How Does Homeowners Insurance Work? 
A company is formed under the laws of a state and under the direction of the insurance commissioner of that state to provide property insurance . There is a great deal that could be said about that process but the company is basically formed because there are many people who want protection should something untoward happen to their home . If these people knew each other they could form an association and provide for the losses of members of the association on either a pre-payment or as losses are incurred basis . This is the basis of fraternal insurance . These types of associations are getting a new life in the health insurance field . However , most of these people who want coverage dont know each other and it is therefore the function of the company to pool these risks . In the practical world there is an organization known as Insurance Services Office -LRB- ISO -RRB- that provides forms that a company can either use or modify . These forms comprise the coverages that the insurance company extends to the risk pool . The basic coverage is fire with wind and hail damage being the next most popular coverage . Since there are many things that are beyond the control of the homeowner and there is measurable information about potential loss , the company will add coverages that are desired . Using the ISO forms allows them to add coverages quickly and easily . There are some losses that the pooled risk doesnt want to accept . These are then made into exclusions by the insurance company . The most common exclusions are for earth movement -LRB- earthquake -RRB- and flood . Even though each year there are major losses to these risks , companies generally only provide that coverage if required . The flood risk is so great that a governmental program is available . These coverages are bound together with liability coverages and other coverages to form a package policy which the company normally calls a homeowners policy . The package is then made available to licensed and appointed agents and brokers in the state where you live . The insurance commissioner supervises the operations of these companies for the sole purpose of making sure that the companies can keep their promises . The brokers and agents then offer the policy to a prospective homeowner . Often there are optional coverages available . With these optional coverages the broker or agent can put together a plan that meets your needs and remains within your budget . The most important aspect of this process from the agent or brokers perspective is the selection of limits . Most insurance companies require an independent evaluation of the cost of rebuilding the residence . That figure is the limit of coverage that the company is likely to accept . This limit may have very little to do with the sale price . Because the policy is a package the limit on the residence determines other coverages on the basis of a formula . The personal property for example is a percentage of the residence coverage as are other coverages . If the personal property of the customer is greater than the limit stated in the normal policy additional coverage can be purchased from the insurance company . Most policies have internal limits on specific types of property , jewelry , furs , art , weapons etc. . Additional coverage for these items is normally available at an increased charge . This happens frequently with guns . Jewelry coverage is often available only when there is an appraised value available . The application for insurance is then underwritten . In this process the company reviews the property and determines if the property falls within the standards that were used when the rates were developed . Usually they are looking for things that would disqualify the residence such as aggressive animals , unfenced swimming pools , poor condition of the property , trampolines etc. . After the policy is underwritten it is then issued and paid . Then the company is obliged to pay for damage to the property from any of the perils mentioned up to the limits of the policy . 