The most important factor is whether or not you perform anywhere for any amount of pay. If you do, you are considered a professional, even if you only know about eight chords like me. Insurance companies charge more for instruments that will be used in paid performance situations, and could deny a claim even if the damage occurred at a time when you were not at a gig.
If you accept money for playing your guitar: Don't rely on your personal insurance unless you are very certain that your policy allows you to perform for pay. Some do, but the details are in the fine print of Homeowners and Personal Articles Floater (PAF) policies. Most do not. Typical wording is:
You agree not to use this equipment for pay unless the words INCLUDING PROFESSIONAL USE is shown on the declarations.
I have only seen one carrier add that coverage on a Homeowners policy. Again, even if the loss occurs in a non-paying situation, it may be denied if you have used it during the policy term as a paid musician. Don't risk it.
I would also not rely on the verbal opinion of a sales agent, a friend, or anyone here. If you are told that you are "fully covered," ask to see the exact wording that allows for performance, and ask if there is any dollar limit on how much you can earn each year. Even then, my personal opinion is that you are better off getting a policy designed for professional performers.
The two best known agency sources among UMGF members are
(1) the MusicPro Program through Heritage Insurance Services, Inc. an agency that sells such policies, and
(2) a similar program through Clarion Associates, Inc..
You'll pay much more for these policies than you would on your Homeowners or PAF, but both programs offer very broad, no-nonsense coverage, and UMGF members report that both agencies offer excellent service. Both sources have first-rate web sites.
If you never, ever perform for pay: This gets a bit technical, but there are really only two choices, and in my opinion, its a simple decision. I do not recommend relying on the Personal Property coverage in your regular Homeowners policy. It is much better to add a Personal Articles Floater endorsement and schedule each instrument with a specific value, what you would expect to be paid to replace the guitar if totally destroyed or stolen.
The Homeowners Policy with no PAF will treat your guitar like any other item of covered property. Hopefully you have Replacement Cost coverage and not an old Actual Cash Value policy, where a loss will involve depreciation for age and obsolescence. However, most Homeowners policies have a deductible of anywhere from $250 to $1,000, and no matter what anyone tells you, the coverage is just not as broad as what you will find on a PAF.
The great news is that its very inexpensive to schedule your guitars. The PAF supplement for Homeowners policies generally has NO deductible, so you won't have a big out-of-pocket expense. The coverage is also broader, with very few exclusions. They are one of the few remaining policies that still use the term "all-risks" of direct physical loss. Common exclusions are wear and tear (sorry, Willie!); insects or vermin; war (think Mike Ip in Iraq!), mechanical breakdown (your Aura no longer works). PAF coverage is worldwide, where the Homeowners Policy itself is most likely limited to the USA, its territories, and Canada. If you have Replacement Cost on your contents, it extends to the PAF as well. By all means, check your policy and upgrade if you don't.
You'll need to support the value of your guitars with a valid appraisal from a disinterested third party. If your guitar is new, that's easy. Just document what you paid, BUT schedule it for the list price of the instrument. Forget the 40% discount. The difference is premium is negligible, and you are better off being a bit over insured.
If your guitar is older or "vintage", get a good appraisal. You want that anyway, but it will make your life easier if you do have to submit a claim. (Personally, if I had a guitar where the collectible value significantly exceeded current replacement costs, I'd spend the extra money for an Agreed Value policy from Heritage or Clarion.)
As a guitar hack, I never perform for pay, so I schedule my two Martins on my PAF endorsement at full list price. (One is a limited production Custom from Maury's Music, so I use what Maury now shows on his site as the total retail price.) The policy also lists any extras such as a Grevin pick guard and K&K pickup. It costs me a whopping $18. annually.
Edit November 2008: My homeowners carrier now embeds the PAF coverge into the homeowners contract with an overall blanket limit for my two guitars, so the scheduling is no longer required. This is fine for my purposes, and just as inexpensive. You must pay attention to the per-item limitations of that approach, however. Your values may exceed such eligibility.
OK, so what happens if you get sued as a musician?
To my knowledge, the "pro" programs mentioned above only offer property insurance, not protection for liability claims against you by others. The worst example I can think of involving a musical performer is the Station nightclub fire in Rhode Island with the pyrotechnics and related deaths. However, a more likely incident such as someone tripping over your microphone cable could result in you being sued for bodily injury. Your equipment could overload an electrical circuit causing a fire and related property damage.
If you are not being paid, you should be fine with a regular homeowners policy and umbrella, at whatever limits you have purchased, subject to all other terms.
If you are being paid, you may not be covered at all. Homeowners policies have different kinds of "business pursuits" exclusions which may result in any claim you submit being turned down, leaving you to hire your own lawyer and paying settlements or judgments out of your own pocket.
As indicated above, some policies do allow for some earnings for minor side businesses that are exempt from this exclusion, usually involving earnings under $2,000 per year. However, I still think you are better off purchasing a business General Liability policy if you wish to protect your personal assets.
Expect to pay at least $1,000 per year or more for a $1,000,000 Commercial General Liability policy. Such policies are usually rated on the number of performances expected per year. Unfortunately, it will probably be with a Surplus Lines company such as Lloyds of London because very few standard domestic markets are interested in insuring part-time musicians. If you are a pro, ask around for policies designed for professional touring musicians. There are not many advertised, but they are available.