General Insurance HW

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Chapter 22

Homeowners Insurance, Section I

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Agenda

Homeowners Insurance

Analysis of Homeowners 3 Policy (Special Form)

Section I Coverages

Section I Perils Insured Against

Section I Exclusions

Section I Conditions

Section I and II Conditions

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Homeowners Insurance Basics

Homeowners insurance forms, drafted by the Insurance Services Office (ISO) are widely used in the United States

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

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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

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Transparency Master 1.2

Current Homeowners Policies (Continued)

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

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Current Homeowners Policies (Continued)

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 construction materials and methods

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Exhibit 22.1 Comparison of ISO Homeowners Coverages

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Exhibit 22.1 Comparison of ISO Homeowners Coverages (Continued)

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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

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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 in Coverage A

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Section I Coverages (Continued)

Coverage C insures personal property owned or used by an insured

Personal property is covered anywhere in the world, both on and off the premises

The amount of coverage is 50% of Coverage A, but can be increased if desired

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

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Exhibit 22.2 Special Limits of Liability

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Transparency Master 1.2

Section I Coverages (Continued)

A schedule can be used to insure certain personal property for a specific amount

Coverage C also excludes certain types of property, for example:

Articles separately described and specifically insured

Animals, birds, and fish

Motor vehicles, aircrafts, hovercrafts, and parts

Property of roomers and other tenants

Property in a regularly rented apartment

Property away from the premises that is rented

Business data

Credit cards or electronic fund transfer cards

Water, such as in a swimming pool

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Section I Coverages (Continued)

Coverage D provides protection when the residence premises cannot be used because of a covered loss

Coverage is 30% of Coverage A

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

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

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Section I Coverages: Additional 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 fund transfer card or access device, forgery and counterfeit money

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Section I Coverages: Additional Coverages (Continued)

Loss assessment charged against the named insured by a corporation or association of property owners because of the direct loss of property collectively owned by all members

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 an ordinance or law

Grave markers

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Section I Perils Insured Against

The dwelling and other structures are insured for all direct physical losses unless specifically excluded

Specific exclusions include:

Collapse

Freezing

Fences, pavement, patio, and similar structures

Dwelling under construction

Vandalism and malicious mischief

Mold, fungus, and dry rot

Wear and tear, mechanical breakdown

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Section I Perils Insured Against (Continued)

Personal property is insured for a direct physical loss if it is caused by one of the perils listed in the policy

The peril must be the proximate cause of the loss

Named perils include fire, windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, vandalism, falling objects, etc.

Coverage for theft is broad, but there are several exclusions:

Theft by an insured

Theft in or to a dwelling under construction

Theft from any part of the premises rented to someone other than an insured

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Section I Exclusions

The policy excludes the following causes of loss:

Concurrent causation losses

Any loss due to an ordinance or law, except as described in the Additional Coverages

Losses due to earth movement

Certain water losses

Losses due to neglect, power failure, or faulty design

Losses which are intentional

Losses due to war, government action, failure to act, or nuclear hazard

Losses due to certain weather conditions

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Section I Conditions

The insurer’s liability for a loss is limited to the insured’s insurable interest at the time of loss

A deductible of $250 applies to any loss covered by Section I coverages

Premiums can be reduced by increasing the deductible

In states that are vulnerable to natural catastrophes, insurers can use percentage deductibles

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Section I Conditions (Continued)

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

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Section I Conditions (Continued)

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

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Section I Conditions (Continued)

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 80percent 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

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Section I Conditions (Continued)

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Section I Conditions (Continued)

Some insurers offer an extended replacement cost endorsement, which pays 20percent 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

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Section I Conditions (Continued)

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 dispute

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

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Section I Conditions (Continued)

No legal action can be brought against the insurer unless all policy provisions have been met

The insurer has the right to repair or replace any part of the damaged property with like property

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

The insurer is not obligated to accept any property abandoned by the insured

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Section I Conditions (Continued)

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

Only losses that occur during the policy period are covered

Concealment or misrepresentation of any material facts, fraudulent conduct, and false statement relating to the insurance will void insurance coverage

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Section I and II Conditions

Conditions that apply to both Section I and Section II include:

A liberalization clause to address issues with broadening coverage

A waiver or change of policy provisions

Terms and conditions for cancellation

Terms for nonrenewal of the policy

Assignment of the policy to another party

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

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