Principles of risk management and insurance 12th by rejde mcnamara chapter 20

Chapter 20
Homeowners
Insurance,
Section I


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-ofdirect-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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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

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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

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Exhibit 20.1
Comparison of
ISO Homeowners
Coverages

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Exhibit 20.1 Comparison of ISO Homeowners
Coverages (continued)

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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

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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
•

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 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, 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

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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 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 funds transfer card or access
device; forgery and counterfeit money

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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

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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

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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

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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 1 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
•

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
•

•

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
– 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

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Section I Conditions
– 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
2.

Amount of insurance carried
x Loss
80% x Replacement cost

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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

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