HO-3 vs HO-5 insurance

HO-3 and HO-5 policies are two forms of homeowners insurance, both of which offer financial protection for your dwelling, structures on your property, personal property and liability coverage. While an HO-3 policy is a sound option, an HO-5 offers more extensive coverage for contents or personal property, which includes your belongings like furniture, clothing and appliances. Although HO-5s provide more coverage, HO-3 policies are the most common and not all standard home insurers offer HO-5 policies. Bankrate’s insurance editorial team has broken down the differences between these two insurance policies so you can feel confident when choosing the right policy type for your home.

HO-5 vs. HO-3 policies

To understand the difference between HO-3 and HO-5 policies, you have to know a bit about how insurance works. Home insurance policies provide coverage for insurance perils, or types of losses. Policies can provide coverage in two ways: named perils and open perils. Named perils means only the specific types of damage listed in the policy are covered, while open perils means anything that isn’t specifically excluded is covered.

Open perils coverage is broader, which tends to make the claims process smoother. When you have named perils coverage, you bear the burden of proving that your damage actually occurred from a covered, named loss. With open perils coverage, the burden falls on the home insurance company to prove that your claim should not be covered.

Both HO-3 and HO-5 policies include open perils coverage for the actual structure of your home and any detached structures. However, HO-5 policies are typically geared toward high-value homes with dwelling coverage of around $750K or higher, according to the Insurance Information Institute’s (Triple-I) research. Additionally, approximately 80 percent of U.S. homeowners have HO-3 policies versus about 12 percent that have HO-5s, according to the Triple-I. The difference between the two is the coverage for your personal property. This includes everything from your clothing and electronics to your curtains and furniture. HO-3 policies only cover personal property for named perils. If you want open perils coverage for your belongings, you will need an HO-5 policy.

The other key difference between HO-3 and HO-5 policies is how insurance companies calculate claim payouts for your personal property. HO-5 policies generally come with replacement cost value (RCV) coverage for the contents of your home while HO-3 policies usually offer actual cash value (ACV). With ACV, instead of receiving money for the current market cost to replace your items, you get the value of items minus the cost of depreciation. However, most insurance companies offer a personal property replacement cost endorsement for HO-3 policies, which may add about 10 percent more to the policy premium.

As always, it is a good idea to read your policy documents and ask questions, since the exact coverage you are purchasing may vary from company to company. If you are unsure what your homeowners policy covers, talking to your company or your agent might be a good idea.

What isn’t covered by HO-3s and HO-5s?

While a policy can protect your finances from many different types of damage, home insurance doesn’t cover everything. Both HO-3 and HO-5 policies generally have several coverage exclusions:

• Flooding
• Earthquake and earth movement
• Pests
• Mold
• Sewer backup and sump pump failure
• Maintenance costs
• Issues caused by poor maintenance
• Damages caused during the course of business
• The full cost of some high-value items

While these exclusions are fairly standard, keep in mind that HO-3 policies only cover personal property damage caused by the perils listed in the policy. This means that if your belongings are damaged by an event that is not specifically covered, it’s excluded.

Named perils vs. open perils

Now that you know the difference between an HO-3 and an HO-5 policy, let’s delve a little bit deeper into insurance perils. To recap: a peril is a cause of damage, like a fire, windstorm or theft. Both HO-3 and HO-5 policies use open perils coverage for your home’s structure and any detached structures like a shed or gazebo. However, HO-3 policies only cover your personal belongings for named perils, while HO-5 policies also cover your belongings on an open peril basis. Understanding how your personal property is covered could help you choose a policy option that best fits your needs.

Named perils

HO-3 policies cover your personal property from damage by a list of named perils that are spelled out in the policy. There are typically 16 named perils, and they are generally the same throughout the U.S., though there might be differences depending on the state you live in and your insurer. The most commonly covered named perils are:

• Fire and lightning
• Windstorm and hail
• Explosions
• Riots or civil unrest
• Damage caused by aircraft
• Damage caused by vehicles
• Smoke
• Vandalism
• Theft
• Falling objects (such as a tree that falls on your house)
• The weight of ice, snow and sleet
• An accidental overflow of water or steam
• Sudden and accidental tearing, cracking, burning or bulging in household systems
• Freezing
• Sudden and accidental damage due to an electrical current
• Volcanic eruption

Open perils

A policy written to cover open perils means you are covered for any kind of peril not specifically excluded in the policy. Common exclusions include flood damage, sewer backups, mold or fungal damage, earthquakes and mechanical breakdowns.

Many insurers offer endorsements, or added coverage options, that will cover some of these additional perils that might otherwise be excluded. A common endorsement, for example, covers sewer backup damage.

How to choose between an HO-3 or an HO-5 policy

Since HO-5 policies provide broader coverage, they tend to cost more than HO-3 policies. By paying a higher premium, your personal property will be covered for more loss scenarios than if you purchased an HO-3. That said, the 16 named perils on an HO-3 policy cover the most frequent claims. According to the Triple-I, 89.8 percent of home claims made in 2020 were for fire, water damage and theft.

An example of a claim that an HO-5 policy might cover over an HO-3 policy would be damage from an animal not owned by an insured. Typically, animal damage is not a named peril on an HO-3 policy, and HO-5 policies usually exclude damage from an animal owned by the policyholder. However, foxes, deer, raccoons and even bears can find their way into homes through door screens and pet doors, wreaking havoc.

Due to HO-5 policies having more stringent underwriting guidelines that not every homeowner will qualify for, it is ultimately an insurer’s call on whether an HO-5 policy is an option for you. If you qualify and an HO-5 policy is within your budget, it is important to note that it will give you more extensive coverage for your personal property than an HO-3 policy. However, if you do not have the budget for the additional coverage or if you do not qualify for or require the additional coverage for your personal property, an HO-3 policy may be sufficient.

Frequently asked questions

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    Is an HO-5 policy more expensive than an HO-3 policy?

    Generally, yes. HO-5 policies are usually more expensive than HO-3 policies because they offer broader coverage for your personal property. However, there are many factors that impact the cost of your homeowners insurance, including what state you live in and where in that state your home is located. Obtaining both HO-3 and HO-5 quotes from multiple insurance companies may help you determine which policy is right for you.
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    I live in a flood zone. Is an HO-3 or HO-5 better for me?

    Neither an HO-3 nor an HO-5 will cover you for flood damage. To cover damage from floods, you will need a separate flood insurance policy, although a few companies do offer a flood insurance endorsement. You can purchase this through the National Flood Insurance Program. Some private insurance companies also offer flood insurance, so it may be worth getting multiple quotes to compare premiums.
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    Can I get replacement cost coverage with an HO-3 policy?

    Whether your insurance policy includes actual cash value coverage, which subtracts depreciation from a payout, or replacement cost coverage is something that you will work out when you purchase your policy. Many insurers do offer replacement cost coverage as an endorsement with an HO-3 policy; it is more likely to be standard with an HO-5. Working with a licensed agent could help you decide which option fits your needs.
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    How does the claims process differ between an HO-3 and HO-5 policy?

    The process of filing a homeowner insurance claim is the same whether you have an HO-3 or HO-5 policy, and can be broken down into these three steps:

    1. Take action to prevent further damage to the property
    2. Document the loss
    3. Contact the insurance provider to submit the claim.

    Usually, the only difference between an HO-3 and HO-5 claim is how your personal property is covered. The insurance provider will deny the claim if the proximate cause of loss is not a named peril on the policy. For a covered HO-3 claim, policyholders would receive a claim payout up to the policy limit for their personal belongings minus depreciation (if they did not purchase a personal property replacement cost endorsement).

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    Is an HO-5 policy better than an HO-3 policy?

    One policy is not better than the other. The policy you ultimately decide on should be one that provides adequate coverage at a premium you can afford. Since an HO-5 policy offers open perils coverage, the insurance company takes on the burden of proof to prove why something isn’t covered. For an HO-3 policy, homeowners carry this burden and need to prove why a loss is covered.