Homeowners Insurance 101: A Guide for Homebuyers in Pensacola, Fl

Homeowners insurance. You know you should probably have it, and if you have a mortgage, you’re required to have it. But how much do you know about it beyond that – what it covers (and does not cover), the types of policies, how much coverage you need? What happens in case of minor damage from a storm, or even something as rare as fire damage? If you’re not familiar with these things, you may very well be overpaying and/or be underinsured. To help you out, we’ve put together this homeowners insurance guide for homebuyers in Pensacola, Fl.

Homeowners Insurance Overview

Homeowner’s insurance is a safety net. It will “compensate you if an event covered under your policy damages or destroys your home or personal items. It will also cover you in certain instances if you injure someone else or cause property damage.”

The three main functions of this insurance are to…

“Repair your house, yard and other structures.
Repair or replace your personal belongings.
Cover personal liability if you’re held legally responsible for damage or injury to someone else.”

There are three basic levels of coverage with homeowner’s insurance – actual cash value, replacement cost, and extended replacement cost/value. In addition, “[p]olicy rates are largely determined by the insurer’s risk that you’ll file a claim.” This risk is assessed on the basis of “past claim history associated with the home, the neighborhood, and the home’s condition.”

Types of Policies

There are several types of homeowner’s insurance (also called “policy forms”), with some providing more coverage than others. The most common policy types are . . .

HO-1 and HO-2 – Basic Coverage with Limited Protection

HO-1 and HO-2 are the most limited forms of homeowners insurance—and as such, they’ve become less common in today’s market.

HO-1 is the most bare-bones policy and is rarely offered today. It only protects against a short list of named perils, such as fire, theft, or vandalism. It typically doesn’t include liability coverage or protection for personal belongings, making it suitable only for homeowners who want minimal coverage at a lower cost.
HO-2 offers broader but still limited coverage compared to other policies. It covers your home and personal belongings against 16 specific perils, such as hail, windstorms, or falling objects. However, if the damage isn’t caused by one of those 16 listed events, you won’t be covered. HO-2 can be a good choice for homeowners on a budget who still want a reasonable safety net.

Together, these policies make up around 8% of all homeowners insurance coverage and are generally chosen for investment properties, older homes, or in cases where limited protection is acceptable.

HO-3 – The Most Common and Widely Accepted Policy

HO-3, known as the “special form” policy, is the industry standard for most owner-occupied homes—especially those with a mortgage.

This policy offers broad protection for the structure of your home, covering it against all risks except those explicitly excluded, such as floods, earthquakes, or war. That means if something unexpected happens—like a tree crashing through your roof or a kitchen fire—your home is likely protected.
For your personal belongings, however, HO-3 typically only covers the 16 named perils, unless you opt to add extended coverage. Items like electronics, furniture, and clothing are protected under this list, but you’ll want to review it carefully to ensure adequate protection.

Because of its balanced coverage and affordability, HO-3 accounts for nearly 80% of all homeowners insurance policies in the U.S.

HO-5 – Premium Coverage with Maximum Peace of Mind

If you’re looking for top-tier coverage, HO-5 may be the best option—often referred to as the “comprehensive form”.

Unlike HO-3, HO-5 provides open-peril coverage for both your home and your personal belongings. That means unless a cause of damage is specifically excluded in the policy, it’s covered.
This type of policy typically includes higher coverage limits, faster claim processing, and greater protection for valuables such as jewelry, electronics, and art—making it ideal for newer, well-maintained homes in low-risk areas.

However, not all insurers offer HO-5, and it may come with higher premiums. Still, for homeowners who want maximum peace of mind with fewer limitations and exclusions, this is the most robust option available.

Replacement Cost, Actual Cash Value, and More

You also need to be aware that “[i]fyour home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your payout could differ depending on the cost to rebuild and the coverage you chose – and much of it will be paid directly to contractors rebuilding your home, in many cases.”

Concerning this, here are some things you need to consider when deciding on coverage:

REPLACEMENT COST – Full Rebuild Protection

Replacement cost coverage ensures that your home can be rebuilt at today’s construction prices, even if those costs exceed your initial policy limits. This type of policy is essential in markets where labor and material prices fluctuate significantly. For example, after a natural disaster, the sudden spike in demand for contractors and materials can drive up rebuilding costs—replacement cost coverage helps absorb that inflation so you’re not left underinsured. It’s a smart choice for homeowners who want peace of mind and long-term property protection.

ACTUAL CASH VALUE – Coverage with Depreciation Deductions

Actual cash value (ACV) coverage pays to repair or replace damaged property, but only after subtracting for depreciation. That means you won’t get the full price of what your item originally cost—just its value at the time of loss. While rarely used for the main structure of a home, it’s commonly applied to personal belongings such as electronics, clothing, or furniture. For instance, if your 5-year-old television is damaged, ACV will only reimburse you for its current market value, not the cost of a new one. It’s a budget-friendly option but may leave you with out-of-pocket expenses during a claim.

FUNCTIONAL REPLACEMENT COST VALUE – Affordable Alternatives

Functional replacement cost value is ideal for older homes or properties with materials that are now outdated or expensive to source. Instead of replacing damaged components with exact replicas, your insurer will use modern, cost-effective materials. For example, if original hardwood flooring is destroyed, it might be replaced with engineered wood. This type of coverage helps keep premiums lower while still maintaining the functionality and usability of your home, even if the new materials don’t match the original aesthetic.

REPLACEMENT COST VALUE – Like-Kind and Quality Restorations

With replacement cost value (RCV) coverage, your insurer pays to repair your home using materials that match the original in kind and quality, up to the policy’s dwelling limit. This means plaster walls will be replaced with plaster, not drywall, and hardwood floors with hardwood. It’s the preferred option for homeowners who want to preserve their home’s character and avoid shortcuts during repairs. However, if rebuilding exceeds your coverage limit, you’ll be responsible for the difference—so reviewing your policy limits regularly is essential.

EXTENDED REPLACEMENT COST VALUE – Added Financial Cushion

Extended replacement cost value coverage goes beyond your policy limit, offering a built-in buffer in case rebuilding costs unexpectedly surge. Typically, this add-on pays out an additional 10% to 25% (or more) above your standard dwelling coverage, making it invaluable in disaster-prone areas or rapidly appreciating real estate markets. It’s a safeguard for homeowners who want full protection against inflation, supply chain disruptions, or local rebuilding spikes. Think of it as your insurance safety net for the truly unexpected.

Guaranteed Replacement Cost Value

“Guaranteed replacement cost value coverage pays the full cost to repair or replace your home after a covered loss, even if it exceeds your policy limits.” The catch, though, is that this level of coverage isn’t offered by all insurance companies.

Determining Amount of Coverage Needed

Now, you need to determine exactly how much coverage you need from your homeowner’s insurance. You’ll need enough coverage to rebuild/repair your home in the case that is destroyed or severely damaged. You can estimate the cost to rebuild by multiplying your home’s square footage by per-square-foot local construction costs. YourPensacola, Fl agent can also provide some guidance here. Just call251-312-5100 to find out more.

What you shouldn’t do is “focus on what you paid for the house, how much you owe on your mortgage, your property tax, or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.”

When it comes to your belongings, your personal property, “you’ll generally want coverage limits that are at least 50% of your dwelling coverage amount, and your insurer may automatically set the limit that way.” You can, however, lower the limit or purchase more coverage if you need to/

With respect to the liability limit, experts advise having a “limit at least high enough to cover your net worth,” including “savings, investment accounts, and other assets, minus auto loans, credit card balances, and other debts.”

Cost of Homeowners Insurance

So what does homeowner’s insurance cost? The national average is about $1,600 per year, but this is an average and individual prices can be much higher or lower. In addition, your credit score can also affect the cost of your insurance.

And then there’s the deductible – the amount you have to pay out of your pocket before the insurance kicks in. Here are the two main things to keep in mind when choosing your policy’s deductible:

A higher deductible will reduce your premium, but you’ll pay a lot more when you file a claim.
With a lower deductible, you’ll pay a higher premium, but will pay a lot less out of your pocket for a claim.

When It’s Time to Buy

Ultimately, homeowners insurance isn’t a luxury – it’s a necessity. But there are so many influencing factors and available options, it’s difficult to know what kind of policy and coverage is right for you. An experienced Pensacola, Fl agent can provide valuable assistance in many of these areas. We suggest that Pensacola, Fl home buyers trying to untangle the homeowner’s insurance puzzle, contact us today at 251-312-5100.