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

Chapter 20
Homeowners
Insurance,
Section I

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Agenda
• Homeowners Insurance Basics
• Analysis of Homeowners 3 Policy
– Section I Coverages
– Section I Perils Insured Against
– Section I Exclusions
– Section I Conditions
– Section I & II Conditions

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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

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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

•

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

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Exhibit 20.1 Comparison of ISO
Homeowners Coverages (con’t)

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Exhibit 20.1 Comparison of ISO
Homeowners Coverages

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Analysis of the HO-3 Policy
• The HO-3 policy has two sections of coverage:
– Section I: Property Coverages
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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

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Analysis of the HO-3 Policy
• The following persons are considered “insureds”
under the policy:
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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 on
the dwelling (Coverage A)

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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

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Exhibit 20.2 Special Limits of
Liability

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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
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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

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Section I Coverages
•

Additional coverages in Section I include:
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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

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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

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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

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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

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

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Section I Conditions
•

Losses to the dwelling and other structures are paid on
the basis of replacement cost with no deduction for
depreciation
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If the dwelling is insured for at least 80% of replacement cost at
the time of loss, partial losses are paid in full
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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

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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
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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

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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

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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

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Insight 20.3 The Big Gap Between
Replacement Cost and Actual Cash Value
Can Empty Your Wallet

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