Insurance policies are legally binding contracts between an insurance company and a policyholder that establishes the details of coverage, specifying the conditions or perils and compensation provided should they occur.  A fire insurance policy is a specific type of property insurance which covers the insured in the event their home is lost or damaged during a fire. It is a common investment and is often required and included as part of a homeowner’s insurance policy when a mortgage is approved.

A fire insurance policy typically has four different coverage areas. The dwelling portion refers directly to the home itself. The coverage for the dwelling should always be enough to adequately replace the home. Rebuilding expenses are often determined based on the actual square footage of the home in question. The portion referring to other structures includes the coverage of garages or sheds that are not part of the dwelling itself and are considered a separate area.

Personal property is considered a separate coverage area as well and includes the contents within the home that are not part of the dwelling itself, for example furniture, electronics, computer equipment, clothing and jewelry. Personal property items of considerable value should be specifically listed as part of the fire insurance policy, items that are not explicitly valued tend to be compensated with a “standard” amount.

The fourth coverage area relates to additional expenses that exceed the insured’s usual cost of living as a result of the fire damage. This can refer to the expenditures of temporary housing among other things, all incurred when forced to live away from your residence during the process of rebuilding or repairing. These expenses need to be documented in order to receive reimbursement later. Usually there is a limit set for additional expenses claimed.

When insurance companies pay losses on claims it is either based on actual cash value or replacement value. Actual cash value commonly refers to the fair market value of the home at the time the loss or damage is incurred. Replacement value means the insured would be compensated for the entire cost or replacing, repairing, or rebuilding the home. Actual cash value can be considerably less than the replacement value and is usually less preferable. Most fire insurance policies also cover any water damage resulting from the process of fighting the fire, such as that created from a fire hose or a broken pipe.  Some insurance policies also make stipulations for building code upgrades, for example if current building codes require a specific material but the home in question had a substandard quality of material, the homeowner would be expected to account for the discrepancy in cost relating to the repair process.