
Homeowners insurance. You know you should probably have it, and if you have a mortgage, you’re required to have it. But how much do you know about it beyond that – what it covers (and does not cover), the types of policies, how much coverage you need? What happens in case of minor damage from a storm, or even something as rare as fire damage? If you’re not familiar with these things, you may very well be overpaying and/or be underinsured. To help you out, we’ve put together this homeowners insurance guide for homebuyers in Ohio.
Homeowners Insurance Overview
Homeowner’s insurance is a safety net. It will “compensate you if an event covered under your policy damages or destroys your home or personal items. It will also cover you in certain instances if you injure someone else or cause property damage.”
The three main functions of this insurance are to…
- “Repair your house, yard and other structures.
- Repair or replace your personal belongings.
- Cover personal liability if you’re held legally responsible for damage or injury to someone else.”
There are three basic levels of coverage with homeowner’s insurance – actual cash value, replacement cost, and extended replacement cost/value. In addition, “[p]olicy rates are largely determined by the insurer’s risk that you’ll file a claim.” This risk is assessed on the basis of “past claim history associated with the home, the neighborhood, and the home’s condition.”
Types of Policies
There are several types of homeowner’s insurance (also called “policy forms”), with some providing more coverage than others. The most common policy types are . . .
HO-1 AND HO-2
The least popular types of homeowners insurance policies, HO-1 and HO-2, provide the most limited coverage and are rarely chosen today. These policies only pay out for damage caused by specific, named perils listed within the policy. Together, these two options represent approximately 8% of all homeowner insurance coverage in the United States.
HO-2 insurance, also called a broad form policy, is more common than HO-1. It typically covers your home and personal belongings against 16 named perils, such as fire, theft, vandalism, and windstorms. However, if the damage is caused by anything outside of these listed perils, the policy won’t provide any compensation.
HO-1 insurance, which is no longer widely available, is considered the most basic form of home insurance. It offers coverage for only a small list of perils, usually fewer than those covered by HO-2. This form is often not accepted by lenders and is generally not recommended for most homeowners due to its limited protection.
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HO-3
HO-3 insurance policies, commonly referred to as the “special form”, are by far the most popular option for owner-occupied homes, accounting for nearly 80% of all policies sold. This type of coverage strikes a good balance between cost and protection, making it ideal for the average homeowner.
If you have a mortgage, your lender will likely require at least an HO-3 level of coverage. HO-3 policies provide “open peril” protection for the structure of your home, meaning they cover any type of damage unless it’s specifically excluded (like floods, earthquakes, or war). For your personal belongings, however, the policy usually only covers losses from 16 named perils, similar to HO-2—unless you purchase a rider or additional coverage.
HO-3 policies are ideal for homeowners who want broad protection without paying for a top-tier plan. You can often customize this policy with endorsements to fill in coverage gaps.
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HO-5
The HO-5 insurance policy, often marketed as comprehensive form or premier homeowners insurance, offers the most inclusive coverage available on the market. This type of policy protects both your dwelling and personal belongings from all perils except those explicitly excluded—making it an “open peril” policy for everything, not just the structure.
HO-5 policies typically include higher limits, replacement cost coverage, and fewer restrictions on claims. They’re best suited for high-value homes or properties located in low-risk areas, such as those with minimal exposure to flooding, crime, or natural disasters. This level of coverage may not be offered by all insurers and often requires that the property meet certain eligibility criteria.
If you own a newer, well-maintained home and want top-tier insurance with robust protection, HO-5 may be the right choice for you. It ensures that unexpected damage to your property or possessions is far less likely to leave you with out-of-pocket expenses.
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Replacement Cost, Actual Cash Value, and More
You also need to be aware that “[i]fyour home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your payout could differ depending on the cost to rebuild and the coverage you chose – and much of it will be paid directly to contractors rebuilding your home, in many cases.”
Concerning this, here are some things you need to consider when deciding on coverage:
REPLACEMENT COST
Replacement cost insurance provides coverage that pays the amount required to completely rebuild your home, even if the cost exceeds your stated policy limits. This is particularly important in areas where construction and labor costs have risen significantly. For example, if your home was insured for $300,000 but rebuilding after a disaster costs $350,000, this policy may cover the difference—protecting you from being underinsured during a crisis.
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ACTUAL CASH VALUE
Actual cash value (ACV) coverage reimburses you for the depreciated value of your property. That means your payout is based on what your damaged or lost items are worth today—not what it would cost to buy them new. While ACV is rarely used for covering the structure of the home, it’s a common option for personal property like electronics, furniture, and appliances.
For example, if your 10-year-old sofa is damaged in a fire, ACV coverage would pay you what that sofa is worth now—not the price of a brand-new one.
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FUNCTIONAL REPLACEMENT COST VALUE
Functional replacement cost (FRC) coverage is a budget-friendly alternative for older or historic homes. It pays to repair or replace damaged parts of your home using more modern, cost-effective materials. For instance, if original plaster walls are damaged, they may be replaced with drywall, which is less expensive but still serves the same purpose.
FRC is ideal for homeowners who want solid coverage without the high premiums associated with true historical restoration.
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REPLACEMENT COST VALUE
Replacement cost value (RCV) coverage pays to rebuild or repair your home using materials that are of “like kind and quality” to what was originally used. Unlike FRC, this means if you had high-end finishes like plaster or hardwood, those same types of materials would be used again—not downgraded alternatives.
However, it’s important to note that this policy won’t cover costs beyond your stated dwelling limit, so you’ll need to ensure your home is insured for its true rebuild value.
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EXTENDED REPLACEMENT COST VALUE
Extended replacement cost coverage offers a buffer above your policy limits, typically 10% to 25% more, to protect you from unexpected rebuilding expenses. This cushion can help absorb cost increases from supply chain issues, labor shortages, or spikes in material prices.
For example, if your policy limit is $400,000 and construction costs rise post-disaster, an extended policy might provide up to $500,000 in coverage—ensuring you’re not stuck with out-of-pocket costs.
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GUARANTEED REPLACEMENT COST VALUE
Guaranteed replacement cost (GRC) coverage is the most robust protection available. It guarantees to cover the full cost to rebuild or replace your home, no matter how much it ends up costing—even if it far exceeds your policy limits. This option is highly recommended in areas prone to natural disasters, where construction costs can surge unexpectedly.
However, not all insurance companies offer this level of coverage, and it may require an in-depth home appraisal and inspection.
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Determining Amount of Coverage Needed
Now, you need to determine exactly how much coverage you need from your homeowner’s insurance. You’ll need enough coverage to rebuild/repair your home in the case that is destroyed or severely damaged. You can estimate the cost to rebuild by multiplying your home’s square footage by per-square-foot local construction costs. YourOhio agent can also provide some guidance here. Just call937-998-4239 to find out more.
What you shouldn’t do is “focus on what you paid for the house, how much you owe on your mortgage, your property tax, or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.”
When it comes to your belongings, your personal property, “you’ll generally want coverage limits that are at least 50% of your dwelling coverage amount, and your insurer may automatically set the limit that way.” You can, however, lower the limit or purchase more coverage if you need to/
With respect to the liability limit, experts advise having a “limit at least high enough to cover your net worth,” including “savings, investment accounts, and other assets, minus auto loans, credit card balances, and other debts.”
Cost of Homeowners Insurance
So what does homeowner’s insurance cost? The national average is about $1,600 per year, but this is an average and individual prices can be much higher or lower. In addition, your credit score can also affect the cost of your insurance.
And then there’s the deductible – the amount you have to pay out of your pocket before the insurance kicks in. Here are the two main things to keep in mind when choosing your policy’s deductible:
- A higher deductible will reduce your premium, but you’ll pay a lot more when you file a claim.
- With a lower deductible, you’ll pay a higher premium, but will pay a lot less out of your pocket for a claim.
When It’s Time to Buy
Ultimately, homeowners insurance isn’t a luxury – it’s a necessity. But there are so many influencing factors and available options, it’s difficult to know what kind of policy and coverage is right for you. An experienced Ohio agent can provide valuable assistance in many of these areas. We suggest that Ohio home buyers trying to untangle the homeowner’s insurance puzzle, contact us today at 937-998-4239.