Homeowner’s insurance protects the major investment you’ve made in your home. Unless you have an extremely high tolerance for risk and deep pockets, this type of insurance is essential. Unlike auto insurance, you aren’t required to buy home insurance in Canada. That said, you usually can’t get a mortgage without it.
Here’s an overview that will help you make the right choice and ask relevant questions when you’re looking for home insurance.
What’s the difference between home insurance and mortgage insurance?
Before we get into how home insurance works, let’s clear up a potential cause for confusion. If you’ve recently purchased a home, you may have bought mortgage insurance.
Home insurance and mortgage insurance are two different kinds of insurance policies. If your down payment on a home is under 20%, a bank won’t give you a loan unless you purchase the latter. This insurance protects the lender if you can’t make your monthly payments. In short, home insurance protects you, but mortgage insurance protects the bank.
How does home insurance work?
The basics will be familiar if you’ve purchased other kinds of insurance. You pay an insurer what is called a premium in exchange for coverage, which is financial protection for potential losses. If you suffer damages, you file a claim and receive a settlement. When you select a policy, you choose a deductible, which sets the amount of out-of-pocket expenses you’ll pay before the coverage kicks in.
If you’re shopping for home insurance for the first time, here’s the surprising part: the term home insurance is somewhat of a misnomer. It covers much more than what the name might lead you to expect.
What is covered?
Personal property
Yes, this type of insurance protects the physical structure of your home. But beyond that, it should also cover other structures on your property—sheds, pools, garages and so on. Plus, it protects belongings inside your home, such as furniture, appliances, electronics, and musical instruments. It usually extends to items inside your car, even if the loss occurs when it’s away from your house.
Additional living expenses (ALE)
Home insurance also generally protects you from the significant costs incurred when your home undergoes damage that makes it unliveable. That’s where your policy’s ALE clause comes in. So sorry, it’s not protection against skunky beer or ale theft (though admittedly such misfortunes can make life almost unliveable for some people).
ALE stands for additional living expenses. This coverage is a standard part of most home insurance plans. If you lose the use of your home due to an accident or mishap or you’re ordered to evacuate because of an oncoming natural disaster, you’ll be glad to have it.
ALE clauses cover the extra expenses you incur in such situations, including the following:
Temporary housing
Fees for storage units
Food
Transportation
Boarding costs for pets
Rent that you could have collected from a tenant
Laundromat expenses
Liability coverage
Perhaps you’ll be surprised to learn that home insurance provides personal liability coverage. This protects you from damage done to other people or their property because of your actions or incidents that happen on your property.
Did your budding major leaguer accidentally hurl a curveball through your neighbour’s French doors? Rest easy: you’re covered. Did your adorable puppy take a chunk out of the mailman? Your insurance company will probably take care of his medical expenses too.
To learn more:
What homeowner’s insurance covers
What are the limits of coverage?
Although homeowner’s insurance may cover more than what you might initially think, there are limits. The distinction between predictable and unexpected events often sets them.
Home insurance protects your home from what the industry calls perils—events or forces that damage your home, property or people on your property. Normal wear and tear are the domain of warranties, not home insurance. Predictable issues—leaky roofs, fading paint, damage caused when you neglect to fix leaking pipes—also are not covered.
For personal liability, you won’t be protected against the results of voluntary actions. So no, your insurance company won’t pick up costs for the not-exactly unexpected injuries to members of your basement fight club. In the same vein, certain bite-prone dog breeds can be excluded from coverage (no matter how sweet your pit bull is).
Limits placed by policy type
The type of home insurance policy also puts limits on coverage.
A standard policy states the risks covered. If a risk isn’t included, you won’t receive a settlement. It can also be called a named perils or basic policy.
A comprehensive policy is the opposite: it covers risks unless they are specifically excluded. It can also be known as an all-perils, broad form or special policy.
A Broad policy, aka broad form policy, is a blend of the two. It covers all risks to your home except for named exclusions. But your belongings are only protected against risks enumerated in the policy.
No-frills or basic form coverage can be an option for rustic hunting cabins, cottages or camps. It’s a bare-bones insurance that only covers a limited number of items.
Other exclusions
Property used in businesses and side hustles
Keep in mind that items used for business or side gig might not be covered under your homeowner’s insurance policy. You may need to purchase additional insurance.
The same goes for liability for business activities carried out on your property. If you’re a message therapist with a home studio, you might not be covered if a client slips on an ice patch in your driveway. To avoid that kind of mishap, spread some sand over the ice and then add some business-related coverage.
Valuables
Is your mountain bike worth more than your car? Do you have a wine cellar full of vintage wines? An extravagant jewelry collection? Trunks full of cash? If you said yes to all those questions, way to go! Also, you should know that many insurers have caps on such items. You may need what is called a floater—additional coverage for high-end, expensive possessions.
Choose the right coverage for your needs
Now that you know the lay of the land, you’re ready to start your search for homeowner’s insurance. Companies offer many different policies, so be sure to discuss the details with an insurance broker or agent before your purchase.