Compare HO-2, HO-3, HO-5 and HO-8 Homeowners Forms

Introduction

"HO" is insurance shorthand for a homeowners policy. The number after it names a standard policy form, meaning a pre-written set of policy wording. Each form answers two different questions about a loss:

1. Is the cause covered? This is the form's peril basis. A peril is a cause of loss, such as fire or windstorm.
2. How much is paid? This is the form's loss settlement rule, which is the method for putting a dollar value on the damage.

Two forms can give the same answer to the first question and different answers to the second, or the reverse. Keeping the two questions separate is the skill this lesson builds.

This lesson reads specimen forms, which are sample copies that show a form's standard wording. A real policy can use a different edition or add changes, and its actual wording controls.

What you'll be able to do

• Explain how HO-2 decides whether a cause is covered for the house, other structures and belongings, and where its coverage stops.
• Explain why HO-3 can cover a cause for the house but not for the belongings damaged in the same event.
• Compare HO-5 with HO-3 for both the house and belongings, without confusing broader causes with higher valuation.
• Recognize when an HO-8 form may be relevant and work through how it values building damage differently.

Before you start: You should be able to sort a loss into the right coverage part, as taught in Map a homeowners loss to the right coverage. As a quick reminder:

• Coverage A is the dwelling, meaning the house itself.
• Coverage B is other structures, such as a detached garage or shed.
• Coverage C is personal property, meaning your belongings.

Two ways a form can decide whether a cause is covered

Named perils means the form lists covered causes, and only those causes are covered. If the cause is not on the list, there is no coverage. A loss is covered only if its cause appears on the list and no exclusion removes it.

Open perils means every cause of direct physical damage is covered unless the policy specifically removes it. The forms word this as insuring "against risk of direct physical loss." An exclusion is a policy provision that takes a cause or situation out of coverage.

Each approach asks a different question:

• Named perils asks: Is this cause on the list?
• Open perils asks: Does anything in the policy take this cause away?

Open perils does not mean everything is covered. In the HO-3 specimen, for example, the open-perils coverage for the house does not cover wear and tear, rust, settling and cracking of foundations, damage by birds, vermin, rodents or insects, and several other listed causes.

Check: A form covers the house on an open-perils basis. Mice chew through wiring inside the walls, and that form excludes damage by rodents. Is the wiring damage covered?

HO-2: a list of covered causes for the house and the belongings

The HO-2 specimen is titled the Broad Form. It uses named perils for Coverages A, B and C. The house, other structures and belongings are all covered only for the causes on its list, unless an exclusion applies.

The list begins with:

• fire or lightning
• windstorm or hail
• explosion
• riot or civil commotion
• aircraft
• vehicles
• smoke

Nevada's consumer guide describes HO-2 as also including causes such as falling objects like trees, and accidental overflow of water from plumbing, heating, air-conditioning or household appliances.

"Broad" has limits

The word "Broad" is the form's title. It does not mean HO-2 covers every accident. Each named peril also carries its own fine print. Two examples from the specimen show this:

• Windstorm. The windstorm peril does not cover rain, snow, sleet, sand or dust that damages the inside of the building or the belongings in it, unless wind or hail first damages the building and creates an opening in a roof or wall that lets the rain or other material in.
• Vehicles. The vehicles peril does not cover damage to a fence, driveway or walk caused by a vehicle owned or driven by someone who lives at the home.

Worked example: same storm, different opening

Dana has an HO-2 policy. During a windstorm, rain blows through a window Dana left open and soaks the living-room couch.

1. Name the cause. Rain came in during a windstorm.
2. Check the list. Windstorm is named, but the peril excludes rain entering the building unless wind or hail first created an opening in a roof or wall.
3. Apply the fact that matters. The opening was a window Dana left open. Wind did not create it.
4. Conclusion. The windstorm peril does not cover the soaked couch.

Change one fact. Suppose the wind tears a hole in Dana's roof, and rain pours through that hole onto the couch. Now the wind created the opening in the roof, so the rain damage falls within the windstorm peril.

The storm is the same in both versions. Only the way the water got in changed, and that one fact changed the answer.

How HO-2 values the damage

Once a cause is covered, the loss settlement rules decide how much is paid. The HO-2 specimen values belongings and buildings differently.

Belongings (Coverage C) are paid at actual cash value.

• Actual cash value (ACV) is what the item was worth at the time of loss, considering its age and wear. It is not the price of a brand-new item.
• Depreciation is the loss in value from age and wear.
• The payment is also capped at no more than the amount needed to repair or replace the item.

Buildings (Coverages A and B) are paid at replacement cost without subtracting depreciation, but only if the form's conditions are met.

• Replacement cost is what it costs to repair or replace the damaged part with material of like kind and quality.
• The conditions include carrying insurance on the building of at least 80% of its full replacement cost.
• Unless the loss is small enough to fit a stated exception, the insurer pays no more than ACV until the repair is actually completed.

For how ACV is figured, see Value damaged property correctly. For the 80% calculation, see Calculate deductibles, limits and coinsurance.

Example. In the roof-hole version of Dana's storm, assume these figures and ignore the deductible:

• A new couch like Dana's costs $2,000. The six-year-old couch's ACV is $900. The couch is personal property, so it is paid at ACV: $900.
• The roof repair costs $8,000 with like-kind materials, and Dana meets the building conditions. The roof is part of the dwelling, so it is paid at replacement cost: $8,000, with no deduction for depreciation.

Check: Under HO-2, a kitchen fire damages the built-in cabinets and the dishes inside them. Which coverage applies to each, is the cause covered, and how is each valued? Assume the building conditions are met.

HO-3: house covered unless excluded, belongings only for listed causes

The HO-3 specimen is titled the Special Form. It mixes the two approaches:

• Coverages A and B (house and other structures): open perils. Every cause of direct physical damage is covered unless the policy excludes it.
• Coverage C (belongings): named perils. Belongings are covered only for the listed causes. Nevada's consumer guide describes these as the same perils provided under HO-2.

HO-3 uses the same loss settlement approach as HO-2: buildings at replacement cost if the conditions are met, and belongings at ACV.

Worked example: one spill, two answers

Luis has an HO-3 policy. A child knocks over a can of paint, ruining part of the hardwood floor and an area rug.

Policy assumption for this example: Luis's policy does not list this cause as a named peril for belongings, and no exclusion applies to the floor damage.

1. The floor is part of the house, so Coverage A applies. Coverage A is open perils, and by our assumption nothing excludes this cause. The floor damage is covered.
2. The rug is personal property, so Coverage C applies. Coverage C covers only listed causes, and this cause is not listed. The rug is not covered.

The tempting mistake is to reason, "The house is covered for this cause, so everything damaged in the same accident is too." The open-perils promise in HO-3 is written only for property described in Coverages A and B. It does not extend to belongings. The rug is judged by the Coverage C list alone.

Change one fact. Suppose a fire, rather than a paint spill, damages the floor and the rug. Fire is a named peril for belongings, so now both the floor and the rug are covered. The rug is still valued at ACV.

Check: Under HO-2, the same stipulated paint spill damages the floor. Is the floor covered?

HO-5: belongings covered unless excluded, too

The HO-5 specimen uses open perils for Coverages A, B and C. The house, other structures and belongings are all covered for any cause of direct physical damage unless the policy excludes it. Nevada's consumer guide notes that HO-5 is not offered by all companies.

Apply it to Luis's spill. Under the HO-5 form, Luis's rug is no longer judged against a list. The question becomes whether anything excludes the cause. By our stipulation, nothing does, so under HO-5 the rug would be covered along with the floor.

Exclusions still apply to every coverage

The HO-5 specimen applies its exclusions to Coverages A, B and C. One example is damage from freezing of a plumbing or heating system or a household appliance. This damage is not covered unless the owner used reasonable care to maintain heat in the building, or to shut off the water supply and drain the systems and appliances. A building with an automatic fire sprinkler system has its own reasonable-care requirement.

Suppose Priya leaves a Reno house unheated in winter without shutting off the water, and a frozen pipe bursts, soaking the walls and a bookcase. Under HO-5, this freezing provision means neither the walls nor the bookcase is covered.

Change one fact. Suppose Priya kept the heat on and the pipe froze anyway. Now the freezing provision's condition is met, so this provision no longer removes coverage. Other policy provisions could still matter.

Broader causes do not raise the valuation

HO-5 changes which causes are covered for belongings. It does not change how belongings are valued. In the base HO-5 specimen, personal property is still settled at ACV. Buildings are settled at replacement cost under the same conditions as in HO-2 and HO-3.

Check: A client says, "I chose HO-5, so if my ten-year-old TV is ruined by a covered cause, I'll get a brand-new TV." What is wrong with that reasoning under the base HO-5 form?

HO-8: older homes that would cost more to rebuild than to sell

Some older homes would cost far more to rebuild with their original materials and craftsmanship than the home is worth on the market. NAIC consumer guidance describes a modified coverage form for older homes in that situation. That form is the HO-8.

Two terms matter here:

• Market value is what a property would sell for. A home's sale price normally includes the land.
• Market value excluding land is what the building alone is worth, with the land's value removed.

The specimen read here is an April 1991 edition used in Minnesota. A Nevada HO-8 policy may use different wording, and this lesson makes no claim about whether or how Nevada insurers offer it. Check the actual form.

Peril basis

The specimen uses named perils for Coverages A, B and C. Some named perils carry their own limits. For example:

• The vehicles peril excludes any loss caused by a vehicle owned or driven by a resident. In the HO-2 specimen, that limit applies only to damage to a fence, driveway or walk.
• The vandalism peril does not cover property at the home if the dwelling was vacant for more than 30 consecutive days before the loss.
• The theft peril does not cover theft away from the home.

Belongings are valued at ACV, as in the other forms.

Two ways to value building damage

The HO-8 specimen gives two routes for valuing building damage.

Route 1: the owner repairs or replaces the building. This route applies when the work restores the building for the same use at the same site and meets the form's other conditions, including a deadline stated in the form. The insurer pays the lesser of:

• the limit of liability for the building, or
• the amount actually and necessarily spent on the repair.

The amount spent is capped at the cost of common construction materials and methods. This cap applies where those common methods do the same job as, and cost less than, obsolete, antique or custom materials. In plain terms, the insurer pays for a repair that works the same, not for recreating original craftsmanship.

Route 2: the owner does not claim under Route 1. The insurer pays the least of these three amounts:

• the limit of liability for the building
• the building's market value at the time of loss, excluding land
• the cost to repair with like-kind-and-quality material, minus an allowance for physical deterioration and depreciation

Worked example: a fire destroys an older house

Assume these figures, and ignore the deductible:

• Coverage A limit: $180,000
• Market value of the building, excluding land: $160,000
• Rebuilding with like-kind, custom materials: $400,000, minus a $150,000 depreciation allowance, which leaves $250,000
• Rebuilding at the same site for the same use with functionally equivalent common materials: $230,000, actually spent. All Route 1 conditions are met.

Route 1. Compare the limit ($180,000) with the amount spent ($230,000), which is within the common-materials cap. The lesser amount is $180,000. The limit controls. Market value is not part of the Route 1 comparison.

Route 2. This is the answer if the owner does not claim under Route 1. Compare $180,000, $160,000 and $250,000. The least amount is $160,000. Without that repair claim, payment cannot exceed the building's market value.

Change one fact. Instead of a total loss, fire damages one room's ornate plaster ceiling. The owner restores it in custom plaster for $30,000. A functionally equivalent common-materials repair would cost $12,000. Route 1 pays $12,000, because the amount spent counts only up to the common-construction cost.

When HO-8 may be relevant

Look for a gap between what the building would cost to rebuild and what it is worth on the market. The HO-2, HO-3 and HO-5 building settlement rules are built around replacement cost. The HO-8 rules are built around functional repair or, without that repair, a cap at market value excluding land.

Tempting mistake: Including the land when you calculate the market value cap. The specimen expressly excludes land value from that figure.

Check: An owner's 1920s house would cost $520,000 to rebuild with its original craftsmanship. The building alone would sell for about $190,000. Which form in this lesson is designed for that situation, and what should the person advising them check before relying on it?

Side-by-side comparison

Based on the specimen forms read in this lesson:

Read each row as two separate answers: the cause columns answer "Is it covered?" and the valuation columns answer "How much is paid?"

Practice on your own

Assume deductibles are ignored, any stipulated building conditions are met, and no exclusion applies unless the question says otherwise.

1. Under HO-3, a cause that the policy does not name for belongings damages a detached shed and the garden tools stored inside it. What is covered?

2. Same facts, but the policy is HO-2. What changes?

3. Same facts, but the policy is HO-5. What is covered, and how are the tools valued?

4. A house is insured under an HO-8 form worded like the 1991 specimen. The facts are:

• Coverage A limit: $150,000
• Market value of the building, excluding land: $120,000
• Land value: $60,000
• Like-kind repair: $70,000, minus a $25,000 depreciation allowance
• The owner does not claim under the repair route.

What does Route 2 pay, and why are $70,000 and $180,000 both wrong?

5. Under HO-2, wind blows a branch through a closed window, and rain then soaks a rug. Does the windstorm peril's rain limit block coverage for the rug?

Recap

• Ask two questions of every form: Is the cause covered? (peril basis) and How much is paid? (loss settlement).
• HO-2 uses named perils for the house, other structures and belongings. "Broad" is a title, not a promise to cover every accident.
• HO-3 uses open perils, minus exclusions, for the house and other structures, and named perils for belongings. Coverage for the building never extends to belongings.
• HO-5 uses open perils, minus exclusions, for belongings as well. The base form still pays belongings at ACV.
• In HO-2, HO-3 and HO-5, buildings are paid at replacement cost only if conditions are met. Belongings are paid at ACV.
• HO-8 may be relevant for an older home whose rebuild cost exceeds its market value. In the specimen, it pays either for a functionally equivalent common-materials repair or, without that repair claim, the least of the limit, market value excluding land, or the depreciated repair cost.
• The actual policy form controls. The specimens show standard wording, not every policy's terms.