purchasing an insurance policy.
Let’s start with one of the basics: availability. HO-3 policies are offered to homeowners by most if not all home insurance carriers, but HO-5 policies are only offered by certain providers.
Under an HO-3 policy, personal property is typically covered under named-perils. When this is the case, the homeowner will only be reimbursed for damage or loss in cases where the event was specifically called out as covered in the policy.
With an HO-5 policy, personal property is covered under open-perils. This can mitigate the headaches that come with handling a claim.
Replacement cost vs actual cost value
Most (though not all) HO-3 policies pay out the actual cost value of personal property, while HO-5 policies are replacement cost policies, meaning they reimburse homeowners for the cost of replacing damaged or lost property at current market value. When an HO-3 policy reimburses actual cost value, it accounts for depreciation.
This distinction means that if the homeowner’s five-year old TV is damaged due to a fire, under an actual cost policy, the homeowner will only be reimbursed the amount a five-year old TV is worth in today’s market. With a replacement cost plan, the homeowner is reimbursed the amount it costs to replace their damaged TV at today’s sticker price.
A number of factors determine whether or not a homeowner qualifies for home insurance, and HO-5 policies typically have additional qualifications for homeowners to meet.
While both HO-3 and HO-5 policies can be denied for the same risks—such as the location and the age of the home—HO-5 policies often have more stringent restrictions for homeowners, such as a low number of claims and an above average credit score.
Which policy is the right fit?
The average cost of homeowners insurance is $2,779, based on a 2022 analysis by Insurance.com, so it is important that a homeowner gets the coverage they need at a price they can afford.
If a homeowner is more budget aware, or doesn’t have a lot of valuable personal belongings, an HO-3 policy may be the best fit. But if there is worry about the cost of replacing their belongings, or for those willing to pay a higher premium for more extensive coverage, an HO-5 policy can offer peace of mind.
Many homeowners don’t realize how much their insurance company will pay out for certain items. Consider an inventory of belongings to determine which policy is right.
Frequently asked questions
Q: How do HO-3 and HO-5 policies differ in terms of coverage?
HO-3 policies typically provide coverage for a specific list of named perils, meaning only those risks listed in the policy are covered. In contrast, HO-5 policies often offer broader coverage by protecting against all perils unless explicitly excluded. This means HO-5 policies generally provide more comprehensive protection against a wider range of potential risks.
Q: Are flood damages covered under HO-3 and HO-5 homeowners insurance policies?
Generally, both HO-3 and HO-5 policies do not include flood insurance as a covered peril. Homeowners seeking protection against flood damage typically need to purchase separate flood insurance. It's important for homeowners to consider their specific needs and risks, especially if located in flood-prone areas.
Q: What is the difference between dwelling coverage in HO-3 and HO-5 policies?
Dwelling coverage in both HO-3 and HO-5 policies is designed to protect the physical structure of the home. However, the HO-5 policy often provides more extensive coverage, including a broader range of perils and potentially higher limits, depending on the specific policy terms.
Q: Does personal liability coverage vary between HO-3 and HO-5 policies?
Personal liability coverage, which protects homeowners against lawsuits for injury or property damage caused to others, is typically included in both HO-3 and HO-5 policies. However, the extent and limits of this coverage can vary, so it's essential to review the specific terms of your policy.
Q: Can I enhance my HO-3 or HO-5 policy with additional coverages for specific risks?
Yes, both HO-3 and HO-5 policies can often be supplemented with additional coverage options, or endorsements, to cover specific risks not included in the standard policy. This could include additional protection for high-value personal property, extended coverage for other structures, or increased liability limits, depending on the homeowner's needs and risk management strategy.
* The above is meant for general informational purposes. This information is not an insurance policy, does not refer to any specific insurance policy, and does not modify any provisions, limitations, or exclusions expressly stated in any insurance policy. Please refer to the policy and declaration page for complete coverage details. Such terms may vary by state and exclusions may apply.