Chapter 7 – Other Residential Insurance
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Introduction
The previous three chapters described the Homeowners Policies used by a large number of people to insure their Real and Personal Property. This chapter discusses other types of Residential Insurance.
Owners of mobile homes and farms can insure their residences under Homeowners Policies that include endorsements specifically designed for these types of residence under Dwelling Policies. These are Mono Line Policies that provide Property Coverage similar in many ways to the Property Coverage in Homeowners Policies. In some instances, the owner of a residence may not be able to purchase Homeowners Insurance because the location of the residence does not meet underwriting requirements. The owners of such residences may be able to purchase Property Insurance through Fair Plans or Beachfront Plans, which are Assigned Risk Plans for Property that is difficult to insure in the standard insurance market.
This chapter concludes with a family residence insurance case. This case presents several loss situations and explains how Homeowners Policies and other types of residence insurance would apply to the losses.
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Homeowners Insurance for Mobile Homeowners
As housing prices have increased in recent years, so have mobile homes sales. Mobile homes are generally less expensive than conventional housing. The flexibility of mobile homes also makes them useful when the housing requirement may not be permanent. Often in "boom" towns when employment is temporarily increased due to the operation of an oil shale facility or surface mine, the workers purchase and set up mobile homes. Mobile homes also are used as summer or vacation homes.
Exposures
The owners of mobile homes face the same exposures to loss, as do owners of conventional homes. Therefore, a mobile homeowner may experience loss to the dwelling or another structure on the residence premises and the contents of either. There is also an exposure to Liability Loss because of Bodily Injury or Damage to the Property of Others.
The Mobile Home and Other Structures
The mobile home itself is Personal Property rather than Real Property. The essence of the mobile home is its impermanence. In some areas of the country, a mobile home is
required to have wheels and axles attached even when set up. This is to emphasize the mobile nature of the structured dwelling. These differences are usually recognized in the manner in which the mobile homes are taxed. Therefore, mobile homes are sometimes taxed as vehicles rather than structures.
When a mobile home is set up, it may be surrounded by skirting that conceals the wheels and gives the appearance of a permanent structure. Patio covers are often attached to mobile homes and sheds and similar outbuildings set up nearby. When they are set up, mobile homes are subject to the perils as any other structure. Exposures to the perils of fire, vandalism, and crime are roughly equivalent to those of a conventional dwelling. Mobile homes are also susceptible to damage from windstorm and earthquake depending on how they are set up.
Mobile homes generally do not remain on their tires. They are set on blocks or piers and, in some cases, on masonry footings. Masonry footings provide a very stable foundation. But they are costly and therefore seldom used. When the mobile home is set up, there are 2 major considerations with respect to the windstorm and earthquake perils. First, the piers or footings must be strong and stable enough to properly support the unit. The second consideration, tie down, is important because a windstorm may either move a mobile home sideways or lift it off the ground. An earthquake can subject the unit to sudden and severe upwards and sideways
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thrusts. Therefore, a properly set up mobile home should not only have a strong and stable foundation, but it should also be tied down to anchors buried in the ground to prevent the unit from moving upwards or sideways.
Mobile homes frequently suffer severe damage in hurricanes or tornadoes, often resulting in total loss of the units, as well as, loss of life of the occupants. Since mobile homes may be relegated to less desirable housing areas by zoning laws, they are often located in areas subject to flooding. Theoretically, the mobile nature of the mobile home should make it possible to move a unit that is threatened by rising water but this is seldom practical. A residential mobile home may be constructed of 2 or 3 modules. Each of these modules may be as large as 10x60 feet.
These units are mobile only in a technical sense. It usually takes many hours of specialized labor to prepare a unit for moving. Units on masonry foundations can take days to prepare.
When mobile homes are moved from the sales lot to the set-up site, or from one site to another, they are subject to Transportation Perils. The high cost of disassembly, transportation and reassembly result in infrequent mobile home moves after the initial set-up.
Other Personal Property and Personal Liability
The contents of a mobile home are similar to those in a conventional dwelling and are subject to the same perils. The mobile home owner also is subject to the same liability perils as the owner of a conventional home. Consequently, there are corresponding similarities in coverage needs.
Mobile Home Coverage
Owners of mobile homes have several options for insuring their dwellings. The American Association of Insurance Services (AAIS) and some specialty insurers have developed policies especially for mobile homes. Insurers that use forms developed by the Insurance Services Office (ISO) provide coverage for mobile homes by attaching a Mobile Home Endorsement, MH-04-01, to a Homeowners Policy. The following discussion is based on the ISO forms, specifically the endorsement used with an HO-3 policy. According to ISO rules, the endorsement may be used with an HO-2 Policy. Tenants of mobile homes may use the HO-4 policy without modification.
Mobile Home Endorsement (MH-04-01) - A mobile home is eligible for coverage if it is designed for portability and year-round living. The mobile home also may not be less than 10' wide x 40' long.
The Mobile Home Endorsement, the Attached Homeowner Form and the Declarations Page constitute the complete Mobile Home Policy. As with all
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Homeowners Policies, other endorsements may be attached to modify the coverage. The Mobile Home Endorsement states that the insurance is subject to all applicable provisions of the Homeowners Form except as revised by the Endorsement. The differences between the HO-3 and the Mobile Home Policy are in the definitions of "residence premises". It is changed to mean the mobile home and other structures located on land owned or leased by the insured where the insured resides. The location must be shown as the residence premises in the declarations.
Coverage A - Dwelling
The Dwelling Coverage applies to mobile homes used primarily as a private residence. Coverage applies to structures and utility tanks attached to the mobile home. It also applies to floor coverings, appliances, dressers, cabinets and similar items that are permanently installed. This provision recognizes the fact that standard features of most mobile homes are built-in cabinets and appliances.
Coverage B - Other Structures
The Limit of Liability for Coverage B is 10% of the limit that applies to Coverage A. However, if that amount is less than $2,000, a minimum limit of $2,000 is provided.
Additional Coverages
The additional coverage for property removed provides up to $500 for reasonable expenses incurred by the insured for removal and return of the mobile home if it is endangered by an insured peril. No deductible applies to this coverage.
Section I - Conditions
The condition regarding Loss Settlement does not include carpeting and appliances as property to be valued on the basis of Actual Cash Value. These types of property are included in Coverage A and are covered for risks of Direct Loss.
The Mobile Home Endorsement applies to loss to a pair, set of panels and will pay the reasonable cost of repairing or replacing dam-aged paneling to match the undamaged part as closely as possible. The insurer does not guarantee the availability of matching panels and will not be liable for replacement of all paneling if a suitable match is not found.
Under the Mortgage Clause, the word "mortgage" includes a trustee or lien holder. Mobile homes are not considered Real Property and liens may take the form of Chattel Mortgages or Trust Certificates.
Other Mobile Home Endorsements
A Mobile Home Policy can be endorsed with many of the Homeowners Endorsements. The following 4 endorsements are unique to Mobile Home Coverage:
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Actual Cash Value - Mobile Home Endorsement (MH-04-02) - This coverage on an Actual Cash Value basis is desired for the mobile home. The MH-04-02 Endorsement is used in addition to the MH-04-01. The MH-04-02 Endorsement changes the Loss Settlement terms to an Actual Cash Value basis. At the insured's discretion, covered property losses may be settled in one of three ways.
The insurer may pay the cost of repairing the damage, the cost of replacing the damaged property with similar property (but not necessarily from the same manufacturer) or it may pay the amount in money. If the amount is paid in money, the insurer will pay no more than the lowest of (1) the difference between Actual Cash Value of the property before and after the loss, (2) the cost of repairing the damage, or (3) the cost of replacing the damaged property with similar property.
Transportation/Permission To Move Endorsement (MH-04-03) - The Transportation/ Permission to Move Endorsement provides coverage for Perils of Transportation and at the new location, anywhere in the United States or Canada, for a period of 30 days from the effective date of the Endorsement. The perils of transportation are collision, upset and stranding or skidding (while the mobile home is being transported on a licensed ferry line).
Mobile Home Lien Holder's Single Interest Endorsement (MH-04-04) - The Mobile Home Lien Holder's Single Interest Endorsement provides coverage for the lien holder only. The first coverage is Transportation Coverage for the limited perils of Collision and Upset. This coverage is designed to cover a loss while the unit is being delivered. In addition, coverage is provided to the lien holder for loss due to the owner's conversion, embezzlement or secretion of the mobile home. Since the mobile home can be moved, some lien holders require the mobile homeowner to purchase this Endorsement to protect the lien holder's interest in the event of any of the covered losses.
Property Removed Increased Limit Endorsement (MO-04-06) - The Mobile Home Endorsement provides $500 in order to cover removal expenses for a mobile home threatened by an insured peril. With a large, multi unit mobile home, removal costs alone may run over $2,000. Added to this would be about the equivalent expense of resetting the mobile home up after the threat from the insured peril had passed. For this reason, the Property Removed Increased Limit Endorsement H0-04-06, provides a means for the insured to purchase a sufficiently high removal limit to cover the expenses to take down, transport and set the mobile home up again.
Vacation Mobile Home Endorsement - Many mobile homes are used in recreational areas as vacation homes. While some of these are set up in mobile home parks, many are not. For instance, a mobile home may
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be placed in the mountains or at the side of a lake or river. The exposures faced by vacation mobile homes are somewhat different from the exposures for mobile homes used as ordinary year-round residences. Often vacation areas do not have full-time fire departments. Also, there may be no telephone in the mobile home or no neighbors nearby to report a fire in the owner's absence. All of these factors contribute to the likelihood of increased loss severity if a fire does occur. Because many vacation mobile home residences are located in heavily wooded areas, they are subject to unusually high fire hazards. Placing a mobile home in a forest area increases potential loss frequency and probable severity.
Homeowners Insurance for Farm Owners
Farm owners may be eligible to insure the Liability Exposures from their farming operations under Homeowners Policies with the appropriate endorsements. These endorsements cover incidental-farming operations on the residence premises or at another location, or larger farms operated away from the residence premises. The Endorsement can be used only if the farming is not the insured's primary occupation.
Incidental Farming Personal Liability Endorsement (HO-24-72) - The Incidental Farming Personal Liability Endorsement extends the Personal Liability and Medical Payments Coverage in Section II to incidental farming operations conducted by the insured. If the farming is on the insured's residence premises, it must be
incidental to the use of the premises as dwelling, and the income derived from it may not be the insured's primary source of income. Coverage also applies if the residence premise is used for the sheltering and raising of animals. Coverage is not available, however, if the residence premise is used for raising purposes.
If the incidental farming activities are at a separate location, that location must be specified in the Endorsement. The permissible farming activities include the boarding or grazing of the insured's animals or use of the land as garden space. The income derived may not be the insured's primary source of income and there is no coverage if the location is used for racing purposes.
Farmers Personal Liability Endorsement (HO-24-73) - This Endorsement is designed to cover the Liability Exposure arising out of a commercial farming operation conducted away from the insured's residence premises. The Endorsement contains a supplemental declaration page. Some of the definitions applicable to Section II of the Homeowners Policy are modified to reflect that farming operations are covered. The Section II - Liability Coverages and Section II - Exclusions in the endorsement replace those in the Homeowners Policy. A new coverage (Coverage G) may be selected by the insured to cover animal collision. Additional conditions apply if farm employees are covered.
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Declarations
The first portion of the HO-24-73 Endorsement consists of a Supplementary Declaration Page which sets forth all farm premises rented, owned/operated by the insured or rented to others. An advance premium is charged for each of the farm premises indicated.
For farms owned/operated or rented/operated by the insured or the insured's employees, the total acreage of the initial farm premises is indicated. An additional farm premises with buildings and a rate per premises are also listed.
For farms owned by the insured but rented to others, the declaration lists all farm premises without buildings, each farm premises with buildings and the rate that applies per premises, along with the total acreage of farms rented to others. An additional flat charge for all such farms is based on the total acreage.
Coverage under the Endorsement assumes that no business other than farming is conducted on the insured location. Therefore, if any other businesses are conducted, they must be listed in the declarations.
The second section of the declarations applies to farm employees. The covered employees are separated into 3 categories based on the number of days per year they are employed. A different rate per employee in each category may be charged, or the premium may be based on a rate per $100 of payroll
If coverage for Animal Collision (Coverage G) is desired, the number of animals to be covered should be indicated in the final section of the declarations. The Coverage G Limit of Liability is $400 per animal.
Definitions
The definition of "business", as it applies to coverage under the HO-24-73 Endorsement, does not include farming and the definition of "insured location" is changed to "include the farm premises". The Endorsement also adds definitions on "farm employees", "farming", and "insured farm employees".
Coverage and Exclusions
Only Section II of the Homeowners Policy is changed by the HO-24-23 Endorsement. Medical Payments Coverage is extended to insure farm employees and to persons who are injured by farm employees off the insured location in the course of employment by the insured. Under the Endorsement, the exclusions for Coverage E and F apply to Pollution Liability and to Bodily Injury for Farm Employees.
Coverage B is provided only if a premium is paid for this coverage. Coverage G pays the amount shown in the declarations for loss by death of any cattle, horse, mule, donkey, swine, sheep or goat owned by an insured. In order to be covered, death must have been the result of collision between the animal and a vehicle not owned or operated by the insured or an employee. The collision must occur while the animal is within a public
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highway and is not being transported. If a farmer's cow were killed by a vehicle that entered the pasture, there would be no coverage.
Additional Conditions
If a premium is shown in the declarations for Coverage of Farm Employees, the coverage is subject to additional conditions. The premium shown in the declarations is a deposit premium that will be applied to the earned premium due at the end of the policy period. The insured must keep records necessary for premium computation and must send copies to the insurer at the end of the policy period. The insurer also reserve the right to inspect the insured's operations and audit the insured's records and books.
Other Coverages for Residences
Coverages for Residences are not always written on Homeowners Policies. Some residences are not eligible for Homeowners Coverage. In some cases, this is because the value of the dwelling is below the homeowners program minimum. In other cases, the residence may not be owner-occupied or it may not be eligible because of underwriting reasons. Example: any residences in Southern California located in brush areas and subject to wind-driven brush fires. Few, if any, insurance companies write Homeowners Policies for homes in these areas. Most of these residences must find alternative coverage. In other cases, the insured may not want the full range of Homeowners Coverages,
preferring a Mono Line approach. A final reason for purchasing alternative coverage is cost. An individual may only be able to afford the minimum for insurance required by the lending institution holding the mortgage on the dwelling. In this case, the homeowners package of coverages may appear to be too expensive.
The Dwelling Program is 1 of the alternatives to the Homeowners Policies. Other alternatives include Fair Plans and Beachfront Plans.
The Dwelling Program
The Dwelling Program provides Property Coverage for Dwellings and their Contents. The Dwelling Program includes 3 forms: DP-00-01, DP-00-02 and DP-00-03, which offer Dwelling and Contents Coverage similar to that offered under Section I of the HO-1, HO-2 and HO-3, respectively. The policy structure and approach to Property Coverage is like that found in the Homeowners Policies.
The following discussion compares the Mono Line Coverage in the Dwelling Forms with the coverage in the Homeowners Policies.
Insuring Agreement and Definitions
The Dwelling Forms is similar to that of the Homeowners Policy. The insuring agreements are identical. The first major difference occurs in the Definition Section.
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The Dwelling Forms only define "you" and "yours" (the named insured and the spouse, if a resident of the same household) and "we", "us" and "our" (the insurance company). The remainder of the definitions in the Homeowners Policy pertain to the Liability and Medical Payment Coverage of Section II. As the Dwelling Forms do not have Liability or Medical Payments Coverage, these definitions are unnecessary.
Coverages
The Dwelling Forms provide coverage for the insured's dwelling, other structures on the described location, the insured's personal property and loss of use of the dwelling.
Coverage A- Dwelling - The Dwelling Forms refer to the "described location", while the Homeowners Policy refers to the "residence premises". When referring to the dwelling on the described location, the Dwelling Forms specify that it is used principally for dwelling purposes. The Dwelling Forms also specifically state that if not covered elsewhere in the policy, building equipment and outdoor equipment used for the service of and located on the described location are covered. The remainder of the Coverage A language is identical in the Dwelling and Homeowners Forms.
Coverage B - Other Structures - There are some minor differences in wording between the Dwelling and Homeowners Forms, but the coverage is essentially the same.
Coverage C - Personal Property - The coverage for Personal Property in the Dwelling Forms applies to Personal Property, usually to the occupancy of a dwelling owned for or used by the insured or resident family members, while the property is on the described location. This is a more restrictive description to the covered property than is in the Homeowners Policy, which covers Personal Property Owned or Used by an Insured while it is anywhere in the world.
There are no special Limits of Liability in the Dwelling Forms with respect to any type of property, while the Homeowners Policy provides Special Limits of Liability on many types of property excluded in the Dwelling Forms. Example: the Dwelling Forms exclude boats, other than rowboats and canoes, but the Homeowners Policy provides a limit of $1,000 on water craft, including their furnishings, equipment and outboard motors.
The Homeowner Policy has special limits on theft losses to jewelry, furs, firearms, silverware and similar types of coverage. The Unendorsed Dwelling Forms have no theft coverage, only coverage for damage done by burglars.
The Coverage C Limit of Liability in the Dwelling Forms is chosen by the insured. In the Homeowners Policy, the Coverage C Limit of Liability is a set percentage of Coverage A and can be increased at the insured's option. If an insured is a landlord, he or she can choose to purchase only Coverage A under the Dwelling Program.
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There is no such option with the Homeowners Policy. A tenant may choose to purchase only Coverage C under a Dwelling Form, thereby obtaining Property Coverage similar to that provided by a HO-4 policy.
Coverage D - Fair Rental Value and Coverage E - Additional Living Expenses - Coverage D and E in the Dwelling Forms correspond to Coverage D - Loss of Use in the Homeowners Policy. The only distinction between the forms concerns Fair Rental Value. The Homeowners Policy provides Fair Rental Value Coverage only if the residence premises where the loss occurred is the principal place of residence of the insured. There is no requirement that the dwelling be the principal place of residence of the insured.
Dwelling form DP-00-01 (basic form) includes only Coverage D, Fair Rental Value. Coverage for additional expenses is added by endorsement, for an additional premium.
Other Coverages
Many of the "other coverages" provided in the Dwelling Forms correspond to the "Additional Coverages" in the Homeowners Policy but there are some differences. Loss Assessment Coverage, which is included automatically in the Homeowners Policy, can be added to the Dwelling Forms by endorsement.
The following paragraphs discuss the other coverages in the Dwelling Forms and compare them with the coverage provided in the Homeowners Policy.
Other Structures - The Dwelling Forms provide up to 10% of the Coverage A Limit of Liability for Loss to Other Structures. Use of this coverage does not reduce the Coverage A Limit of Liability for the same loss. Similar coverage is provided in the Homeowners Policy under Coverage B.
Debris Removal - The Debris Removal Coverage of the Dwelling Forms is included in the Coverage A Limit of Liability. The Homeowners Policy provides an additional 5% of the Coverage A limit for Debris Removal if required.
Improvements, Alterations, and Additions - The Dwelling Forms, like the HO-4 Policy, provide 10% of the Coverage C Limit of Liability to cover a tenant's Improvements, Alterations and Additions. There is no comparable coverage in other Homeowners Forms.
Worldwide Coverage - In the Dwelling Forms, up to 10% of the Coverage C Limit of Liability is provided for loss to the property covered under Coverage C, except rowboats and canoes, while anywhere in the world. The Homeowners Policy provided worldwide coverage for Personal Property Owned or Used by an Insured but a 10% limitation applies to property usually located at a secondary residence.
Rental Value and Additional Living Expense - Under the Broad and Special Dwelling Forms (DP-00-02 and DP-00-03), the insured may use up to 10% of the Coverage A Limit of Liability for loss of both Fair Rental Value and Additional
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Living Expense. Use of this coverage does not reduce the Coverage A Limit of Liability for loss of Fair Rental Value. Payment under this coverage reduces the Coverage A Limit of Liability by the amount paid for the same loss.
Reasonable Repairs - The Dwelling Forms and the Homeowners Policy provide coverage for the cost of Reasonable Repairs made solely to protect covered property from further damages. This coverage does not increase the Limit of Liability that applies to the covered property.
Property Removed - Covered property is protected if it is removed from premises endangered by an insured peril under both the Dwelling and Homeowners Forms. In both cases this coverage applies to direct loss from any cause for a period of 30 days (a limit of 5 days applies to the basic Dwelling Form).
Trees, Shrubs, and Other Plants - In the Dwelling Forms and the Homeowners Policy, the aggregate Limit of Liability that can be applied to trees, shrubs, plants or lawns is 5% of the Coverage A limit. The limit for any one tree, plant or shrub is $500. This coverage can be added by endorsement to Dwelling Form DP-00-01, the basic form.
Fire Department Service Charge - As in the Homeowners Policy, the Dwelling Forms will pay up to $500 for fire department service charges. Coverage is not provided if the property is within the city limits, municipality or protection district furnishing
the fire department response. This coverage Is Additional Insurance and no deductible applies.
Collapse - The Broad and Special Dwelling Forms (DP-00-02 and DP-00-03) provide the same coverage for Collapse that is provided in the Homeowners Policy. This coverage is not available in the Basic Dwelling Form.
Glass or Safety Glazing Material - Dwelling Forms DP-00-02 and DP-00-03 provide coverage for the breaking of glass or safety glazing material that is part of a building, storm door/ storm window, and damage to covered property by such glass or safety glazing material.
Coverage does not apply if the dwelling has been vacant for more than 30 days. Similar coverage is provided in the Homeowners Policy.
Perils Insured Against
The following examinations of the perils insured against in the Dwelling Program is based on the Dwelling Special Form, DP-00-03. (This form will be referred to as DP-3 in the following discussion). Forms DP-00-01 and DP-00-02 provide coverage against essentially the same perils covered by the HO-1 and HO-2 forms. To the extent that there are differences, the Dwelling Forms tend to provide narrower coverage. For instance, there is no theft coverage for Personal Property under any of the Dwelling Forms, although such coverage can be added by endorsement.
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Coverage A and B
The DP-3, like the HO-3, insures against risks of Direct Loss to Property under Coverage A and B. In each policy, the Coverage for Direct Loss to Real Property is defined by the perils that are excluded. Those causes of loss that are not excluded are covered. The DP-3 Form excludes coverage for theft of any property that is not part of a covered building or structure. It excludes loss by wind, hail, ice, snow, or sleet to (1) outdoor radio and TV antennas and aerials and (2) trees, shrubs, plants or lawns. The other DP-3 exclusions are essentially the same as those in the HO-3.
Coverage C
Although the Coverage C perils under the DP-3 form are similar to the perils covered by the HO-3, there are some differences. Theft of Personal Property is not covered under the DP-3, but coverage is provided for damage to Personal Property caused by burglars, unless the dwelling has been vacant for more than 30 days. The DP-3 specifically excludes pilferage, theft, burglary and larceny under the Vandalism or Malicious Mischief peril.
The Windstorm or Hail Coverage also differs slightly from the HO-3 in that the DP-3 specifically excludes windstorm or hail damage to canoes, rowboats, plants, shrubs and trees. The HO-3 does not cover windstorm or hail damage to trees, shrubs and other plants but it does cover damage to water craft and their trailers, furnishings, equipment and outboard motors, while inside a fully enclosed building.
Dwelling Policy Conditions
The DP-3 Form contains a single section of conditions. These same conditions are found in the HO-3 Policy, however, some conditions are applicable only to Section I, while others are applicable to both Section I and II. The Dwelling Policy does not contain the references to Loss by Theft and to Credit Card or Fund Transfer Card Coverage that are in the Homeowners Policy.
Coverages for Liability and Theft Loss - The Dwelling Forms do not provide coverage for Liability or for Theft Losses. Coverage is available, however, through a Personal Liability Supplement and Theft Endorsements.
Personal Liability Supplement - Liability Coverage may be written in conjunction with the Dwelling Policy or independently as a separate policy through the Personal Liability Supplement. The Personal Liability Form DO-24-01 provides basic Personal Liability Coverage (Coverage L) and Medical Payments to Others Coverage (Coverage M). These coverages are similar in format and language to Coverages E and F in Section II of the Homeowners Policy.
The definition in the Personal Liability Supplement (PL) differs from the Homeowners Policy only in regard to "residence premises". The definition of "residence premises" in the DL Form includes a 1-4 family dwelling. The corresponding language in the Homeowners Policy refers to 1-or-2 family dwellings.
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Coverage L - Personal Liability and Coverage M - Medical Payments to Others of the DL Form are identical to Coverages E and F of the Homeowners Policy. Similarly, the exclusions and additional coverages in the DL form are virtually the same as those applicable to Section II of the Homeowners Policy. The only difference is that the additional coverage for Loss Assessment in the Homeowners Policy is not provided in the DL form, as with the Dwelling Forms, the conditions and the conditions applicable to Section I and II in the Homeowners Policy.
Fair Plans
Fair access to insurance requirements plans were set up in response to the urban riots of the 1960's. At that time, property insurance was difficult to obtain in the "congested urban core" of many major cities.
The Fair Plan Program is an Assigned Risk Property Program. In order to be eligible for Fair Plan Coverage, the insured must have the property inspected. Only property that meets the inspection criteria will be insured.
When the program was drawn up, the concern was that well-kept properties with inner city locations would be prevented from obtaining coverage by virtue of their location. The program directs that the inspection of the property must concentrate on the property alone and ignore "environmental perils". The environmental perils that the program designers had in mind were primarily those found in run-
down, crime-ridden urban slums. Others noticed that brush hazards found in wealthy, tree-studded suburban areas might also be considered "Environmental Hazards".
Many Fair Plans do not provide the Homeowners Coverage package but such coverage is available in some states. In most states, however, only coverage for fire and a limited number of other perils is provided by the Fair Plan. Other coverages are provided by means of a Difference in Conditions Policy written outside of the Fair Plan. Such policies can provide coverage for Risks of Direct Loss, while excluding fire and the other perils covered under the Fair Plan Policy. Since it is the Fire Peril that is the major concern in these cases, the Difference in Conditions Policy can be written in the private market.
Beachfront Plans - Beachfront Plans are part of an Assigned Risk Property Insurance Program that is somewhat like the Fair Plan. The origins of the plans differs in that the Beachfront Plans were set up in response to heavy windstorm losses rather than urban riots.
Beachfront property in many parts of the country is exposed to heavy windstorm losses during hurricanes and lesser windstorms. Much of this property also is vulnerable to damage from high waves. The Beachfront Plans provide coverage for fire and windstorm losses. Losses from high waves are generally excluded.
Family Residence Insurance Case - Jim and Mary Pierce own a home at 1 Beacon
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Place, in Palm Harbor, Florida. It is a single-family home with 3 bedrooms and 2 baths. The mortgage on this dwelling is held by National Bank and Trust.
Jim Pierce has an office in the home where he runs an investment advisory business as a sideline. Jim's in-home office is the only location of that business, which Jim operates as a sole ownership. Mary Pierce is an amateur nature photographer and has several expensive cameras and lenses. With the exception of Jim's business property and Mary's photography equipment, they own no other remarkable Personal Property.
The Pierces also have a summer cottage at Ocean City, New Jersey. This cottage has two bedrooms and two baths. A 2-car detached garage also is located on the premises. The Pierces have no mortgage on the property.
Family Residence Coverages - Jim and Mary Pierce have purchased an HO-3 Policy with a $200,000 Coverage A limit on their 1 Beacon Place home. This $200,000 of coverage is approximately equal to the replacement cost of the dwelling.
The Pierces had added several endorsements to their HO-3 policy to meet their needs. Since Jim has an office in the home, which is a permitted incidental occupancy, Endorsement HO-04-02 has been added to the policy. In order to keep the policy's Property Coverage current with inflation, the Pierces purchased Inflation Guard Coverage under an HO-04-46 Endorsement. Mary's camera collection is listed as Scheduled Property on the
Scheduled Property Endorsement HO-04-61. The Pierces have added the Personal Property Replacement Cost Endorsement, HO-04-96, to their policy. Due to this Endorsement, the Pierce's insurer requires that they carry a Coverage C limit of $140,000, which equals 70% of the Coverage A limit. The Pierces receive a premium credit for the 3 smoke alarms in the house. The premises alarm for Fire Protection System Endorsement HO-04-16 was added to the policy to reflect the presence of alarms. National Bank & Trust has its interest in the Pierce's dwelling protected by being listed as the mortgagee on the declarations page of their policy.
The Pierce's have purchased a DP-3 Policy to cover their summer cottage in New Jersey. The dwelling is covered for $50,000, which is its approximate replacement cost. The garage is covered for $6,000, the limit chosen by the Pierce's. They have also purchased $15,000 of DP-3 Contents Coverage on the furnishings and other items usually left at the cottage. A $100 deductible applies to all covered losses.
HOMEOWNERS LOSS SITUATIONS
Section I Coverages
The following situations apply to the Property Coverages of the HO-3 and DP-3 Policies. Each loss is a separate occurrence.
Loss: Jim and Mary Pierce suffered a loss to the kitchen of their Florida home as a result of a smokey grease fire started by food cooking on their stove. The woodwork
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and ceiling were stained by the heavy smoke and built-in kitchen cabinets were damaged. The Pierce's reported the loss and were asked by their insurer to get 3 estimates from contractors. The estimates ranged from $3,850 to $4,425 to clean and repaint the kitchen and to repair and replace the damaged cabinets. The contents of the kitchen were also damaged. The Pierce's can replace the damaged small appliances, cookware and utensils for $650.
Comment: Because the Pierces carry Insurance to Value, the repairs to the kitchen will be paid under Coverage A with no deduction for depreciation. The adjuster for their insurance company accepted the estimate of $3,850 for the Coverage A loss. The Coverage C loss of $625 was also found to be in order. Thus, if replacement is made, the Pierce's recovery will be as follows:
Coverage A 3,850
Coverage C 625
Less Deductible (250)
Total Payment $4,225
Assume that the Pierces had carried a Coverage A limit of only $100,000 at the time of the above loss. What amount would the Pierce's receive for the loss to the dwelling?
The insurance-to-value faction yields:
Insurance Carried
80% replacement cost
$100,000 = 5 or .625
80% x 200,000 8
Because the insurance-to-value fraction equals less than 1.0, the Pierces would not receive Replacement Cost Coverage on the loss to the dwelling. The Pierces would receive the greater of the following amounts: (1) the insurance-to-value fraction, multiplied by the replacement cost of the loss, less the deductible or (2) the Actual Cash Value of the loss less the deductible.
If the Pierces and the adjuster agreed that the Actual Cash Value of the loss is $3,300, what settlement would the Pierces receive? To answer this question, the following calculation using the insurance-to-value fraction is required to determine the settlement:
$100,000 x (3,850-250) - 5 x 3,600 = $2,250
80% x $200,000 8
Loss Settlement on an Actual Cash Value basis would be $3,300 - $250 or $3,050. Since $3,050 is greater than $2,250, the Pierce's loss would be settled on an Actual Cash Value basis for $3,500.
Loss: The sewer backs up at the Pierce's Florida home and water overflowed from the drains. The overflow in their first-floor powder room damaged the contents of their linen closet and vanity. In addition, it costs $475 to cleanup their home.
Comment: Damage caused by water backing up through sewers is excluded under Coverage A and is not a peril insured against under Coverage C. There would be no coverage for damage to the dwelling or its contents.
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Loss: Due to malfunction of the water heater, steam sprayed into the laundry room of the Pierce's Florida Home, causing $350 worth of irreparable damage to their clothing. It costs $50 to replace a defective part in the water heater.
Comment: Under Coverage C, damage to Personal Property caused by the accidental discharge of steam from within a plumbing system is covered. The Pierce's will receive the replacement cost of the clothing because of the Personal Property Replacement Cost Coverage (HO-04-90) Endorsement, less the $250 deductible. Under Coverage A, coverage for this type of accidental discharge excludes damage to the system or appliance from which the water or steam escaped. Therefore, there will be no payment for the cost to repair the water heater.
Loss: A five-story apartment building near the Pierce's Florida home was severely damaged by fire. The Fire Department ordered the Pierce's and several of their neighbors to evacuate their homes because the fire threatened to spread to homes near the apartment building. The Pierces were not allowed to return to their home for 3 days after the fire because the Fire Department feared that the fire-gutted apartment building might collapse. The Pierces incurred the following Additional Living Expenses during this period:
1. $375 for 3 nights lodging at a motel.
2. $270 for 3 days of restaurant meals.
The cost of groceries for the Pierces averaged $35 per day when they eat at home.
Comment: Coverage D Loss of Use provides coverage for Additional Living Expenses if a civil authority prohibits the insured from use of the residence premises as the result of direct damage to neighboring premises by a peril insured against under the Homeowners Policy. The Pierce's $375 motel bill and their additional expenses for meals qualify for payment under Coverage D. The Pierces additional food expense is the $270 cost of restaurant meals less the $105 that they would have spent to eat at home, which comes to $165. The Pierce's recovery will be as follows:
Motel Bill $375
Additional Cost of Meals 165
Less Deductible (250)
Total Payment $290
When determining the Loss Settlement in such a case, it is necessary to consider other increased expenses, such as laundry, transportation and telephone. However, the insured's usual expenses for such items, as well as, any decrease in the cost of utilities or other expenses, would be considered in determining the total amount of the additional expense.
Loss: When the Pierces returned to Palm Harbor from New Jersey, they found that the rear door of their home had been broken open and that several items had been stolen. The Pierce's losses are as follows:
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Item Replacement-Cost or Value
Jewelry $1,495
Cash 250
Video Cassette Recorder 350
Nikon FA Camera Body 525
Nikon 500mm Lenses 475
Replacement for rear door and trim 300
The Pierces reported the loss to their insurer and the police as required in the HO-3 Loss Settlement Conditions. An adjuster visited the Pierce's home, photographed the rear door, obtained copies of receipts and other supporting evidence for the Pierce's Personal Property Claim.
Comment: Theft is a covered peril under Coverage C of the Homeowners Policy and under the Scheduled Personal Property Endorsement. The Pierces will receive settlement under these coverages for the loss of their Personal Property. Damage done by burglars is not excluded under Coverage A, so the Pierce's Loss Settlement will include the cost of repairs to the rear door. Each item of the Loss Settlement is described below.
Jewelry - The Pierce's $1,495 jewelry loss is $495 greater than the $1,000 HO-3 sub-limit on jewelry. In addition, their HO-3 contains a $250 deductible applied to the total theft loss. These 2 limits on recovery
are applied in the following way: the $250 deductible applied to the total jewelry loss
of $1,495, leaves an insured jewelry loss of $1,245. Next, the sub-limit of $1,000 is applied to the loss, resulting in a payment of $1,000 for the jewelry loss. Because the deductible has been satisfied by this portion of the loss, no deductible applies to the balance of the loss.
Cash - The HO-3 contains a $200 sub-limit on cash, which is the amount the Pierces will receive for the loss.
VideoCassette Recorder - The HO-3 provides the insurer with the option of making Loss Settlement by replacing damages or stolen property. Insurers frequently use replacement services from which they can purchase appliances at a lower cost than the insured would have to pay in the retail market. The Pierce's insurer may replace their stolen VCR with a comparable new model or pay its replacement cost.
Camera Body - The replacement cost of the stolen camera is greater than the amount on the Pierce's Scheduled Personal Property (HO-04-61) Endorsement. Therefore, the insurer's payment will be limited to the amount of insurance shown, which is $480.
500MM Lens - The replacement cost of the lens is less than the amount of insurance shown on the Pierce's HO-04-61 Endorsement. Therefore, the insurer will pay this lesser amount of $475 or replace the lens.
Damage to the Dwelling - The full $300 cost for repairing the damage done by the
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burglars breaking into the dwelling will be paid under Coverage A, since the Pierces carry Coverage A limits that meet the HO-3 Insurance-to-Value Requirements.
Additional Comments: The Personal Property Replacement Cost Endorsement HO-04-90 provides that if the entire loss is more than $500, the insurer will pay no more than the Actual Cash Value of Covered Personal Property until the actual repair or replacement of an item is complete. If the Pierces decide not to replace any of the stolen items, payment for any item not replaced would be made on an Actual Cash Value basis because their total Personal Property loss exceeds $500.
If any of the stolen items are recovered and returned to the Pierces, or their insurer, after the Loss Settlement, the party to whom the items are returned must notify the other. The Pierces would then have the option of accepting the recovered items and returning the loss payment to the insurer or allowing the insurer to keep the items as salvage and retaining the loss payment already made.
Loss: During a severe storm, several feet of snow accumulated on the roof of the detached garage at the Pierce's New Jersey property. The garage roof caved in under the weight of the snow, causing some structural damage to the garage walls. At the time of the loss, the replacement cost of the garage was $8,000. Based on estimates from 3 contractors and considering the age of the roofing material destroyed, the Pierces and their insurer's adjuster agreed on the following values of the loss: (1) a Replacement Cost Value of $3,300 and (2) an Actual Value of $2,800.
Comment: Damage to the garage is covered for risks of Direct Loss under Coverage B of the Pierce's DP-3 policy. Damage to the garage caused by snow accumulation is not excluded and is covered. The DP-3 Policy provides Replacement Cost Coverage on Other Structures if the amount of coverage carried equals at least 80% of the structure replacement cost. The Pierces’ coverage does not meet this requirement so the insurance-to-value fraction must be applied to the replacement cost of the loss to determine the amount payable if settlement is made on this basis. The calculation, which includes the $100 policy deductible, is as follows:
$ 6,000 x (3,300-$100) = 15 x $3,200 = $3,000
80% x $8,000 16
The Pierce's will receive $3,000 in payment for the loss because this is greater than the $2,500 settlement amount on an Actual Cash Value basis ($2,900 less the $100 deductible).
Section II Coverages
The following situations apply to the Liability and Medical Payments Coverage of the HO-3 policy. Each loss is a separate occurrence.
Loss: The Pierces went to Vermont on a weekend ski trip. As James was skiing down a steep slope, he collided with another skier who had stopped to adjust the bindings on his skis. The other skier, Bruce, was hospitalized with a broken hip as a result of the accident.
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Comment: Coverage E of the Homeowners Policy provides coverage for liability arising out of accidental bodily injury caused by the insured. Because the Coverage E limit of the Pierce's Homeowners Policy is $100,000, the insurer will pay court awarded damages or a negotiated settlement for this loss up to the $100,000 policy limit. In addition, the insurer will pay the costs associated with investigating the claim, negotiating a settlement or defending the case if it goes to court.
Loss: Jim and Mary entertained their friends Chip and Dee at their Florida home one weekend. Dee tripped walking up the stairs and hurt her ankle. Mary and Dee went to the emergency room of a local hospital, where the Doctor determined that Dee had sprained her ankle but had suffered no broken bones. The cost of the emergency room visit and follow-up care by Dee's Doctor amounted to $375.
Comment: Coverage F of the Homeowners Policy provides for the payment of necessary medical expenses that arise out of bodily injury to a guest in the insured's home. Coverage is provided without regard to negligence or fault on the part of the insured up to the policy limit purchased. The Pierce's Coverage F limit is $1,000 and Dee's medical expenses will be paid in full under the Pierce's Homeowners Policy.
Assume that Dee sustained this injury at the Pierce's New Jersey Cottage. Would either the Pierce's DP-3 or HO-3 policy respond? The DP-3 Policy provides Property Coverage only and would not respond to this loss. The Pierces had requested their insurer include their Ocean City cottage as an "Other Insured Location" for Section II Coverage under the HO-3 Policy. Therefore, Coverage F, as well as Coverage E, applies to losses occurring at either the Florida home or the Ocean City cottage. Dee's medical expenses would not have been paid in full if the loss had occurred at the Pierce's vacation cottage.
Loss: Jim trimmed several trees and bushes at the Pierce's Florida home one weekend. He borrowed a gas-powered chipper from a neighbor to turn the cuttings into mulch for the garden. Jim accidentally dropped a rock into the machine, breaking some of its blades. Repair costs for the machine were $175.
Comment: The HO-3 provides up to $500 of coverage for Accidental Property Damage to the Property of Others. In this case, the adjuster would confirm that the repair costs were reasonable and pay the full bill, reimburse Jim or the neighbor for payments made. The payments under this additional coverage are made whether or not the Pierces are legally liable for the loss.
Loss: As Sandy, one of Jim's investment clients, was leaving the Pierce's home, she slipped on the slick, rain drenched cement that had not been swept or mopped up. Sandy suffered a broken wrist. Her medical expenses were $1,500. Sandy sought payment from Jim for these medical expenses.
Comment: Sandy's injury arose out of Jim's use of the Pierce's residence for business purposes. Coverage for Liability Damage
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and Medical Expenses arising out of this bodily injury is available to the Pierces only because they added the Permitted Incidental Occupancies Endorsement (HO-04-42) to their HO-3 Policy. Sandy's medical expenses exceed the Pierce's Coverage F medical payment limit of $1,000. However, because of the circumstances of the injury, it is possible that the Pierces could be held liable for the cost of Sandy's medical expenses, as well as, other damages should she choose to bring suit against them. The insurer will respond under Coverage E of the HO-3 Policy and pay Sandy's $1,500 of medical expenses.
Loss: Sal, a client of Jim's investment advisory service, asked Jim whether he should sell 1,000 shares of a particular stock or hold on to it in the hope that the price would go higher. Jim recommended that Sal sell the stock immediately, which Sal did. In the two weeks after Sal sold the stock, its price increased $10 per share. Sal sued Jim alleging that Jim's bad advice had resulted in a $10,000 loss to Sal.
Comment: Any liability on Jim’s part for Sal’s loss arises out of Jim’s rendering of professional advisory services. Liability arising out of the rendering of professional services is excluded under the HO-3 policy, and the permitted incidental occupancies endorsement does not provide this coverages. The insurance company would provide no coverage for this liability claim under the Pierce’s HO-3 policy.
Chapter 7 - Review Questions
1. Mono Line Policies that provide property coverage similar in many ways to the property coverage in Homeowners Policies are?
A. Vacation Home Policies
B. Auto Policies
C. Dwelling Policies
D. All of the above
2. Frequently mobile homes suffer severe damage in:
A. Snow storms
B. Heavy rains
C. Sunshine and heat
D. Hurricanes
3. The minimum Limit of Liability for Coverage B under a Mobile Home Endorsement is:
A. 2,500
B. 500
C. 1,500
D. 2,000
4. An alternative to purchasing a Homeowners Policy would be the purchase of:
A. Dwelling Program
B. Various Endorsements
C. An Umbrella Liability Policy
D. None of the above
5. Property insurance that was difficult to get in the "congested urban core" areas of many major cities was addressed by what plan?
A. HUD Plan for Development (HUD)
B. Intercity Redevelopment Organization (IRO)
C. Fair Access to Insurance Requirements (FAIR)
D. None of the above
Answers
1. C
2. D
3. D
4. D
5. C