With hundreds of homes already destroyed in the Waldo Canyon area of Colorado, American homeowners are being reminded of just how important home insurance is.

“There’s a lot of houses in harm’s way,” RiskMeter’s founder Dan Munson said. “My gut says they’re going to lose a lot of houses in this.”

An estimated 20K residences and 160 commercial buildings are currently at risk, with more than 32,000 people already having been evacuated from the area and 18,500 acres already consumed in flames.

Munson believes that the newest wildfire in the area could exceed the damage caused in Colorado’s High Park Fire which destroyed 257 homes and has cost $33.1 million to date.

Though it’s too early to make any estimates on the insured losses thus far, it’s clear to see that millions of dollars will likely be paid out to those homeowners who have appropriate coverage. For those who don’t have appropriate coverage, the Waldo Canyon Fire can be the most devastating event in their life.

Most homeowners insurance will cover what are called “all risks” or “named perils”, with one of the perils covered being “fire” (in addition to hail, windstorm, and other direct physical losses). If you have “all risks” covered in your homeowners insurance policy, then that should cover all perils except for any that may be notably excluded in your policy. As a general rule, “all risks” policies will cover homeowners on a grander scale than a “named perils” policy. Here’s a simple breakdown of what each type of homeowners insurance looks like:

When shopping for homeowner’s insurance, be aware of the different forms of home insurance so that you aren’t tricked into purchasing a cheaper policy but has a lot less coverage or protection—that can end up being a complete loss of your most valuable asset if you experienced something like the Colorado wildfires.

  1. Basic Form-HO1
    • The HO1 Basic Form has limited protection that includes fire, lightning, vandalism, theft, and malicious mischief.
    • Sometimes this form only will cover Actual Cash Value (ACV) of your home instead of replacement cost, which means if your home is older the insurance company may depreciate the payment amount.
  2. Broad Form-HO2
    • The HO2 Broad Form includes the losses named in the HO1 Form and also includes coverage for falling objects, water damage from pipes or utilities, ice/snow damage, and electrical surge.
    • Unless you specifically ask for reduced coverage, this form typically is for replacement cost of your home. You will get up to 150% of the full cost to build your home, depending on your state’s guidelines and your choices.
  3. Special Form-HO3
    • The HO3 Special Form provides much more extensive coverage called “All-Risk”. Unless there is a stated exclusion on your policy, it is covered. Your personal belongings will have broader protection.
    • This coverage is a little more expensive than the other two, but if you want to have the best protection, this is it.

Once you’ve figured out what kind of coverage you need and what form you’ll have your policy written under, it’s helpful to understand how homeowner insurance rates are calculated so you know in the future how claims will impact your premium and also how you can get the rate down.

Your homeowners insurance premiums are impacted by:

  • Any claims in the past three to five years.
  • If your home has a high dwelling replacement cost you’ll pay more than someone with a lower replacement cost policy.
  • If you live in an area susceptible to storms, flooding, tornados, wildfires, or hurricanes, you’re likely to have higher rates.

If your rates are significantly impacted by any of the above scenarios, it may make sense to increase your deductible to save on annual premium. Just make sure you set aside the deductible amount in a savings account in case of a claim. If you do increase your deductible, your premium will be lower– however, if you don’t save much by increasing your deductible or if you don’t have the savings set aside for higher deductibles, it doesn’t make sense to do so and you’re better off paying more in premium and being responsible for a smaller amount in the event of a claim.

As you can see, there’s a big difference between homeowners insurance policy options. Don’t be tricked into buying a cheaper policy that gives you far less protection though—paying a slightly cheaper premium certainly isn’t worth it. Make sure you’re getting the best protection for your insurance dollar.

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