What does home insurance cover?

If you're looking to purchase a home, you've probably thought about getting home insurance to give you financial protection should your home be damaged by unforeseen events.

However, we know deciphering product disclosure statements (PDS) to figure out what events you are and aren't covered for can be tricky. Here, we break down what most home insurance policies cover and don't cover so that you can be fully informed before you buy a policy.

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What is home insurance?

Home insurance covers you financially if your home is damaged or destroyed by 'insured events.' Insured events vary depending on the insurance company, but they are types of events that you will be covered for under your policy. We will explain what these events typically are in more detail in the next section of this article.

Home insurance coverage falls into two different categories: sum insured cover and total replacement cover.

Sum insured cover

The more common of the two, sum-insured home insurance covers property damage costs up to an amount decided by you. You can risk being underinsured with sum-insured coverage, because it is possible the amount you decide on will not be enough to cover the total cost to repair or replace your property.

Total replacement cover

As the name suggests, this form of home insurance covers the cost of rebuilding your property to the same standard that it was in prior to being damaged. This type of coverage reduces the chances of underinsurance occurring, but it is only offered by a few insurers and can be more expensive than sum-insured coverage.

What’s covered by home insurance?

As we've mentioned, home insurance covers damage to your home caused by insured events. These events are usually:

• Fire
• Storm (like cyclones or hail storms)
• Lightning
• Earthquake or tsunami
• Explosion
• Escape of liquid (like water from a burst pipe or leaking washing machine)
• Impact (like from a fallen tree or power pole)
• Damage by an animal
• Vandalism
• Riot
• Legal liability (usually for injury and death to others in connection to your property)
• Flood (however this is often an optional extra).

Home insurance will cover loss or damage to the building and its fixtures (like inbuilt lights or fixed cabinets) caused by these events.

In addition to these standard events, many insurers offer optional covers for extra events at an additional cost to you. These can include events like flood cover (if flood is not included as an insured event), motor burnout and accidental damage.

It is important to note that home insurance does not protect your personal belongings. These are protected under contents insurance, which you can often bundle with your home insurance. However, if you rent your home, you would only need contents insurance, as your landlord is responsible for insuring the building.

What’s not covered by home insurance?

All home insurance policies come with exclusions and limits, however these will vary between insurers. Some common exclusions include:

• Wear and tear/ gradual deterioration
• Maintenance costs
• Intentional loss or damage
• Loss or damage caused by rodents or vermin (like termites or rats).

Make sure to check your individual policy to see the full list of exclusions and limits that apply.

How is it calculated, and why do premiums increase?

The way home insurance is calculated is complicated and based on many variables. When you take out a home insurance policy, you'll pay a premium, which is simply the cost of your insurance coverage. Some of the many factors impacting the price of your home insurance premium are:

• The amount you insure your property for
• The excess you choose
• The location of your home
• The level of cover you choose with your insurer
• The construction materials and other characteristics of your home
• Any optional extras you have added to your policy
• The age of your property
• The age of the oldest person residing at your home
• How the home is used
• The cost of insurance claims paid to other customers by the insurer
• The cost of claims the insurer expects to pay in the future
• The cost of the insurer doing business.

So, if you see your insurance premium increases from one year to the next, it's hard to say exactly what could have caused this.

Regardless of which type of home insurance you choose, you need to be aware that all insurance policies have their own unique exclusions, limits, caps and clauses that then vary between insurance companies. When deciding on home insurance make sure that you shop around to find the best cover and pay close attention to each policy's PDS.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.