Chapter 20 Homeowners Insurance, Section I Copyright © 2008 Pearson Addison-Wesley All rights reserved Agenda • Homeowners Insurance Basics • Analysis of Homeowners Policy – Section I Coverages – Section I Perils Insured Against – Section I Exclusions – Section I Conditions – Section I & II Conditions Copyright © 2008 Pearson Addison- 20-2 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 Copyright © 2008 Pearson Addison- 20-3 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 construction materials and methods Copyright © 2008 Pearson Addison- 20-4 Exhibit 20.1 Comparison of ISO Homeowners Coverages (con’t) Copyright © 2008 Pearson Addison- 20-5 Exhibit 20.1 Comparison of ISO Homeowners Coverages Copyright © 2008 Pearson Addison- 20-6 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 Copyright © 2008 Pearson Addison- 20-7 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 Copyright â 2008 Pearson Addison- 20-8 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) Copyright © 2008 Pearson Addison- 20-9 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 Copyright © 2008 Pearson Addison- 20-10 Exhibit 20.2 Special Limits of Liability Copyright © 2008 Pearson Addison- 20-11 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) • Water or steam • • • • • • • • • • Copyright © 2008 Pearson Addison- 20-12 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 Copyright © 2008 Pearson Addison- 20-13 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 Grave markers Copyright © 2008 Pearson Addison- 20-14 Section I Coverages • A deductible of $250 applies to any loss covered by Section 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 Copyright © 2008 Pearson Addison- 20-15 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 Copyright © 2008 Pearson Addison- 20-16 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 Copyright © 2008 Pearson Addison- 20-17 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 Copyright © 2008 Pearson Addison- 20-18 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 amount of insurance carried (2) 80% x replacemen t cost Copyright © 2008 Pearson Addison- x loss 20-19 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 dispute Copyright © 2008 Pearson Addison- 20-20 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 Copyright © 2008 Pearson Addison- 20-21 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 Copyright © 2008 Pearson Addison- 20-22 Insight 20.3 The Big Gap Between Replacement Cost and Actual Cash Value Can Empty Your Wallet Copyright © 2008 Pearson Addison- 20-23 ... materials and methods Copyright © 200 8 Pearson Addison- 20- 4 Exhibit 20. 1 Comparison of ISO Homeowners Coverages (con’t) Copyright © 200 8 Pearson Addison- 20- 5 Exhibit 20. 1 Comparison of ISO Homeowners... to 15% of the limit of insurance on the dwelling Copyright © 200 8 Pearson Addison- 20- 15 Section I Perils Insured Against • The dwelling and other structures are insured against risk of direct... 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