Principles of risk management and insuarance 10th by george rejda chapter 20

Personal property is covered on a named perils basis • HO-4 contents broad form: covers a tenant’s personal property on a named perils basis • HO-5 comprehensive form: provides open peri

Chapter 20

Homeowners

Insurance,

Section I

• Homeowners Insurance Basics

• Analysis of Homeowners 3 Policy

Homeowners Insurance Basics

• Homeowners insurance forms, drafted by the

Insurance Services Office (ISO) are widely used in the US

– They are designed for the owner-occupants of family

dwellings

– A policy can be used to cover the dwelling, other

structures, personal property, additional living expenses, personal liability claims, and medical payments to others

– Six forms are available

Current Homeowners Policies

• HO-2 (broad form): covers the dwelling, other structures, and personal property on a

named perils basis

• HO-3 (special form): covers the dwelling and other structures on a risk-of-direct-physical loss basis All direct physical losses are covered except those losses specifically

excluded Personal property is covered on a named perils basis

• HO-4 (contents broad form): covers a tenant’s personal property on a named perils basis

• HO-5 (comprehensive form): provides open perils coverage (“all-risks coverage”) on the dwelling, other structures and personal property All direct physical losses are covered except those losses specifically excluded

• HO-6 (unit owners form): covers personal property on a named perils basis A minimum

of $5,000 of insurance is also provided on the condominium unit that covers

improvements and additions

• HO-8 (modified coverage form): designed for older homes Dwelling and other

structures are based on the amount required to repair or replace using common

Exhibit 20.1 Comparison of ISO

Homeowners Coverages (con’t)

Exhibit 20.1 Comparison of ISO

Homeowners Coverages

Analysis of the HO-3 Policy

• The HO-3 policy has two sections of coverage:

– Section I: Property Coverages

• Coverage A: Dwelling

• Coverage B: Other Structures

• Coverage C: Personal Property

• Coverage D: Loss of Use

• Additional Coverages

– Section II: Liability Coverages

• Coverage E: Personal Liability

• Coverage F: Medical Payments to Others

Analysis of the HO-3 Policy

• The following persons are considered “insureds”

under the policy:

– Named insured and spouse

– Resident relatives

– Other persons under age 21

– Full-time student away from home

– Section II coverage also includes:

• Any person legally responsible for covered animals or watercraft

• With respect to a motor vehicle covered by the policy (e.g., a riding mower), persons employed by the named insured

Section I Coverages

• Coverage A covers the dwelling on the residence premises and any structure attached to the dwelling

– Materials intended for construction are included

– The coverage specifically excludes land

• Coverage B insures other structures on the residence

premises

– Includes a detached garage, tool shed, etc

– Structures that are rented out or used for a business are excluded

– The amount of coverage is based on the amount of insurance on

the dwelling (Coverage A)

Section I Coverages

• Coverage C insures personal property owned or used by

an insured

– Personal property is covered anywhere in the world

– The amount of coverage is 50% of the insurance on the dwelling,

but can be increased

– Coverage for personal property at another residence, such as a

vacation home, is limited to 10% of Coverage C or $1000,

whichever is greater

– Certain types of personal property have maximum dollar limits on

the amount paid for any loss

Exhibit 20.2 Special Limits of

Liability

Section I Coverages

– An insured can use a schedule to insure certain personal property for a specific amount

– Coverage C also excludes certain types of property:

• Articles separately defined and specifically insured

• Animals, birds, and fish

• Motor vehicles

• Aircraft and parts

• Hovercraft and parts

• Property of roomers, boarders, and other tenants

• Property in a regularly rented apartment

• Property rented or held for rental to others off the residence premises

• Business records

• Credit cards, electronic transfer devices, or other access devices (some coverage in Additional Coverages)

Section I Coverages

• Coverage D provides protection when the residence

premises cannot be used because of a covered loss

– Coverage is 30% of the amount of insurance on the dwelling

(Coverage A)

– Additional living expense is the increase in living expenses actually incurred by the insured to maintain the family’s normal standard of living

• For example, the cost of renting a furnished apartment

– The policy pays the fair rental value for that part of the residence

that is rented to others, but is not fit to live in

– Coverage applies if the home is not damaged, but a civil authority prohibits the insured from using the premises

Section I Coverages

• Additional coverages in Section I include:

– Removal of debris following an insured peril

– Reasonable repairs to protect the property from further damage

– Trees, shrubs, and plants, for a limited set of perils

– Fire department service charge

– Removal of property that is endangered by an insured peril

– Unauthorized use of credit card, electronic funds transfer card or access

device; forgery and counterfeit money

– Loss assessments charged by a corporation or association of property

owners

– Collapse of a building, for certain perils

– Breakage of glass or safety glazing material

– Landlord’s furnishings

– Increased costs of construction or repair because of a law

Section I Coverages

• A deductible of $250 applies to any loss covered

by Section 1 coverages

– Premiums can be reduced by increasing the deductible

– In states that are vulnerable to natural catastrophes,

insurers can use percentage deductibles

• Percentage deductibles for windstorm and hail losses vary from 1% to 15% of the limit of insurance on the dwelling

Section I Perils Insured Against

• The dwelling and other structures are insured against risk

of direct physical losses

– All direct physical losses are covered unless specifically excluded

• Personal property is insured on a named-perils basis

– A direct physical loss is covered if it is caused by one of the perils

listed in the policy

• Named perils include fire, windstorm or hail, explosion, riot or civil commotion, theft, etc

– The peril must be the proximate cause of the loss

Section I Exclusions

• The policy also excludes:

– Any loss due to an ordinance or law, except as

described in the Additional Coverages

– Property damage from earth movement

– Property damage from certain water losses

– Losses due to power failure

– Losses due to neglect

– Property damage due to war or nuclear hazard

– Any intentional loss

Section I Conditions

• The insurer’s liability for a loss is limited to the insured’s insurable

interest at the time of loss

• The insured must perform certain duties after a loss occurs:

– Give prompt notice to insurer

– Protect the property from further damage

– Prepare an inventory of damaged personal property

– Exhibit damaged personal property

– File a proof of loss with 60 days after the insurer’s request

• Losses to personal property are paid on the basis of actual cash

value

– If the insured purchases a replacement cost endorsement, there is no

deduction for depreciation

• After giving notice to the insured, the insurer has the right to repair or replace any part of damaged property with like property

Section I Conditions

• Losses to the dwelling and other structures are paid on

the basis of replacement cost with no deduction for

depreciation

– If the dwelling is insured for at least 80% of replacement cost at

the time of loss, partial losses are paid in full

• Replacement cost is the amount necessary to repair or replace the dwelling with material of like kind and quality at current prices

– If the dwelling is insured for less than 80% of the replacement

cost, the insured receives the larger of

(1) the actual cash value of that part of the building damaged or

Section I Conditions

• Some insurers offer an extended replacement cost

endorsement, which pays an extra 20% or more above the policy limits

• Under a guaranteed replacement cost policy, the insurer

agrees to replace the home exactly as it was before the

loss even if the replacement cost exceeds the amount of

insurance stated in the policy

• In the event of a loss to a pair or set, the insurer can elect either repair or replace any part of the pair or set or to pay the difference between the actual cash value of the property before and after the loss

• The appraisal clause is used when the insured and insurer agree that the loss is covered, but the amount of loss is in

Section I Conditions

• If other insurance covers a Section I loss, the insurer will only pay the proportion of the loss that is limit of liability bears to the total amount of insurance covering the loss

– For example, the HO policy is excess over any amount payable under a

home warranty or service agreement

• The insurer is generally required to make a loss payment directly to the named insured

• The mortgage clause is designed to protect the mortgagee’s insurable interest

– If the mortgagee is named in the policy, the mortgagee is entitled to receive

a loss payment from the insurer to the extent of its interest, regardless of any policy violation by the insured

• Concealment or misrepresentation of any material facts, fraudulent

conduct, and false statement relating to the insurance will void

insurance coverage

Section I and II Conditions

• Some conditions apply to both Section I and Section II

coverages These include:

– A liberalization clause to address issues with broadening coverage

– A waiver or change of policy provisions

• Must be in writing

– Terms and conditions for cancellation

– Terms for nonrenewal of the policy

– Assignment of the policy to another party

• Insurer must give written consent

– A subrogation clause to address recoveries from third parties

– Extension of policy terms to a legal representative upon the death of the named insured or spouse

Insight 20.3 The Big Gap Between

Replacement Cost and Actual Cash Value

Can Empty Your Wallet