Chapter 20 Homeowners Insurance, Section I 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 ©2014 Pearson Education, Inc All rights reserved 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 ©2014 Pearson Education, Inc All rights reserved 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-ofdirect-physical loss basis – All direct physical losses are covered except those losses specifically excluded – Personal property is covered on a named perils basis Copyright ©2014 Pearson Education, Inc All rights reserved 20-4 Current Homeowners Policies • 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 Copyright ©2014 Pearson Education, Inc All rights reserved 20-5 Current Homeowners Policies • 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 ©2014 Pearson Education, Inc All rights reserved 20-6 Exhibit 20.1 Comparison of ISO Homeowners Coverages Copyright ©2014 Pearson Education, Inc All rights reserved 20-7 Exhibit 20.1 Comparison of ISO Homeowners Coverages (continued) Copyright ©2014 Pearson Education, Inc All rights reserved 20-8 Analysis of the HO-3 Policy • Section I: Property Coverages – Coverage A: Dwelling – Coverage B: Other Structures – Coverage C: Personal Property – Coverage D: Loss of Use – Additional Coverages Copyright ©2014 Pearson Education, Inc All rights reserved 20-9 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 ©2014 Pearson Education, Inc All rights reserved 20-10 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, for example: – 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 Copyright ©2014 Pearson Education, Inc All rights reserved 20-14 Section I Coverages • 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 Copyright ©2014 Pearson Education, Inc All rights reserved 20-15 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 funds transfer card or access device; forgery and counterfeit money Copyright ©2014 Pearson Education, Inc All rights reserved 20-16 Section I Coverages: Additional 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 a law – Grave markers Copyright ©2014 Pearson Education, Inc All rights reserved 20-17 Section I Perils Insured Against • The dwelling and other structures are insured for all direct physical losses unless specifically excluded • Personal property is insured for a direct physical loss 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, aircraft, vehicles, smoke, vandalism, theft, etc – The peril must be the proximate cause of the loss Copyright ©2014 Pearson Education, Inc All rights reserved 20-18 Section I Exclusions • The policy excludes: – 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 Copyright ©2014 Pearson Education, Inc All rights reserved 20-19 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 coverages – Premiums can be reduced by increasing the deductible – In states that are vulnerable to natural catastrophes, insurers can use percentage deductibles Copyright ©2014 Pearson Education, Inc All rights reserved 20-20 Section I Conditions • 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 Copyright ©2014 Pearson Education, Inc All rights reserved 20-21 Section I Conditions • • 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 ©2014 Pearson Education, Inc All rights reserved 20-22 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 Copyright ©2014 Pearson Education, Inc All rights reserved 20-23 Section I Conditions – If the dwelling is insured for less than 80% of the replacement cost, the insured receives the larger of: the actual cash value of that part of the building damaged, or Amount of insurance carried x Loss 80% x Replacement cost Copyright ©2014 Pearson Education, Inc All rights reserved 20-24 Section I Conditions • Some insurers offer an extended replacement cost endorsement, which pays 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 Copyright ©2014 Pearson Education, Inc All rights reserved 20-25 Section I Conditions • • • 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 is limit of liability bears to the total amount of insurance covering the loss No legal action can be brought against the insurer unless all policy provisions have been met – Legal action must be started within two years Copyright ©2014 Pearson Education, Inc All rights reserved 20-26 Section I Conditions • • • • • 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 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 Copyright ©2014 Pearson Education, Inc All rights reserved 20-27 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 Copyright ©2014 Pearson Education, Inc All rights reserved 20-28 ... II Conditions Copyright 201 4 Pearson Education, Inc All rights reserved 20- 2 Homeowners Insurance Basics • Homeowners insurance forms, drafted by the Insurance Services Office (ISO) are widely... materials and methods Copyright 201 4 Pearson Education, Inc All rights reserved 20- 6 Exhibit 20. 1 Comparison of ISO Homeowners Coverages Copyright 201 4 Pearson Education, Inc All rights reserved 20- 7... 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