Chapter 4 – Homeowners Insurance
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Introduction
As noted, Homeowners' Policies provide a package of Property and Liability Coverages tailored to the needs of most homeowners, apartment renters and condominium owners. This chapter focuses on the Homeowners Policies developed by the Insurance Service Office (ISO), an advisory organization serving insurers throughout the United States. Some insurers may use similar policy forms developed by the American Association of Insurance Services (AAIS), an advisory organization similar to ISO. Still, other insurers may develop their own policy forms.
Homeowner Policies
The most widely used HO policy is the HO- 00-03 Special Form and it is the basis for much the discussion in this chapter. Two other widely used homeowners forms HO-00-04 Contents Broad Form (for apartment renters) and HO-00-06 Unit Owners Form (for condominium owners) are discussed in a later chapter.
All homeowner’s policies include the following components:
Declarations
The first items on the declarations page usually are the policy number and the policy period. In most states, the policy periods begin at 12:01 am, standard time at the insured location. The date coverage begins is known as the inception date. The name of the insurance company may also be included in this section of the declarations.
The next items on the declarations page are the name and mailing address of the insured. If the address of the residence to be insured is not the same as the insured's mailing address, the address of the insured residence is also included.
The coverages under Section I and Section II are listed and a Limit of Liability is shown for each coverage. The amount of the premium also is included in this part of the declaration page, either as a single amount of all coverages or broken down to reflect the premium for each coverage.
The HO form under which coverage is provided is also indicated on the declarations page. The HO Form number may be pre-printed, or it may be filled in as part of the listing of forms and endorsements that are part of the policy. Endorsements are listed by number and any change resulting from an endorsement is shown in the same section of the declarations page.
Next, the deductible to be applied to property is listed. The standard deductible is $250. The amount of the deductible may be in-creased or decreased with a corresponding decrease or increase in premium. Homeowners' deductibles are discussed in a later chapter.
If the insured owns another residence for which Section II coverage is to be provided, the location of that residence must be shown. Example: if an insured owns a vacation home, the insured's HO policy covering the primary residence can also provide liability protection for the vacation home. The insured can then purchase separate insurance covering only the property loss exposures arising out of ownership of the vacation home.
Finally, if the insured premises are mortgaged, the mortgagee's name and address must be listed on the declarations page. This gives the mortgagee specific rights under the policy.
The Insuring Agreement
The insuring agreement, which applies to all coverages, states the following:
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"We will provide the insurance described in this policy in return for the premium and compliance with all applicable provisions of this policy".
A contract requires consideration from both parties. The insurer's consideration is its obligation to provide the specified insurance coverage for the policy period. The insured's consideration has two parts: the obligation to pay the policy premium and the obligation to comply with the policy conditions.
Definitions
When a contract is drawn up by one party and accepted by the other party, it is known as a Contract of Adhesion. Any ambiguities in a Contract of Adhesion are constructed against the party that drew the contract. Since the Homeowners Policy is a Contract of Adhesion, it is necessary to clearly define the terms used in the contract.
The terms "you" and "your" are defined in the HO-3 as referring to the "named insured", as shown in the declarations, and the spouse if a resident in the same household. The terms "we" and "our" refer to the insurer providing the coverage.
The term "resident premise" is also defined. It means the one family dwelling, other structures and grounds, or that part of any other building in which the insured resides and which is known as the "residence premises" in the declarations. "Residence premises" also means a two-family dwelling where the insured resides in at least one of
the family units and which is shown as the "residence premises" in the declaration.
Most of the other terms defined at the beginning of the HO policy refer to Section II - Liability and are discussed in a later chapter.
Property Coverages
The HO-3 policy includes the following 5 types of Property Coverage:
The description of each type of coverage includes definitions and exclusions intended to clarify the intent of the coverage.
Coverages "A" and "B" - Coverage for the insured's real property: the dwelling and other structures (such as a detached garage) is provided under coverages A and B.
Covered Property - Coverage A applies to the dwelling and attached structures on the residence premises. In addition, coverage is provided for building materials and supplies located on or next to the residence premises for use in construction alteration, or repair of either the dwelling or other structures on the residence premises. Coverage A does not apply to land, including the land on which the dwelling is located.
Coverage B applies to other structures on the residence premises that are detached from the dwelling. The policy clarifies the
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distinction between attached and detached structures by stating that a structure connected to the dwelling only by a fence or utility line is considered to be detached. Once again, land is specifically excluded. Other structures used in whole or in part of business are excluded. Other structures rented to someone other than a tenant of the dwelling are also excluded unless such a structure is used solely as a private garage.
The Homeowners Policy uses the phrase Limit of Liability to identify the amount of insurance applicable to each of the coverages. The phrase amount of insurance, amount of coverage, and coverage amount are used in insurance practice and in this book are synonyms for Limit of Liability.
When a HO-3 is purchased, the insured chooses the Coverage A - Limit of Liability based on the value of the covered dwelling. The Coverage B - Limit of Liability is automatically set at 10% of the amount of insurance for Coverage A unless the insured purchases a higher amount of insurance. An insured whose residence premises contains a large detached garage, workshop, barn, guest house or several smaller detached structures, may need to increase the Coverage B - Limit of Liability beyond the amount automatically provided.
While the covered perils are the same for Coverages A and B, the determination for which coverage applies to a garage or a shed is important. A policy with a $100,000 Coverage A - Limit of Liability would automatically provide $10,000 of additional
insurance for a detached garage or shed. If the same structure were attached to the insured's dwelling, it would be included in the $100,000 Coverage A - Limit of Liability.
Covered Perils - The HO-3 insures against risks of direct loss to property described in Coverages A and B but only if that loss is a physical loss to property. Coverage is further limited by the exclusions described below:
Exclusions
Some of the exclusions that limit the property coverages in Section I apply only to Coverages A and B. Other exclusions apply to all of the Section I coverages.
Exclusions Applying Only to Coverages "A" and "B"
The exclusions are the key to analyzing the perils insured against under Coverage A and B because direct physical loss to property is covered unless specifically excluded. The following exclusions apply only to Coverage A and B.
Collapse - Losses involving collapse is specifically excluded unless the cause of the collapse is described under the Additional Coverages Provision.
Freezing - When the dwelling is vacant, unoccupied or under construction, the insured must maintain heat in the building or shut off the water supply and drain the system and appliances of water. Otherwise,
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freezing of a plumbing, heating, air conditioning or automatic fire protective system or of a household appliance is not covered. Damage caused by discharge, leakage or overflow from within such a system or appliance is excluded unless the preceding precautions have been taken.
Foundations Retaining Walls, and Non-Building Structures - Loss by freezing, thawing, pressure or weight of water or ice to fences, swimming pools, foundations, retaining walls, piers, wharf’s or docks, also is excluded. This exclusion applies whether or not the water or ice was driven by wind, therefore, there is no coverage even if a loss to any of these structures was the result of a windstorm.
Dwelling Under Construction - Theft in or to a dwelling under construction is excluded. The theft exposure is much greater during construction than it is after construction is completed and the property is occupied.
Vandalism and Malicious Mischief - There is no coverage for vandalism and malicious mischief if the dwelling has been vacant for more than 30 consecutive days immediately before the loss. A dwelling being constructed is not considered vacant. There is a distinction between "vacant" and "unoccupied". A vacant dwelling is empty and unfurnished. An unoccupied dwelling is furnished but the residents are not on the premises. Therefore, if an insured from Vermont spends January and February in Florida, the Vermont dwelling is unoccupied but not vacant while the insured is in Florida.
Risks of Direct Physical Loss Exclusion
Coverage A and B insure property against risks of direct physical loss that are not specifically excluded. Policies that provide such broad coverage generally contain an exclusion that lists specific causes of loss that are not insured. Thus, Coverages A and B do not insure losses caused by any of the following:
1. wear and tear, marring, deterioration
2. inherent vice, latent defect, mechanical breakdown
3. smog, rust or other corrosion, mold, wet or dry pot
4. smoke from agricultural smudging or industrial operations
5. discharge, dispersal, seepage, migration, release or escape of pollutants (unless caused by a peril covered under Coverage C)
6. settling, shrinking, bulging or expansion, including resultant cracking of pavements, patios, foundations, walls, floors, roofs or ceilings.
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coverage for loss to the system or appliance from which the water escaped.
Concurrent Causation Exclusion
Sometimes there is more than one peril involved in a loss. As such, each peril may be called a concurrent cause of the loss and insurance problems can arise if one of the perils is covered and another is excluded.
The HO-3 and many other insurance policies that provide coverage for risks of direct physical loss contain provisions intended to resolve problems arising from losses including Concurrent Causation. Thus, the HO-3 does not insure for loss to property described in Coverages A and B if the loss is caused by any of the following:
1. Weather Conditions - This exclusion applies only to conditions that contribute to a loss that would otherwise be excluded. Example: damage caused by windstorm would not be affected by this exclusion.
exclusion denies coverage when loss results from acts or decisions, including the failure to act or decide, of any person, group, organization or government body.
maintenance of any property on or off the residence premises. However, these exclusions do not apply to any ensuing loss to property if such loss is not excluded or excepted by some other policy provision.
Exclusions to All Section I Coverages
The HO-3 contains 8 general exclusions that apply to all of the coverage in Section I. Those exclusions are:
Ordinance of Law - Loss caused by enforcement of any ordinance or law regulating the construction, repair, demolition of a building or other structure is not covered unless specifically provided under the policy. Example: an old dwelling not meeting the current building code is damaged. Because of the provisions of a building ordinance, repairs would have to include extensive modifications to the dwelling's wiring, plumbing and foundation. The additional cost of these modifications is not covered because of the Ordinance or Law Exclusion.
Earth Movement - There is no coverage for property damage from earthquake (including land shock waves associated with a volcanic eruption), landslide, mine subsidence, mud-flow, earth sinking, rising, or shifting. However, if direct loss by fire, explosion, breakage of covered glass or safety glazing material insurers, coverage is provided for the ensuing loss. The earth movement exclusion does not apply to loss by theft, such as looting following an earthquake.
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Water Damage - The water damage exclusion is often referred to as the flood exclusion but, in fact, it also excludes other types of water damage to which dwellings and their contents are exposed. Water damage from the following is excluded:
1. flood, surface water, waves, tidal water, overflow of a body of water, spray from any of these whether or not driven by wind.
2. water which backs up through sewers or drains or which overflows from a pump.
3. water below the surface of the ground, including water which exerts pressure on, or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure. However, direct loss by fire, explosion or theft resulting from water damages is covered. Example: if the dwelling is flooded and the insured is evacuated, the flood damage would not be covered, but furnishings stolen from the dwelling by looters would be covered.
Power Failure - Loss caused by the failure of power or other service utility is excluded if the failure occurs off the residence premises. Therefore, if a hurricane knocked out the power from the local electric company and a freezer full of meat spoiled, there would be no coverage for the loss of the meat. If the power failure is caused by an insured peril on the residence premises, any resulting loss is covered. If lightning strikes the dwelling causing a power interruption, the consequent freezer food spoilage would be covered.
Neglect - If the insured neglects to use all reasonable means to save and preserve property at and after the time of loss, there is no coverage for any damage that results from the insured's neglect. This exclusion encourages the insured to take reasonable steps to protect endangered property. The requirement that property must also be protected following the loss encourages the insured to exercise the same degree of care for the insured property as he/she would if the property were not covered by insurance.
War - This exclusion applies to war, as well as, to any of the following types of actions and any consequences of these actions:
Discharge of a nuclear weapon is considered a warlike act even if such discharge is accidental. The War Exclusion takes away some of the worldwide coverage for personal property ordinarily provided under Coverage C. Therefore, the loss would not be covered if the insured's luggage and its contents were damaged when rebellion breaks out in the foreign country the insured is visiting.
Nuclear Hazard - Losses caused directly or indirectly by nuclear hazard is excluded but direct loss by fire resulting from the nuclear hazard is covered. This exclusion is unusual in that the actual Nuclear Hazard Exclusion
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is part of the Section I - Conditions, discussed later in this chapter.
Intentional Loss - There is no coverage for any loss arising out of any act committed by or at the direction of an insured with the intent to cause a loss. Not only must the act be intentional but the loss must also be intended. This exclusion eliminates coverage for all insured when an intentional loss is committed by or at the direction of any insured. Example: there is no coverage available to the innocent spouse of an arsonist who burned down the family home.
Coverage C provides insurance for personal property of the insured. Special limits apply to some types of property and some property is excluded from coverage.
Covered Property
Coverage C provides worldwide coverage for personal property owned or used by an insured. At the insured’s request, coverage is extended to personal property owned by others while the property is on the part of the residence premises occupied by an insured. The requirement that the property be on the part of the residence premises occupied by an insured is designed to eliminate coverage from the personal property of a tenant.
At the request of the insured, personal property owned by a guest or a residence employee is covered while the property is in any residence occupied by an insured. The term "any residence" is broader than the "residence premises" but note that coverage
under this section is limited to guests of the insured and residence employees.
If personal property is scheduled (described and listed separately) on another policy or endorsement such as the scheduled Personal Property Endorsement, such scheduled property is not covered under Coverage C. For this reason, the subject matter of Coverage C is at times called Unscheduled Personal Property. The overall Limit of Liability for Coverage C is 50% of the Coverage A figure. A limitation of 10% of the Coverage C amount exists for personal property usually located at a secondary residence. There is a minimum of $1,000 coverage for such property.
Assume that John and Marsha Cabot, residents of Miami, have a HO-3 with a Coverage A limit of $200,000. The Limit of Liability under Coverage C would be $100,000 (50% x $200,000). The Cabots also own a summer cabin home in North Carolina. The HO-3 with their Miami house would provide $10,000 (10% x $100,000) coverage for personal property usually located at the secondary residence in North Carolina. Furniture, appliances and household items left year round in North Carolina would be subject to the $100,000 limitation. If the Cabots regularly carried their television, videocassette recorder and clothing back and forth from Miami to North Carolina, these items would not fall under the $10,000 limitation.
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Property Subject to Special Limits of Liability
Eleven types of property are subject to special Limits of Liability under Coverage C of the HO-3. These limits do not increase the overall Coverage C Limit of Liability but represent sub-limits within the overall limit. The special limit for each category is the total limit for each loss for all property in that category. Following are the special Limits of Liability:
1. $200 on money, bank notes, bullion, gold other than goldware, silver (other than silverware), platinum, coins and medals.
2. $1,000 on securities, accounts, deeds, evidences of debt, letters of credit, notes (other than bank notes), manuscripts, personal records, passports, tickets and stamps. This dollar restriction applies regardless of the medium on which the material exists. The costs to research, replace, or restore the information from the lost or damaged material is included in this Special Limit of Liability.
3. $1,000 on watercraft, including their trailers, furnishings, equipment and out- board engines or motors.
4. $1,000 on trailers not used with watercraft.
5. $1,000 for loss by theft of jewelry, watches, furs, precious and semiprecious stones.
6. $2,000 for loss of theft of firearms.
7. $2,500 for loss by theft of silverware, silverplated wares, goldware, goldplated ware, and pewterware. This includes flatware, hollowware, tea sets, trays and trophies made of or including silver, gold or pewter.
8. $2,500 on property, on the residence premises, used at any time or in any manner for any business purpose.
9. $2,500 on property, away from the residence premises, used at any time or in any manner for any business purpose.
10. $1,000 for loss to adaptable electronic apparatus while it is in or upon a motor vehicle or other motorized land conveyance. Such adaptable electronic apparatus is equipped to operate by power from the electrical system of the vehicle while retaining its capability of being operated by other sources of power.
11. $1,000 for loss to adaptable electronic apparatus while it is (a) not in or upon a motor vehicle or other motorized land conveyance, (b) away from the residence premises, (c) used at any time, or in any manner, for any business purpose.
Property Excluded from Coverage
There are 9 categories of property not covered under Coverage C of the HO-3.
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insured in this or other insurance. Coverage C provides Unscheduled or Blanket Coverage. Example: If a particular item, a diamond ring, is scheduled on a Personal Articles Floater Endorsement, then it is excluded from Blanket Coverage under Coverage C. This applies if the scheduled coverage is provided by an endorsement to the HO policy or if it is provided under a separate policy. This eliminates duplicate coverage and possible disputes about which coverage should be primary in the event of a loss.
2. Animals, birds, or fish are excluded from coverage. Household pets are difficult to value and even more difficult to insure. They are subject to loss from a variety of causes including theft, illness and simply becoming lost. Property policies have traditionally excluded household pets from coverage.
3. There is no coverage for motor vehicles, all other motorized land conveyances and their equipment and accessories. Also excluded is electronic apparatus that can be operated solely by power from the electrical system of a motor vehicle land conveyance. However, the exclusion applies to equipment, accessories and electronic apparatus only while such property is in or upon the vehicle or conveyance. Coverage C does provide coverage for vehicles or conveyances not subject to motor vehicle registration and which are used to service an insured's residence or designed for assisting the handicapped.
4. Aircraft and parts are also excluded. An aircraft is defined as any conveyance used or designed for flight, except model or hobby aircraft not used or designed to carry people or cargo.
5. Property of roomers, boarders and other tenants (except property of roomers and boarders related to an insured) is excluded. Any non-related tenant should have his/her own insurance. This exclusion is consistent with the description of property of others that the policy would cover at the insured's option.
6. There is no coverage for property in an apartment that is regularly rented or held for rental to others by an insured. This refers to property, such as furniture, owned by the insured and used to furnish a rental apartment. This exclusion does not apply to the landlord's furnishings, which are subject to an additional cover- age discussed later.
7. Property rented or held for rental to others off the residence premises is also excluded. This section makes it clear that property related to an insured's rental operations is excluded whether on or off the residence premises.
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computer programs available on the retail market. Business records, including computer floppy disks, could be covered under Valuable Papers and Record Policy or Electronic Data Processing Policy if they are to be insured at all. The HO-3 is not intended to provide coverage for a business exposure of this nature.
9. Credit cards and fund transfer cards are excluded except as provided in the Additional Coverages Section described later.
Covered Perils
Insurance is provided under Coverage C for direct physical loss to personal property from the following sixteen perils:
1. Fire or lightening - The Fire Insurance provided by a HO policy is one of the most important coverages for the typical homeowner. The Homeowners Policy, following the practice in Property Insurance forms that preceded it, does not define the term fire. Insurers rely instead on the definition of fire that has grown out of court cases relating to insurance coverage. The courts have generally held that fire means combustion or oxidation rapid enough to cause a flame or glow. In addition, the courts have held that insurance coverage applies only to "hostile fires", fires that are not within there intended confines. A fire that re- mains within its intended confines, such as a fireplace, charcoal grill or stovetop is termed a "friendly
fire". No coverage is provided for damage caused by friendly fires. Example: no coverage is provided for scorching of the finish on a chair that was set too close to a fireplace, unless the chair itself caught fire. Likewise, there would be no coverage for fire damage to a pair of eyeglasses that melted after being accidentally dropped into a charcoal grill.
Lightning, although not specifically defined in the HO Policy, is generally considered to be a discharge of atmospheric electricity.
2. Windstorm or Hail - the Windstorm Peril includes damage from violent winds, such as hurricanes and tornadoes. The coverage for loss due to windstorm or hail excludes loss to property located within a building caused by rain, snow, sleet, sand or dust, unless the direct force of the wind or hail created an opening in the roof or wall through which these elements could enter. Windblown rain entering through an open window or around the crevices of a poorly fitted one is not covered. Wind or hail damage to a boat and its equipment is covered only if the boat is located inside a fully enclosed building.
3. Explosion - Explosion is not defined in the policy. A loss to the contents of a dwelling caused by an explosion off the property, such as an industrial explosion or blasting work would be covered. Other covered explosions include water damage, bursting pipes and sonic booms.
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4. Riot or Civil Commotion - The term riot is defined by state laws. One state defines riot as public activity involving 3 or more persons with a common purpose who carry out that purpose with a show of force. A civil commotion is generally considered to be a large or prolonged riot. Damage to Personal Property resulting from a riot or civil commotion is covered.
5. Aircraft - Damage from aircraft, including self-propelled missiles and spacecraft is covered.
6. Vehicles - HO Policies provide coverage for damage to the insured's property by a vehicle, even a vehicle owned by an insured. Example: if a motorist lost control of a vehicle and crashed into the insured's patio furniture, the loss of the furniture would be covered under all forms of the HO policy. In addition, if the insureds son ran over a lawn mower while putting the family car into the garage, the loss to the lawn mower would be covered.
but coverage is provided for willful or malicious damage to property caused by one or several persons without the violence associated with a riot.
9. Theft - The Theft Peril includes attempted theft and loss of property from a known place when it is likely that the property has been stolen. Example: an insured checks in at an airline gate one hour before the flight departs, places some carry-on luggage in the passenger waiting area and leaves to buy a cup of coffee from a nearby vending machine. Upon returning to the waiting area, the insured finds that the carry-on luggage has disappeared. If the airline personnel at the gate have no knowledge of what happened to the luggage, the most likely presumption is that it was stolen. This type of loss would be covered and the Actual Cash Value of the luggage and its contents, in excess of the policy deductible, would be paid to the insured.
10. Falling Objects - Damage caused by a falling object to personal property contained within a building is covered only if the roof or an outside wall of the building is first damaged by that falling object. Example: it would be possible for a tree to fall against the exterior wall of a masonry home with sufficient force to knock a mirror off an interior wall and onto the floor without actually damaging the exterior wall. In such a case, the damage to the mirror would not be covered. If the exterior wall were damaged, loss to the mirror would be covered subject to the policy deductible.
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11. Weight of Ice, Snow or Sleet - Coverage is provided for personal property within a home damaged by the weight of ice, snow or sleet. Therefore, if the weight of snow collapsed the roof of the home, the resulting damage to the contents of the home would be covered.
12. Accidental Discharge or Overflow of Water or Steam - This policy covers loss resulting from accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioner, and automatic fire protective sprinkler system or from a household appliance. Example: if an automatic dishwasher malfunctions and floods the kitchen, water damage to the kitchen furniture would be covered. Coverage is not provided for the damage to the system or appliance from which the water or steam escaped. Any loss or damage from freezing is covered under the terms of the freezing peril.
13. Sudden and accidental tearing apart, cracking, burning, or bulging of a steam, hot water, air conditioning, automatic fire protective sprinkler system, or appliance for heating water - Coverage for this peril includes damage to the objects or systems and the ensuing damage to personal property, such as might occur when a water heater suddenly explodes.
can result in burst pipes, releasing water or other liquids that damage personal property. Coverage applies unless the dwelling is unoccupied and the insured has not taken reasonable care to maintain heat in the building, shut off the water supply, drain the system and appliances of water.
15. Sudden and accidental damage from artificially generated electrical current - Most damage of this type is caused by power surges due to sudden increases of the current in an electrical system. Damage to a tube, transistor or similar electronic equipment is excluded. If a power surge caused an electric clothes dryer to burn out, the loss would be covered.
16. Volcanic Eruption - Loss caused by a volcanic eruption is covered except for loss caused by earthquake, land shock waves or tremors. Property damage caused by volcanic explosion, volcanic ash, lava flow or airborne shock waves would be covered.
Coverage "D" Loss of Use
In the event of a loss under Coverage A, such as fire damage to the dwelling, the insured may lose the use of the dwelling because it is uninhabitable, while repairs are being made. The act of civil authority, such as the evacuation ordered because of a nearby fire, may also cause the insured to temporarily lose the use of the dwelling. Coverage D provides compensation to the insured in the event of such loss of use.
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Compensation for loss of use is determined in one of two ways depending on the circumstances of the loss.
First method of determining payment is the insured's additional living expenses, which is the insured's necessary increase in living expense required to remain in the household's normal standard of living. Example: if a family were forced to move out of its home for 2 weeks, additional living expenses would typically include the costs of motels, restaurant meals and laundry service, less the cost of normally prepared meals at home and any reduction in utility bills during the period of repairs.
The second method of use Is Fair Rental Value, which is the amount of rent that could reasonably be charged for the premises, less any expenses that do not continue while the premises are not fit for habitation.
Loss of Use Resulting from Coverage "A" Losses
Payment for this loss is made for the shortest time required repairing or replacing the damage to the dwelling. If the insured chooses to permanently relocate rather than move back into the dwelling, payment is made for the shortest time required to relocate. This basis on which the insured is compensated depends on the use of the premises at the time.
Insured's Principal Place of Residence - Loss payment is made on the basis of Additional Living Expense or Fair Rental
Value at the option of the insured. Loss payments are made on the basis of additional living expenses. The insured does not have the option of payment on the basis of Fair Rental Value.
Part of the Insured's Residence Premises Rented to Others - When loss of use occurs to part of the residence premises rented to or held for rental to others, loss payment is made on the basis of Fair Rental Value.
Loss of Use Resulting from Action of a Civil Authority - To be covered, loss of use must result when a civil authority prohibits the insured from using the residence premises because of a peril insured against under the policy. Loss payment is made for no more than 2 weeks on the basis of Additional Living Expense or Fair Rental Value, at the option of the insured.
Additional Coverages
The following additional coverages are included in the HO-3 to provide protection, subject to certain limitations, in the event of specific perils and types of losses:
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Debris Removal - Coverage is provided for the reasonable expense incurred for removal of debris of covered property if the loss was caused by a covered peril. Example: cost of removing debris from a house after a fire.
The cost of debris removal is included in the Limit of Liability that applies to the damaged property. In the event that the loss for actual damage to the property plus debris removal exceeds the policy limit, an additional 5% of the coverage Limit of Liability is available for debris removal expense.
The insurer will pay up to $500 to remove fallen trees that damage a covered structure on the residence premises. Payment will be made for (1) the insured's tree(s) felled by windstorm or hail, (2) the insured's trees felled by weight of ice, snow or sleet, (3) a neighbor's tree(s) felled by a peril that is covered under Coverage C. The $500 amount is the most that will be paid in any one loss regardless of the number of fallen trees.
Reasonable Repairs - Coverage is provided for the reasonable cost incurred by the insured following a loss from a peril insured against, a necessary measure to protect covered property from further damage. Example: if part of the roof of the insured's house is blown off during a tornado, coverage for reasonable re-pairs would pay for the purchase of plywood, tarps and other material to protect household goods from rain and weather damage until permanent repairs could be made.
Trees, Shrubs, and Other Plants - Coverage is provided for trees, shrubs, plants or lawns on the residence premises for loss caused by fire, lightening, explosion, riot or civil commotion, aircraft, vehicles not owned or operated by a resident of the resident premises, vandalism, malicious mischief and theft.
The limit for this coverage is 5% of the Coverage A Limit of Liability but not more than $500 of this limit will be paid from any one tree, shrub or plant.
Fire Department Service Charge - Up to $500 of coverage is provided for fire department service charges incurred when the fire department is called to save or protect covered property from an insured peril. Coverage is not provided if the property is located within the limits of the city, municipality or protection district furnishing the fire department response.
Property Removed - Covered property is insured against direct loss from any cause while being removed from a premise endangered by an insured peril. This coverage extends for no more than 30 days while the property is removed.
Credit Card, Fund Transfer Cards, Forgery and Counterfeit Money - Up to $500 of coverage is provided for the following:
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Coverage is not provided for use of a credit card or fund transfer card by a resident of the insured's household or by a person entrusted with either type of card. Coverage is similarly not provided if the insured has not complied with all the terms and conditions under which the cards are issued.
When the Limit of Liability is being determined, all losses resulting from a series of acts committed by any one person is considered to be one loss. This coverage is additional insurance. No deductible applies to this coverage.
Loss Assessment - Up to $1,000 of coverage is provided for loss assessment by a corporation or association of property owners charged against the insured as owner or tenant of the residence premises. This coverage is only provided when the assessment is made as a result of direct loss to the property owned collectively by all members and the loss is caused by a peril insured under Coverage A. Example: suppose 4 families with ad-joining lakeside properties decide to construct a pier for docking their boats. To do this they form an Association to build and maintain the pier. Sometime later, the pier is struck by
lightning and burns to the water line. Repairs to the pier cost $6,000 and each property owner is assessed 25% of the cost ($1,500) to repair the pier. For any property owner who had insured his/her lake side property under the HO-3, the insured's HO-3 policy would provide $1,000 toward this loss.
Collapse - Coverage is provided for direct physical loss to covered property involving collapse of a building or part of a building caused only by one of the following:
1. perils insured against in Coverage C
2. hidden decay
4. weight of contents, equipment, animals or people
5. weight of rain which collects on a roof
6. collapse during construction, remodeling or renovation due to the use of defective materials or methods
Loss to non-building structures, underground pipes and structures, retaining walls and piers, wharf’s and docks is not covered under item 2 through 6 above, unless the loss is a direct result of the collapse of a building. Collapse does not include settling, cracking, shrinking, bulging or expansion.
This coverage does not increase the Limit of Liability that applies to the damaged-covered property.
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Glass or Safety Glazing Material - Coverage is provided for (1) breakage of glass or safety glazing material that is part of a covered building, storm door, or storm window and (2) damage to covered property that is caused by such glass or safety glazing material. However, there is no coverage for loss on the residence premises if the dwelling has been vacant for more than 30 consecutive days immediately before the loss occurs.
Coverage for glass and safety glazing materials does not increase the applicable Limit of Liability.
Landlord's Furnishings - Up to $2,500 will be paid for loss of appliances, carpeting and other household furnishings in apartments on the residence premises that the insured regularly rents or holds for rental to others. Coverage applies to losses caused by the perils insured against in Coverage C except that there is no coverage for theft. The $2,500 limit is the most that will be paid regardless of the number of items of landlord's furnishings involved in a loss.
Conditions
The conditions applicable to Section I of the HO-3 policy primarily deal with the rights and duties of the insured and the insurer following a property loss. With few exceptions, the conditions apply to all of the Section I - Property Coverages. The Section I Property Coverages also are subject to the Section I and II conditions, discussed in the next chapter. These conditions deal with matters such as the policy period,
cancellation non-renewal, assignment, subrogation and other matters that apply to both the Property and Liability Coverage in the policy. The Section I conditions are examined in the balance of this chapter.
Insurance Interest and Limit of Liability
This condition states that the basic insurance principle for any insured's loss recovery is limited to the extent of that insured's insurable interest.
Duties After Loss
If there is a loss to covered property, the insured must make certain that the following duties are performed.
Prompt Notice - Prompt notice must be given to the insurer or its agent. The police must be notified of a theft loss. The issuer of a credit card or fund transfer card must be notified of loss, theft or unauthorized use of one of these cards. This helps prevent fraudulent losses and limits the amount of loss.
Protect the Property - The insured must protect the property from further damage, make reasonable and necessary repairs to protect the property and keep an accurate record of repair expenses. Payment for these expenses comes from additional coverage for reasonable repairs.
Prepare an Inventory - The insured must prepare an inventory of damaged personal property showing the quality, description, Actual Cash Value and amount of loss. The
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insured should be able to justify the figures in the inventory with bills, receipts and related documents.
Show the Damaged Property - As often as the insurer reasonably requires the insured must show the damaged property and provide records and documents. The insured must submit to questions, under oath, while not in the presence of any other insured, again, as often as the insurer reasonably requires.
File a Proof of Loss - Within 60 days of the insurer's request, the insured must submit a signed, sworn proof of loss. This must include, to the best of the insured's knowledge and belief, the time and cause of loss, the interest of the insured and all others in the property including all liens on the property, other insurance covering the loss, and other relevant information. This helps the company to determine insurable interest, to investigate the loss and to coordinate payment with any other insurance.
Loss Settlement
The provision in this condition explains how losses to covered property will be settled. Losses to personal property, awnings, carpeting, household appliances, outdoor antennas and outdoor equipment attached or not attached to building, and non-building structures are all settled on an actual cash basis.
Non-building structures are those not designed for human occupancies, such as fences, concrete patios and swimming pools.
An endorsement may be added to the policy that changes the settlement basis for personal property to replacement cost. This Endorsement will be discussed in a later chapter.
Losses to the dwelling and other structures are paid on the basis of replacement cost with no deduction for depreciation. Insurance on a replacement cost basis is one of the most important features of the Homeowners Policy. The Homeowners Policy contains a provision that reduces the loss payment if the insured does not carry coverage equal to at least 80% of the replacement cost of the damaged structure. Note that the 80% figure applies not only to the dwelling but also to other covered structures. Example: assume that an insured's residence premises include a detached garage. The Coverage B limit on that garage must be equal to at least 80% of the replacement cost of the garage for Replacement Cost Coverage to apply to a loss to the garage.
Determining whether a loss under a Homeowners Policy will be settled on a replacement cost basis is a simple process. The following insurance-to-value formula is used to determine whether the insured has coverageequal to at least 80% of the replacement cost of the damaged structure.
Insurance-to-value fraction;
amount of insurance carried
80% of replacement cost
Example: assume that an insured carries a Homeowners Policy with a Coverage A limit
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of $100,000 on a dwelling that has a replacement cost of $110,000. Using these dollar amounts in the insurance-to-value fraction yields the following:
$100,000 = 100 or 1.14
80% x 110,000 88
In the event of a covered loss to the dwelling, the insured would receive settlement on a replacement cost basis because the value of the fraction is greater than 1.
Another Example: assume that the same insured's residence premises also includes a detached garage with a replacement cost of $20,000. On the HO-3, the Coverage B limit is 10% of the Coverage A limit, unless the insured purchases additional limits. Therefore, the insured's policy with $100,000 of coverage on the dwelling provides $10,000 of coverage on the detached garage.
The insurance-to-value fraction yields the following result with regard to coverage on the garage:
$10,000 = 10 or .625
80% x $20,000 16
Because the value of the fraction is less than 1, the amount of insurance carried on the garage does not meet the policy’s insurance-to-value requirements. Therefore, if a covered loss occurred to the garage, payment would not be made on a replacement cost basis. When the amount of coverage carried does not meet the insurance-to-value requirements, the policy will pay the larger of the following 2 amounts:
1. the insurance-to-value fraction, multiplied by the replacement cost of the loss.
2. the Actual Cash Value of the loss, typically meaning replacement cost less depreciation.
Example: assume that the roof of the insured's $20,000 detached garage was damaged by a hurricane. The calculations above show that the loss will not be settled on a replacement cost basis. However, both the replacement cost and the Actual Cash Value of the damage to the roof are needed to determine the amount the insured will receive. Assume that the replacement cost of the damage to the roof is $1,000. Because the roof is 10 years old, the Actual Cash Value of the loss is $500. The amount the insured will receive depends on which amount is greater: (1) the insurance-to-value fraction, multiplied by the $1,000 replacement cost or (2) the $500 Actual Cash Value. For purpose of illustration, the effect of the policy deductible has been ignored. Calculating the amount payable under the 1st options yields the following:
Amount of insurance carried x Replacement cost 80% X
replacement cost of loss.
$10,000 x $1,000 = 625
80% x 20,000
Because $625 is greater than $500, the insured will receive $625 in settlement of the loss. If, however, the actual cash value of the damage were $900 because the garage roof had recently been replaced, the insured would receive a $900 settlement. The insured always receives the larger of the two amounts.
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Loss to a Pair or Set
This condition applies when there is a loss to 1 item in a pair or to part of a set of items. The loss of 1 item does not result in a total loss of the value of a pair or set. Therefore, the insurer may elect to (a) repair or replace any part to restore the pair or set to its value before the loss or (b) pay the difference between the Actual Cash Value of the property before and after the loss.
Glass Replacement
This condition is an exception to the exclusion for loss caused by enforcement of ordinances or laws. For safety purposes, many communities required that broken glass in storm doors or windows be replaced by safety glazing material such as tempered glass or plastics. Use of such materials can prevent injuries that occur when ordinary glass shatters. To encourage safety, the insurer agrees that if a glass door (or other glass subject to such a law) must be replaced following a covered loss, the insurer will pay the additional cost to meet the requirements.
Appraisal
The appraisal provision outlines the procedure for settling disputes between the insurer and the insured if they cannot agree about the amount of the loss. The insurer and the insured each select competent appraisers within 20 days of receiving a written request from the other. These appraisers then select an umpire. The 2 appraisers review the items in question and
set an amount of loss for each item. If the appraisers do not agree on the value of an item, the umpire is asked for an opinion. Agreement of 2 of the 3 persons will set a value for the amount of the loss. The final document setting the value of the contested item is called an Appraisal Award.
Other Insurance
If a loss covered by a Homeowners Policy is also covered by another insurance policy, the Homeowners Policy will contribute to the loss settlement on a pro-rata basis.
For the purposes of illustration, assume that a loss qualifies for payment under Coverage C of 2 Homeowners Policies. The calculation of each insurer's pro-rate share of the loss is a 2-step process. First, the Coverage C limits of the 2 policies would be added to find the sum of the Coverage C limits. Second, the Coverage C limit of each policy would be divided by the sum of the Coverage C limits. The result of this calculation, for each policy, is the percentage of loss the policy will pay.
Example: assume that a loss is covered under polices A and B with coverage limits of $10,000 and $40,000, respectively. If the amount of the loss settlement were $5,000, the pro-rate share of each insurer would be calculated as follows:
Sum of coverage limits =
$10,000+$40,000 = $50,000
Insurer A's pro-rata share:
10,000 x $5,000 = $1,000
50,000
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Insurer B's pro-rata share:
40,000 x $5,000 = $4,000
50,000
Suits Against the Insurers
This condition sets a time of 1 year, or longer in some states, during which the insured may take legal action to settle a dispute with the insurer. It also requires the insured to comply with all other policy provisions before a legal action may be brought against the insurer. For instance, if an insured disputes the amount of a loss settlement offered by the insurer, the insured must follow the policy's appraisal provision before filing suit against the insurer.
Additional Loss Settlement Conditions
Insurer's Option - This condition gives the insurer the right, after providing written notice to the insured, to repair or replace any part of the damaged property with like property. Insurers are often able to purchase items from replacement services at costs lower than the insured would have to pay in the retail market. The result is that the insured is indemnified and the insurer has met its contractual obligation while producing loss settlement costs.
Loss Payment - This condition indicates who will be paid and when payment will be made. It is, with regard to the Section I Coverages, the insurer's promise. It states that payment will be made to the named insured unless the policy provides otherwise, or unless someone else is legally entitled to
receive payment. For instance, the "legal representative" of the insured following the insured's death. The loss settlement provisions are reinforced by the requirement that a proof of loss be filed by the insured. After the insured files the proof of loss, the insurer will pay within 60 days after reaching an agreement with the insured, receiving a final judgment (in a legal action), or following the filing of an appraisal award.
Abandonment of Property - This condition prohibits the insured from claiming that property damaged in a covered loss is automatically owned by and the responsibility of the insurer. The insurer has the option of paying for damaged items in full and then taking the item as salvage.
Mortgage Clause - Most insured dwellings are purchased with a mortgagee. In such cases, the name and address of the mortgagee (the lender) are shown on the policy declarations page. The Mortgage Clause provides that any loss payable under Coverage A or B will be paid to the insured and the mortgagee as their interest appear in the policy. In practice, insurers often draw a settlement check payable to both the insured and the mortgagee and the proceeds of the check are used to pay for repairs necessitated by the loss.
No Benefit to Bailee - When an insured delivers property to a bailee, the bailee's receipt may state that if the insured has valid insurance on the property and there is a loss, the bailee need not pay the insured.
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Recovered Property - If either the insurer or the insured recovers stolen property, for which a loss payment has already been made, that party is required to notify the other of the recovery. The insured then has the option of accepting the recovered property and returning the loss payment to the insurer or giving the property to the insurer and keeping the loss payment.
Chapter 4 - Review Questions
1. The most widely used Homeowner Policy is:
A. HO-4
B. HO-6
C. HO-3
D. HO-2
2. The property coverages included in the HO-3 Policy would include all of the following except:
A. Dwelling Coverage
B. Definitions Coverage
C. Personal Property Coverage
D. Other Structures Coverage
3. "We will provide the insurance described in this policy in return for the premium and compliance with all applicable provisions of this policy.” is an example of:
A. insuring agreement
B. a definition
C. an exclusion
D. none of the above
4. Coverage B Limit of Liability is automatically set at what percentage of the amount of insurance for Coverage A (unless the insured purchases a higher amount of insurance):
A. 40%
B. 30%
C. 20%
D. 10%
5. Coverage C protects:
A. dwelling
B. other structures
C. personal property
D. all of the above
ANSWERS
1. C
2. B
3. A
4. D
5. C