Homeowners policies are all about risk-sharing

Homeowners policies are like homeowners: They come in many sizes and shapes. Some are long on coverage and short on paperwork, and others quite the opposite. So becoming familiar with the sometimes subtle provisions of homeowners policies is a good idea for anyone who owns a home or is thinking about buying one.

The whole idea behind homeowners insurance is to share the risk of a home investment. When a person buys a home, he is buying a physical asset as well as a functional one: The house might be pleasant to the eye, but it also gives the owner a place to sleep and wash up and eat. The loss of the house means both financial and practical dislocation.

Homeowners policies seek to lessen the risk of a homeowner losing his home and his investment. They are structured in such a way that an insurer can reasonably expect to make money from policy premiums more often than he loses money by paying a claim to policyholders. For this reason, high-risk properties are not popular with insurers.

The risk factor is a part of every provision in homeowners policies. The chances of loss are actuarially computed and a premium attached to a provision that reflects the risk faced by the insurer. For example, if a homeowner has a houseful of priceless antiques and avant garde paintings, the provision for the home’s contents will reflect its dollar value.

Homeowners policies offer some features (such as fire loss) and don’t offer other features (such as flood loss) because of risk considerations.  Fire risk can be controlled somewhat by smoke alarms, a nearby fire hydrant, and relatively low flammability construction materials such as stone. Not so a beach house, which always is at risk of being swamped.

So homeowners policies vary, but all are designed to share the risk of replacing a destroyed or damaged home. While both homeowner and insurer are interested in the risk-sharing, the devil is in the policy details. Homeowners should decide how much financial risk they want to take and look for an insurance provider willing to take the rest.