What is homeowners insurance, exactly? How does it work in Texas?

December 16, 2022

How does homeowners insurance work in Texas? What do you need to know to insure your Texas home?

It's no secret - Texas is one of the fastest-growing states in the country and has been for years now. From our wide open spaces and skies to our selection of charming towns and bustling cities, it's easy to see why so many people have decided to call the Lone Star State home!

But as with any location on Earth, it can't always be sunny skies and beautiful weather - sometimes mother nature makes plans that can put your home and property in danger! Fortunately, we can make plans, too, and that's where homeowners insurance comes in. 

Whether you're a new arrival or a native, it's important to have a solid understanding of how homeowners insurance works so that you can protect your home and property from the unexpected. There's a lot to learn and you may have questions, so read on as we take you through our guide to homeowners insurance in Texas!

What types of homeowners insurance are there? 

Depending on your location, the type of home you have, and the insurance company you choose, there may be several types of homeowners insurance policies available to you. However, the two most common types of policies you're likely to find are called HO-2 and HO-3 homeowners insurance policies.

HO-2 Homeowners Insurance Policy

Although many insurance providers offer an HO-2 policy, it is not as common as an HO-3.  HO-2 policies are what is known as a "named perils" policy.

A peril simply refers to a cause of loss or a source of damage to your home and property, like a fire or tornado. A named perils policy means that your home is only protected against the perils specifically listed on the policy - nothing else.

Named perils for an HO-2 policy typically include: 
  • Fire and lightning
  • Explosion
  • Theft
  • Vandalism
  • Riots or civil disturbances
  • Aircraft
  • Vehicles
  • Falling objects
  • Smoke damage
  • Sudden and accidental release of water
  • Freezing
  • Damage from the weight of ice or snow
  • Accidental damage caused by a water heater, heating system, or air conditioning system
  • Windstorms and hail (although not available to zip codes along the Gulf Coast)
While these perils are common for most HO-2 policies, it's important to review your policy information or speak to your agent to understand the specifics for your policy or a policy you are considering. 

HO-3 Homeowners Insurance Policy

According to the Insurance Information Institute, an HO-3 policy is the most common and popular type of homeowners insurance you'll find. These are called "open perils" or "all-risk" policies.

This means that most HO-3 policies will cover all of the named perils listed above and anything else as long as it is not listed as an exclusion. An HO-3 policy should provide a list of perils that it specifically excludes, so make sure to review your policy to understand your coverage.  

If you have a mortgage or owe money on your home, the lender will likely require you to have an HO-3 policy.

What does homeowners insurance cover?

What does homeowners insurance cover? The answer may seem obvious: your home, of course! While it is indeed true that homeowners insurance provides insurance for your house, a policy has a number of different pieces, or coverage types. 

Coverage A - Dwelling (your home). This is what most people think of when they think about homeowners insurance. It protects your home and covers it in the event of a loss or disaster. If you've ever heard the term, "dwelling coverage limit," it is referring to this coverage.

It's important to understand that your dwelling coverage limit is not the same thing as the market value of your home. The market value of your home (i.e. what it would sell for in the real estate market today) includes your house, but also takes into account the land it sits on, the location, proximity to public resources and schools, neighborhood amenities, and so on. Your Coverage A dwelling limit reflects the cost to rebuild your home completely in the event of a total loss. 

Coverage B - Other structures. Other structures refers to a structure that isn't directly connected to your house. This part of a homeowners policy typically covers things like in ground swimming pools, storage sheds, and separate or stand-alone garages.

Coverage C - Personal belongings/property. It's not just your house that is at risk after a disaster. You also stand to lose your belongings within. This coverage can help you replace things like furniture, appliances, and even clothing. 

It's important to remember that after a disaster or total loss, it can be difficult to remember all of your personal belongings and their value. That's why it's a good idea to conduct a home inventory beforehand, keeping track of your personal belongings, the quantity, location, and value. Video is another effective way to catalogue many of your household belongings. 

Loss of use and additional living expenses. If you're forced to vacate your home following a total loss, you and your family will need a place to stay. This coverage can help pay for temporary lodging and other living expenses while repairs are made or your home is rebuilt. You may see this referred to as "Coverage D," in a homeowners insurance policy. 

Personal liability coverage. This provides bodily injury and property damage coverage for visitors, guests, and residence employees (like nannies) for which you are legally liable. It can pay for their medical bills and your court fees if you are sued for such an incident. Lastly, if you damage another person's property, it can pay for that as well. You may see this listed as "Coverage E" within homeowners insurance documents. 

Like your dwelling coverage limit, there are limits on the amount of personal liability coverage included in a homeowners policy, as well as limits to the types of perils and claims it covers. Limits can usually be raised up to a maximum limit, but additional liability coverage can be purchased with an umbrella insurance policy. 

Medical payments. If someone requires medical care after injuring themselves on your property, medical payments coverage can pay for those costs.

It is important to note that these various coverage options and the amount of coverage they provide can vary from company to company. In some instances, you may want to extend the amount, which you can do by purchasing additional coverage or an umbrella insurance liability policy.

What DOESN'T a homeowners insurance policy cover in Texas?

Whether you have an HO-3 all-risk policy or an HO-2 named perils policy, there are a number of causes of loss that homeowners insurance will not typically cover. 

According to TDI, home insurance policies do NOT typically cover the following:
  • Floods - Supplemental flood insurance is usually provided by the National Flood Insurance Program (NFIP).
  • Wind and hail - If you live on the Gulf Coast, most insurance companies won't cover this. For these areas, the Texas Windstorm Insurance Association (TWIA) may provide supplemental coverage.
  • Mold and water damage from continuous water leaks
  • Termites, insects, rats/mice, or other such destructive vermin 
  • Normal wear and tear
  • Construction defects
  • Earthquakes
If you have a specific question or concern about a peril and whether or not a policy will cover it, make sure to speak to your agent.

How much does homeowners insurance cost in Texas?

Average cost of homeowners insurance in Texas

The average cost of home insurance in Texas is $4,142 a year for $300,000 dwelling coverage with $100,000 liability coverage and $1,000 deductible, but there are many factors that can determine how much homeowners insurance will cost you and many ways to customize and adjust.

Factors that determine your homeowners insurance cost

There are many variables that a homeowners insurance company takes into consideration when determining the cost of your policy. 

Location and environmental factors. Some of the primary factors taken into consideration when evaluating insurance premiums are the possible natural disasters an area may be prone to. Some areas are more susceptible to certain events while others aren't likely at all.

For example, Texas happens to be prone to wildfires, hail, and coastal areas may experience strong winds and hurricanes. However, it is (extremely) unlikely that your Texas home will burn in a river of lava oozing out of a volcano.

But it's not just about the danger - rates can be positively affected by location, too. For example, you may have a lower rate if your home is near a fire station.
Building materials. It isn't just where your house is built that determines your insurance rate - it can also be influenced by what your house is built from. Homes with a lot of wood in their design can take more damage from fires (and are more susceptible to fires), especially compared to homes made from less-flammable material like concrete and steel. As you can imagine, houses that burn easily cost more to insure. 

Age and condition of the home. Construction technology has come a long way over the years. Older homes are often more expensive to insure because the materialize and specialized labor required to repair or replace them are more expensive. Plumbing and wiring can be questionable and may require updating or replacing to comply with current building codes. All of this can contribute to a higher rate. 

However, any home that is in poor shape can cost you extra, regardless of the age. Cracked foundations, leaky rooftops, and other such defects can affect the insurance rates of new homes if they are not addressed. In fact, those issues may also make the home uninsurable with many insurance companies.

Cost of replacement. One of the largest factors that insurance companies take into consideration is the cost of repairing or replacing your home, also known as your dwelling coverage limit. This takes into account the size and square footage of your home, the cost of the building materials used to build your home, and your home's features or amenities. It isn't uncommon for this amount to change over time as the cost of rebuilding can change due to outside economic conditions. 
Level of coverage options. The particulars of your policy and the coverage amounts you choose also play a role in establishing a rate. Insurance providers may offer various enhancements, endorsements, or optional coverages to policies to reduce or expand coverages and coverage limits.

Your deductible is also a key piece of this equation; the higher your deductible is, the more you can typically save on your premium. Of course, this means that should you need to file a claim, you'll wind up paying more out of pocket, so it's about finding a balance that is right for you. 

Actual cash value vs. replacement cost coverage. After filing a claim for a covered loss, your provider will reimburse you an amount based off of either your property's actual cash value or its replacement cost. Actual cash value coverage reimburses you the value of the property less depreciation while replacement cost coverage reimburses you for the amount it costs to repair, replace, or rebuild your property at current market prices. 

Actual cash value reimbursement is common for personal property. Depending on the specifics of your home insurance policy and the coverage options your insurance company makes available, actual cash value and replacement cost may both be options. Typically, actual cash value policies cost less than policies with replacement cost, but pay less for a claim because depreciation is subtracted from it.

Credit-based insurance score and claims history. Insurance score is calculated using elements from your credit history, and experience has shown that insurance score is an accurate predictor of future loss experience. While this can impact your rate, it is important to know that a company can not turn down your application because of your credit-based insurance score alone. Additionally, insurers are prohibited by Texas regulations from charging a higher premium or removing a claims free discount for claims resulting from natural causes, such as hail or hurricane.

That said, an insurer may look into your previous homeowners insurance history as other types of previous claims may increase your premium.

What discounts can I get for home insurance in Texas?

While discounts vary from company to company, most insurance companies commonly offer discounts if you:

What can I do to keep my homeowners insurance costs low?

As we mentioned, the cost of repair and replacement, which includes building material and labor costs, is one of the main factors that contributes to the cost of your homeowners insurance. Unfortunately, because construction and labor costs have rapidly increased, insurance companies across Texas have had to adjust rates to keep up with inflation. This means that, like everything, insurance costs are increasing. Read our previous blog that explains how inflation affects homeowners insurance costs for a more detailed explanation. 

However, there are still ways to keep your homeowners insurance costs low. 

Deter theft and crime. Regardless of where you live, it's important to take steps to deter theft and protect your property from crime. 

Installing deadbolts on all of your doors (not just the main entrance) and on your windows can go a long way to not only giving you peace of mind, but easing any concerns an insurance company might have. As previously mentioned, having some sort of burglar alarm or a monitoring service with central station connections can help, too.

Keep the property in good condition. As part of the application process, insurance companies often perform an initial inspection of the home prior to writing a policy. As you can imagine, the condition of your home can influence their evaluation.

Before your home is inspected by the insurance company, give it a thorough inspection yourself. Make a note to repair any rotten boards, broken windows or window screens, missing or damaged shingles, and any unrepaired or non-functioning gutters or downspouts. It's also important to find and repair major cracks in the foundation or walls and any steps and railings that are inadequate or unsafe.

If there are any tree limbs or shrubs that could potentially damage the exterior of the house in any way, it might be necessary to trim them back away from it (especially near the roof and windows).

Finally, if your house is painted, make sure the coat is in good condition and touch up any flaking or patchy areas. This is more than just a question of cosmetics - gaps in paint coverage can lead to accelerated aging and deterioration of wooden elements. 

Is homeowner insurance required by law in Texas?

While homeowner insurance is not technically required by law in Texas, it is still an extremely important and necessary aspect of protecting yourself and your home. 

If you have a mortgage, the lending company is legally allowed to require you to purchase a policy that covers the amount of the loan while there are payments remaining. If your house is in an area that is prone to flooding, the lender might also require you to purchase flood insurance from the National Flood Insurance Program.

Beyond that, having homeowners insurance in Texas (or anywhere) is just a good idea. For many of us, buying a house is one of the largest investments we'll ever make. That's why it's essential to protect your investment and prepare for the unexpected.

What is the best insurance company in Texas?

As we discussed, there is a lot that goes into determining the cost of homeowners insurance in Texas. While different companies can certainly offer different rates, many of the factors involved depend on you and your individual needs. That's why it's essential to consider factors like a company's customer service record and their attentiveness to your circumstances.

When disaster strikes, the best insurance company is the one that you can count on to guide you through the claims process and get you back into your home as soon as possible. Rates are important, but it's also important to find an insurance company you can trust. 

A beautiful Texas home flying the Texas flag

When you're filing an insurance claim, great customer service is essential. Since 1896, Germania Insurance has been the Insurance Texans Trust for great coverage and outstanding customer service. But don’t take our word for it! Hear what our customers have to say

For more information about our insurance products, request a free quote online, or reach out to one of our trusted agents today!

Read more: Learn everything you need to know about AUTO insurance in Texas!

by Geoff Ullrich

About the Author

Geoff Ullrich is a writer and Content Marketing Strategist at Germania Insurance.

What do you want to read more about? For suggestions, questions, or content-related inquiries, contact us at content@germaniainsurance.com!

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