Chapter 5 – Homeowners Insurance for Owners of Condominium Units

Section II – Liability Coverages

 

Introduction

 

Insurance for tenants represents an important market.  The number of apartment dwellers is already large increasing for a number of reasons: the high price of single fami­ly homes has forced many younger people to postpone home ownership and to continue renting apartments, there are older people who move to apartments from large single-family homes and workers who rent apartments in urban areas to avoid commuting.

 

Exposures

 

The 3 major types of Loss Exposures faced by tenants are Loss to Additions, Loss to Personal Property and Legal Liability.

 

Additions and Alterations - Property exposures for tenants include Additions and Alterations the tenants may have made in the dwelling itself. These Additions and Alterations may include new paneling or electrical fixtures that become part of the building and, as such, are real property.  Such Additions and Alterations are sometimes referred too as "tenants improvements and betterment".

 

Personal Property - Personal Property owned by the tenant represents the most significant Property Exposure. Personal

 

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Property includes such items as furni­ture, bedding, clothing, televisions, videocas­sette recorders, stereos and record tape collections.  Such items often are re­ferred to as contents.

 

Legal Liability - Tenants have a Pre­mises Liability Exposure for people who enter there home. Example:  a guest may be injured after tripping over a loose carpet in an apartment and may seek damages on the basis of Negli­gence Liability. Apartment dwellers also have a Liability Exposure for injuries to other tenants and damage to the property of other tenants or the owner of the apart­ment building. Example: If an apartment dweller allows a bathtub to overflow, the water may damage the con­tents of the apartment below and the apart­ment building itself, resulting in liabili­ty actions against the forgetful ten­ant.  Finally, tenants face Legal Liability Expo­sure that arises out of their off-premises activities, such as golf or hunting.

 

HO-4 Contents Broad Form

 

The HO-4 Policy is a combination of Property and Liability Coverages de­signed for apart­ment renters and other tenants. Discussed below are HO-4 Eligibility, a Comparison of the HO-4 Section I to the HO-3 Section I and HO-4 Endorsements.

 

Eligibility - A tenant of either a single-family resi­dence or an apartment is eligible for the HO-4.  There is no limit on the number of units in the apartment building, al­though the number of units affects the rate.

 

The owner-occupant of a dwelling, coopera­tive unit or apartment building that is not otherwise eligible for one of the Other Home­owner Policies also may purchase a HO-4.  Example: a person might own a five-unit apartment building, reside in one of the units and rent the other four.  Such occu­pancy would not be eligible for a HO-3 for his/her unit. Commercial Cover­age would be pur­chased to provide coverage for the Property and Liability Exposures represented by the apartment building itself.

 

Comparison of Section I of the HO-4 and HO-3 - Since the HO-4 provides insurance for tenants, the policy does not include coverage for the dwelling and other structures provided by Coverages A and B of the HO-3.  Such coverage is not needed in the HO-4 because the tenant does not have an insurable interest in the building.

 

The Limit of Liability for Coverage C - Per­sonal Property in the HO-4 is the primary limit for Property Coverage.  In the HO-3, the Limit of Liability for Cov­erage A determines the limits for the other coverages.  There is no other difference in Coverage C between the two policies.

 

Under the HO-4, the Limit of Liability for Coverage D, Loss of Use is 20% of the Cover­age C limit and coverage applies if a peril insured under Cover­age C makes the resi­dence uninhabit­able. Under the HO-3, the Limit of Liability for Coverage D is 20%

 

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of the limit for Coverage A and applies to loss of use resulting from a peril covered by Cover­age A.  In all other respects, Coverage D is the same under both policies.  There are three differences in the addi­tional coverages provided by the two policies.  First, the limit in the HO-4 for trees, shrubs and other plants is 10% of the Coverage C limit.  The limit for such property in the HO-3 is 5% of the Coverage A limit.

 

Second, both policies will pay up to $1,000 for the insured's share of a loss assessment. The HO-4 pays for loss assessment that results from a peril insured against under Coverage C and the HO-3 pays if the loss assessment results from an insured peril under Coverage A.  (Neither policy pays if the loss assessment results from earth­quake or volcanic eruption).  Since Coverage A of the HO-3 insures against risks of direct losses that are not other­wise excluded, the coverage for loss assessment under the HO-3 is broader than that provided by the HO-4.

 

Third, the HO-4 covers building addi­tions and alterations.  Coverage is pro­vid­ed for building improvements or instal­lations, made or acquired at the insure­d's expense, to that part of the resi­dence premises used exclusively by the named insured, this coverage repre­sents additional insurance and has a Limit of Liability equal to 10% of the Coverage C limit.  There is no corre­sponding coverage in the HO-3 but the coverage for landlord's furnishings in the HO-3 is not provided by the HO-4.

 

Because the HO-4 does not cover the dwelling and other structures, the perils insured against exclusions and condi­tions are different in the two policies.  The

 

insured perils in the HO-4 apply only to Coverage C but they are the same perils insured under Coverage C of the HO-3.  The corresponding sec­tion in the HO-3 also lists the perils that are excluded with regard to Cover­ages A and B.  The HO-4 does not contain the concur­rent causation exclu­sions that are in the HO-3. 

 

The loss settlement condition in the HO-4 states only that losses are settled on the basis of actual cash value at the time of loss, but the settlement cannot be more than the amount to repair or re­place the property.  The loss settle­ment condition in the HO-3 is much more complex because of the replace­ment cost coverage on the dwelling and other structures.  The HO-4 also does not contain the mortgage clause includ­ed in the Section I - Conditions of the HO-3.

 

HO-4 Endorsements

 

Most of the endorsements discussed in the next chapter can be used with the HO-4.  However, the two Endorsements discussed below apply specifically to the Loss Expo­sures of tenants.

 

Building Additions / Alterations (HO-4-51) - as an additional coverage, the HO-4 insures Building Additions and Alterna­tions that a tenant has installed.  The Limit of Liability is 10% of the Coverage C limit but a person who has made substantial alterations to a rented unit is likely to require a higher limit.  The HO-4-51 Endorsement increases the Limit of Liability for the insured's Build­ing Additions and Alterations for an addi­tional premium.  To avoid ambi­guity, the Endorsement shows, both, the increase in the Limit of Liability and the total Limit of Liability.

 

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Waterbed Liability - Many landlords require proof of Liabili­ty Insurance before completion of lease arrangements for a tenant with a water­bed. A number of insurers have filed Waterbed Liability Endorsements for use with the HO-4 to meet this need.  For an additional premium, the endorsement provides coverage for liability arising out of an insured's owner­ship or use of a waterbed on the residence premises.

 

Insurance for Unit Owners

 

Many homeowners do not reside in one-or-two family dwellings. A special form of Homeowners Insurance is avail­able for own­ers of condominium units and cooperative apartments.

 

Condominiums and Cooperative Apart­ments - Condominium ownership has two dis­tin­guishing characteristics. First, each unit owner has individual ownership and the right to exclusive occupancy of his or her unit.  The unit is commonly defined as the space be­tween the walls, ceiling, and floor.  This is called the bare walls definition of exclusive own­ership.  Sometimes the unit owner is also responsible for parts of the unit beyond the bare walls such as exterior glass or a lean-to porch.  The unit own­er's responsibilities are usually outlined in the Condominium Agree­ment and Bylaws. As defined in the condomini­um agreement, the unit is an area of space.  The unit owner may occupy, sell, lease or will that space.

 

Second, each unit owner also has an undi­vided interest with the other mem­bers of the condominium association in the common areas of the property.  Common areas include the land, stair­ways, halls, parking

 

and storage areas and the heating and cooling systems.  Usually the condominium complex is man­aged by an Association of unit own­ers.

 

The owner of a cooperative apartment does not own the individual unit, as is the case with a condominium. Instead, the owner has an ownership interest in the Cooperative Associ­ation or Corpora­tion that owns all of the units.  As a consequence of that ownership, the cooperative apartment owner has a right to a perpetual lease to occupy a specific unit.

 

Particularly in urban areas, both condo­mini­ums and cooperative apartments have become increasingly popular.  Both young couples and older people prefer ownership of such units because of their convenient urban locations and because the owners do not have to per­form their own maintenance.

 

Exposures

 

The 3 major Loss Exposures for unit owners are Loss to Real Property, Loss to Personal Property and Legal Liability.

 

Real Property - Real Property Exposures for the unit owner include alterations, appliances, fixtures and improvements that are part of the residence premises. The residence premises consist of that part of the area occupied exclusively by the unit owner.  This would include any patio, yard or parking area adja­cent to the unit portion of the building occu­pied exclusively by the unit owner. The real property exposure also in­cludes the common areas of the proper­ty.  This exposure is usu­ally insured in a separate policy by the condo­minium or cooperative association.

 

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Personal Property - The Personal Property Exposures of the unit owner are similar to those of a tenant.  The unit owner's personal property may include furniture, cloth­ing, television, stereo equipment, books, records, compact discs and tapes.  Any appliances not considered part of the building structure would constitute personal property.  Carpets and rugs that are placed over finished floors could be considered personal property, while wall-to-wall carpeting installed over a rough sub-floor or concrete slab is considered part of the building.

 

Legal Liability - The Legal Liability Exposure for the unit owner include all of those previ­ously discussed for tenants.  The unit owner's interest in the common areas carries with it a corresponding Legal Liability Exposure for events that occur in/on those areas. This Common Areas Liability Exposure usually is cov­ered in a separate policy obtained by the Condominium Association or the Cooperative Apartment Ownership Associ­ation or Corpo­ration. A loss assessment can be collected from all unit owners to pay the damages.

 

HO-6 Unit Owners Form

 

The HO-6 is designed to meet the unique insurance requirements of own­ers of condo­minium units and coopera­tive apartments.  The Property Coverage provided is for the insured's dwelling, as well as, for Personal Property and Loss of Use.

 

Eligibility for the HO-6

 

An owner-occupant of a residential condo­minium unit or a cooperative apart­ment is

 

eligible for a HO-6 re­gardless of the number of units in the complex.  Since the residence premises is defined as the unit where the insured resides, the unendorsed HO-6 cannot be used to insure a unit owned by the insured but rented or leased to others.

 

Comparison of Section I of the HO-6 and HO-3

 

The following paragraphs describe the differ­ence in the property coverage provided by the HO-6 and the HO-3.  The primary difference is the coverage provided for the insured's dwelling.

 

Coverage A - Dwelling - Coverage A of the HO-6 applies to the insured's real property.  This coverage is provided on a named-perils basis and is separated into four categories.  The first category includes the alteration, ap­pliances, fixtures and improvements that are part of the building contained within the residence premises. This usually includes built-in appliances and cabinets, electrical fixtures, interior partitions.

 

The second category relates to items of real property that pertain exclusively to the resi­dence premises, including such items as exterior glass or trees and shrubs located in a patio that is part of the residence premises.  In addition, although it is in excess of the associatio­n's coverage, the coverage provided would apply to any part of the owner’s portion of the building itself in the event that the association's limits proved to be inadequate.

 

The third category includes property that is the responsibility of the unit owner under an agreement of a Corpora­tion or Association

 

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of Property Owners.  Insurance for this category of property provides coverage for any portion of the common areas of the building for which the Association Agreement has made the unit own­er responsible for the insurance.

 

The fourth category of property relates to structures owned solely by the insured at the location of the residence premises but are not a part of the residence pre­mises.  An example would be a private garage that was not adja­cent to the residence premises but located else­where in the condominium complex.

 

An additional difference between Cov­erage A of the HO-6 and the corre­sponding coverage in the HO-3 is that the HO-6 provides no coverage for building materials and supplies.

 

Coverage A of the HO-6 does not cover struc­tures used in whole or in part for business, or structures rented to others unless used solely as a private garage. A similar exclusion is found under Coverage B of the HO-3.  This illus­trates the fact that Coverage A of the HO-6 combines Coverages A and B of the HO-3.

 

The HO-6 does not include a Coverage B.  The basic Limit of Liability under Coverage A of the HO-6 is $1,000.  This can be increased if necessary. If the association policy is writ­ten on a bare walls basis, the Coverage A of the HO-6 would have to provide coverage for the entire interior or the unit, including all fixtures, built-in appliances and, in a multi-story unit, the floors, stairs and ceilings be­tween the lowest floor and the highest ceiling in the unit. This

 

is why it is important to review the Con­dominium or Cooperative Association's Coverage to determine if the basic limit for Coverage A of the HO-6 is ade­quate.

 

Coverage C - Personal Property - Coverage C provides the same coverage as the corre­sponding section of the HO-3.  The difference is that the usual amou­nt of Coverage C of the HO-3 is based upon the Limit of Liability for Coverage A.  In the HO-6, the in­sured selects the Limit of Liability for the Coverage C.

 

Coverage D - Loss of Use - The Limit of Liability for Coverage D in the HO-6 is 40% of the Coverage C limit. Coverage is provided for a loss caused by an insured peril to the covered property or to the building containing the property, which makes the residence pre­mises not fit to live in.

 

Additional Coverages - Additional coverages in HO-6 differ from the HO-3 in two ways:

 

1.   In the HO-6, the coverage for trees,         shrubs and other plants is 10% of the             Limit of Liability for Coverage C.

 

2.   In the HO-3, the corresponding Limit of             Liabili­ty is 5% of the Coverage A limit.         In         addition, the HO-6 does not include     the coverage for landlord's furnishings           provided by the HO-3.

 

Perils Insured Against

 

The covered perils in the HO-6 are virtually identical to the perils insured against under Coverage C of the HO-3. Thus, the HO-6 covers loss to the insured's dwelling only if

 

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the loss is caused by the specified perils.  Under HO-3, the insured's dwelling is covered for risks of direct loss that are not otherwise excluded.

 

Exclusions

 

Because the HO-6 is written on a named-peril basis, the Section I-Exclu­sions does not contain the current causa­tion exclusions of the HO-3.  In all other respects, the Section I-Exclusions of the two policies is virtually identi­cal.

 

Conditions

 

The only difference between the HO-3 and HO-6 with respect to the Section I-Conditions is found in the Loss Settle­ment paragraphs.  In the HO-6, Real Property under Coverage A is covered at the actual cost to repair or replace, if the damage is repaired or replaced within a reasonable time. In the HO-3, Replacement Cost Coverage is provided for buildings insured under Coverages A and B, subject to an 80% insurance-to-value requirement.

 

HO-6 Endorsements

 

Just as certain endorsements relate specifi­cally to the exposures of tenants insured by the HO-4, there are endorse­ments to the HO-6 that further tailor the policy to meet the needs of unit owners.  Five of these endorsements are dis­cussed below.

 

Unit Owners Coverage A-  Special Cove­rages (HO-17-32) - This endorsement can be used to change Coverage A of the HO-6 to provide coverage for risks of direct loss.  When this endorsement is used, the perils

 

insured under Coverage A of the HO-6 become identical to the insured by the HO-3.

 

The HO-17-32 endorsement also adds the concurrent causation exclusions that are otherwise omitted under the HO-6. This reflects the fact that concurrent causation is a problem only when poli­cies provide coverage for risks of direct loss.

 

Unit-Owners Rental to Others (HO-17-33) - This endorsement provides Property and Liability Coverage for the unit owner while the resident premises is regularly rented or held for rental to others. Theft coverage is provided for Personal Property in a rented condominium but high-value items such as money, securi­ties, jewelry, watches and furs are ex­cluded. The HO-17-33 Endorsement also provides Liability and Medical Payments Coverage on behalf of the unit owner for occurrences at or from the resident premises when rented or held for rental to others.

 

Loss Assessment Coverage (HO-04-35) - For an addition premium the HO-04-35 endorse­ment increased the Limit of Liability for the additional coverages for Loss Assessment provided in Section I and Section II.  For an additional premium, the insured's share of cover­age loss assessment at additional loca­tions can be covered.  These additional loca­tions must be listed on the face of the en­dorsement.  Coverage for an assessment that results from a deduct­ible in the insurance purchases by a Corporation or Association of Property Owners is limited to $1,000.

 

A review of the Unit Owner's Deed, the Con­dominium Declarations (also known as

 

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the Master Deed) and the Condomin­ium Associa­tion Bylaws will define the com­mon areas.  It is for damage to these areas that the unit owner will be assessed in the event of a cov­ered loss.  By determining the current cover­age carried by the Association, the value of these areas, the possibility of damage to more than one of these areas in one loss, and the number of unit owners who will be assessed, the individual unit owner can determine if his/her exposure is greater than the $1,000 provided by the unen­dorsed HO-6.  If the exposure is greater than $1,000, the HO-4-35 endorsement should be con­sidered.

 

Loss Assessment Coverage for Earth­quake (HO-04-36) - This endorsement provides coverage for a Loss Assessment made against the unit owner by a Corporation or Association of Property Owners due to the peril of eart­hquake.  Loss assessments charged again­st the unit owner of a Corporation or Association of Property Owners by any govern-mental body are not covered.  Flood and tidal waves are also exclud­ed.

 

This coverage is subject to a percentage deductible based upon the Limit of Lia­bility for the unit; the percentage is stated in the endorsement.  The deduct­ible amount will not be less that $250 in any one assessment.

 

Unit-Owners Coverage C, Special Coverage (HO-17-31) - This endorsement changes the HO-6 to provide for risks of direct loss to prop­erty insured under Coverage C, the in­sured's Personal Property.  The typical exclu­sions that apply to this type of coverage are listed in the endorse­ment (the exclusions are similar to those for

 

Coverage A of the HO-3).  Coverage is provided under the HO-17-31 endorsement with the understanding that the insured occupies the unit in which the covered property is located.

 

Section II - Liability Coverages

 

Homeowners Policies meet both the Property and Liability Exposures of a wide range of insured.  The Section I coverage discussed up to this point provides protection against direct losses to property and the loss of use of that property.  The next part of this chapter is devoted to Section II of the Home­owners Policy, which Provides Liability Coverage for Personal Loss Exposures.  Section II is uni­form among all of the Homeowners Policies.

 

Types of Losses Covered

 

Section II of the Homeowners Policies covers bodily injury and property dam­age for which the insured is legally liable.  Coverage is also provided for medical expenses incurred be­cause of bodily injury to others.

 

Coverage E - Personal Liability - Coverage E provides Liability Coverage if a claim is made or suit is brought against an insured because of bodily injury or property damage caused by a covered occurrence.  Coverage E pro­vides a basic Limit of Liability of $100,­000 for dam­ages, which may be in­creased for an addi­tional premium.  Damages include prejudg­ment interest awarded against the insured.  Costs of investigating claims and defending against lawsuits are not included in the liabil­ity limits but are paid in addition to any pay­ments made for damages.

 

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The coverage statement for Coverage E incor­porates many of the terms set forth in the policy’s definitions section.  The term bodily injury means bodily harm, sickness, or disease, including required care, loss of services and death that may result. The term property dam-age is defined as physical injury to, destruc­tion of, or loss of use of tangible property.

 

This coverage is on an “occurrence ba­sis".  Occurrence means an accident, includ­ing continuous or repeated expo­sure to substan­tially the same general harmful conditions, which results in bodily injury or property damage dur­ing the policy period.

 

Coverage E provides Liability Protection for the named insured and members of the named insured's household who are relatives.  Other persons under the age of 21 who are in the care of a household member are also covered. With respect to animals or watercraft to which the policy applies, coverage is extended to any persons or organiza­tions legally respon­sible for animals or watercraft that are owned by a house­hold member. With respect to any vehicle which the policy ap­plies, coverage is provided for any person employed by the named insured or a family mem­ber and other persons using the vehicle on a covered loca­tion with the insured's consent.

 

An important part of Coverage E is Premises Liability Coverage. The policy defines an in­sured location to include not only the resi­dence premises but also other premises used by an insured as a residence, permanently or tempo­rarily.  The definition of an insured location also includes vacant land owned by the in­sured, cemetery plots, and any part of

 

a pre­mises occasionally rented to an insured for other than business purpos­es. Examples: a neighbor's child who ran into a closed sliding glass door at the insured's home and was injured.  Other occurrences that might result in a Premises Liability Claim could include a neighbor's child drowning in the insure­d's swimming pool or a passerby being bitten by the insured's "friendly" dog.

 

In addition to the Premises Liability Cover­age, Coverage E provides Liability Protection for off-premises, non-busi­ness activities of the insured.  Off-pre­mises occurrences include sport and hobby accidents. Example: while playing baseball with friends, the in­sured may injure another player by throwing the bat in the excitement of getting a hit.

 

Coverage E also provides defense for liability suites even if the suit is grou­nd­less, false or fraudulent.  The duty to defend on the part of the insurance company is broader than the duty to indemnify.  Therefore, if there is doubt about coverage, the insurer often will defend the case but reserve its rights to with­draw from the defense if it deter­mines that the occurrence is not cov­ered.

 

The insurer may investigate and settle any claim or suit that it decides is ap­propriate without the permission of the insured.  The insurer's duty to defend ends when the amount paid for damages resulting from the occur­rence equals the Limit of Liability.

 

Coverage F - Medical Payments To Others - Coverage F will pay the necessary medical expenses that are incurred or medical

 

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ex­penses ascertained within three years from the date of the accident causing bodily injury. Coverage applied to accidents that occur on the insured premises or as the result of an action by the insured at any location. The basic limit under Cover­age F  is $1,000 per person but the insured may select a higher limit. By prompt payment of physicians and hospital bills for an accident, for which the insured might be responsible, troublesome litigations often can be avoided.

 

Coverage F is not intended to provide acci­dent insurance for the named insur­ed's family.  Therefore, any insured under the policy is ex­cluded from cov­erage.

 

Exclusions To Coverages E and F

 

The Liability Coverage in Section II provide broad protection for the in­sured, however, the exclusions in Section II limit or eliminate coverage for specified types of occurrences.  Some of the exclusions apply to both Cover­age E and F, others apply only to Coverage E or Coverage F.  The fol­lowing exclu­sions are applicable to Coverages E and F:

 

• expected or intended injury or dam­age
• insured's business
• premises rented or held for rental
• professional services
• non-insured locations
• motor vehicles
• water craft
• war
• aircraft
• communicable disease
• abuse or sexual molestation
• controlled substances
• home day-care (excluded by en­dorsement           in most states)

 

These exclusions are described in the follow­ing paragraph.  The exclusions relating to the non-insured location, motor vehicles, water crafts and air­craft do not apply to bodily injury to a residence employee if the injury arises out of or in the course of employment by an insured.

 

• Expected or Intended Injury or Damage -          Bodily injury or property damage that is expected or intended by the insured is excluded. Example: an insured breaking a window in a neighbor's house following an argument.

 

• Insured's Business - Bodily injury or property damage arising out of or in connection with a business engaged in by an insured is excluded.  The Homeowners Policy is intended to provide only Personal Liability Coverage. Business activities must be covered under an appropriate lines policy.

 

• Premises Rented or Held for Rent­al - There is no coverage for liability arising out of the rental or holding for rental of any part of any premises by an insured.  However, this exclusion does not apply to    rental of an insured loca­tion:

 

1.   on an occasional basis if used only as                         a residence.

 

• in part for use only as a residence

unless more than 2 roomers or boarders are lodged in a single family unit.

 

3.   in part as an office, school, studio or                          private garage.

 

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• Professional Services - Liability arising out of the rendering of, or failure to render, professional services is excluded. Professional services would include, i.e., the services of an insurance agent, physician, nurse, engi­neer or architect.

 

• Non-Insured Locations - An in­sured location is defined in the definition section as     noted above. The poli­cy excludes coverage for liability aris­ing out of any premises owned, rented, or rented to others by an insured that is not an insured       location as defined in the policy. Premises, other than the resi­dence, that the insured uses as a residence must be shown in the decla­rations or acquired dur­ing the policy period in order to be considered an insured location. It is im­portant    for the insured to list all owned and rented locations in the ­policy decla­rations.

 

• Motor Vehicles - With a few ex­ceptions, Homeowners Polices exclude coverage for    liability arising out of an insured's use of a motor vehicle or motorized land conveyance, including trailers.  The policy does not define "motor vehicle" but in most states the term is defined by law for motor vehi­cle registration, it is considered to be a motor vehicle. Notice that the exclusions are broader than motor vehi­cles and ap­ply to any motorized land conveyance.

 

With regard to the vehicle described above, Homeowners Polices provide no coverage for liability arising out of their ownership, maintenance use, loading or unloading or entrustment to another person. Also excluded is Vicarious

 

Liability,    whether or not statutorily imposed, for the actions of a child or minor, with regard to such a vehicle. This Exclusion ap­plies to any vehicle an insured owns, op­erates, bor­rows or rents. Liability resulting out of the use or ownership of motor vehicles and motor­ized land conveyance is covered under the following circum­­stances:

 

1.   a trailer while it is not being towed by or             carried on a motorized land con­veyance.

 

2.   a motorized land conveyance designed for          recreational use off public roads, not subject to motor vehicle registration, which is not owned by an insured.  Example:  an unreg­istered snowmobile rented by an in­sured.  Liability arising out of the            use of a similar vehicle owned by an insured is only covered while on an in­sured location.

 

3.   A motorized golf cart when used to play             golf on a golf course.

 

4.   A vehicle or conveyance, not subject to motor vehicle registration, that is used to service an insured's residence, designed for assisting the handicapped or in storage on an insured location.  Example:  of a covered vehicle for each category would be: a garden tractor, a motorized wheel chair and an unli­censed antique car that the insured was rebuilding as a hobby.  If       the an­tique car went into operation after it was rebuilt, Homeowners Liability Coverage would be excluded.

 

This limited coverage applies to the          named insured, resident relatives and            

 

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employees of the insured on and off the insured's premises.  Coverage for others         using one of the above vehicles with the         insured's permission applies only on the         insured's premises.

 

• Watercraft - The policy excludes certain defined watercraft. The exclu­sion applies to the ownership, mainte­nance, use, loading, or unloading of this watercraft. Similarly the entrust­ment by an insured of such a watercraft to any person is excluded. The exclusions extend to vicarious liability, whether or not imposed by statute, for the actions of a child or minor using such watercraft.  The watercraft ex­clusions do not apply while the watercraft is stored.

 

Excluded watercrafts are boats that are de­signed to be propelled principally by engine power, electric motor or sailing vessels that are owned by or rented to an insured. There­fore, the following types of watercraft are among those excluded:

 

1.   Inboard or inboard outboard powerboats             owned by an insured.

 

2.   Boats with inboard or inboard outboard motor power of more than 50 horsepower that are rented to an insured.

 

3.   Boats powered by one or more outboard             engines or motors of more than 25 total         horsepower, provided the en­gines or          motors are owned by an in­sured.

 

4.   Sailing vessels with or without auxiliary power that are 26 feet or more in length and are owned by or rented to an insured.

 

• Aircraft - The ownership, maintenance, use, loading, and unloading of an aircraft is excluded.  As with moving vehicles and watercraft, the aircraft exclusion extends to the entrustment of an aircraft by an insured to any person or vicarious liability, whether or not imposed by statute, for the action of a child or minor using an aircraft.

 

• War - Homeowners Polices exclude bodily injury, property damage caused directly or indirectly or as a consequence of war. The definitions of war include civil war, insurrection, rebellion, revolution, warlike act by a military force or military personnel, destruction or seizure, use for a military purpose, discharge of a nucle­ar weapon. These are deemed to be war-like acts, even if it is accidental and is ex­cluded.

 

• Communicable Disease - Bodily injury or           property damage that arise out of the transmission of a communi­cable disease by an insured is excluded. This Exclusion           responds to a series of court decisions that found coverage in the Homeowners Policy for the insured's liability for damages as the result of infecting another person with the herpes virus. Such coverage was            never contemplated by homeowners actuaries when setting the rates for the policy and this exclusion makes that         intent clear.

 

• Abuse or Sexual Molestation - Liability or bodily injury or property damage arising out of sexual molesta­tion is excluded. Also excluded is liabil­ity resulting from corporal punish­ment and physical or mental abuse.

 

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• Controlled Substances - Homeown­ers Policies also exclude liability for bodily injury or property damage aris­ing out of the use, sale, manufacture, deliv­ery, transfer or possession of a controlled substance. This includes, but is not limited to, cocaine, marijuana, LSD and all other narcotic drugs. This exclusion does not apply to the legitimate use of prescription drugs by a person following the orders of a licensed physician.

 

• Home day-care - Coverage for a Home Day-care Business is limited under Section I and excluded under Section II.  To        emphasize that there is no cov­erage for          liability arising out of a Home Day Care Business, most states require insurers to    add the HO-04-86 Endorse­ment to Home­owners Polices. This endorsement does   not constitute a re­duction of coverage, but    it repre­sents a clarification of certain exclu­sions pertaining to Home Day Care Busi­ness.  The Endorsement states that if an insured regularly provides home day-care services to a person or persons other than the insured and receives mone­tary or         other compensation for such services, that enterprise is a business.  However, the rendering of Home Day Care Services by an insured to a relative of an insured is not considered a busi­ness.

 

The Endorsement points out that since Home Day Care conducted for compen­sation is a business, there is no Liability Coverage what­soever because of the business exclusion discussed above. Further, the HO-04-96 en­dorsement highlights the Section I exclusion per­tai­ning to other

 

structures under Cover­age B, where the other structures are used in whole or in part for business. The Endorse­ment also states that the Section I limits of $2,500 on business property on the residence premises and $250 off the residence premises also apply to the Home day-care Business.

 

Exclusions to Coverage E

 

The exclusions to Coverage E - Person­al Liability restricts or eliminates cover­age provided for Bodily Injury or Prop­er­ty Damage.  These exclusions apply to the following:

 

• Loss Assessment
• Property Owned by the Insured
• Property in the Care, Custody or       Control of the Insured.
• Bodily Injury Covered by Compensat­ing Law
• Nuclear Liability
• Bodily Injury to an Insured

 

The exclusions applicable to Coverage E are described in the following paragraphs.

 

Loss Assessment - If a condominium associa­tion were found liable, coverage would have to be found on the association's own policy and not the Homeowners Policies of the individ­ual members. An Association of Own­ers of single-family dwellings could be ex­posed to a similar liability situation with respect to their individual Home­owners Poli­cies.  Reimbursement of certain loss assess­ments is provided as an additional coverage.

 

Property Owned by the Insured - Property owned by the insured is ex­cluded from Prop­erty Damage Liability Coverage under

 

69

Cover­age E.  Coverage for damage to the insured's property is provided under Section I.

 

Care, Custody or Control - The care, custody or control exclusion is found in virtually all Liability Policies.  Dam­age to property rented to, occupied or used by, or in the care of the insured is ex­cluded.  This exclusion does not apply to property damage caused by fire, smoke or explosion. Therefore, Liabili­ty Coverage is provided for a ten­ant insured by a HO-4 who is found to be responsible for a fire that destroys the apartment building.

 

Bodily Injury Covered By Compensa­tion Law - The policy excludes bodily injury to any person eligible to receive any benefits either voluntarily provided or required to be provided by the in­sured under a Compensa­tion Law.  The exclusion applies to benefits payable under Workers Compensation, Non-occu­pational Disability, or Occupational Dis­ease Laws.

 

Nuclear Liability - Bodily injury or property, for which an insured is covered under the Homeowners Policy, is also an insured under a Nuclear Energy Liability Policy is excluded. This exclusion also applies in the case where the insured would have been an insured under a Nuclear Energy Liability Policy is issued by American Nuclear Insurers, Mutual Atomic Energy Liability Underwriters and the Nuclear Insurance Association of Canada.

 

Bodily Injury to an Insured - There is no Liability Coverage for claims arising from bodily injury to an insured resi­dent of the household.  This exclusion applies to the

named insured, related residents of the same household and other persons in their care who are under the age of twenty-one.

 

Exclusions To Coverage F

 

Coverage for medical payments to others is restricted or eliminated by the following exclusions that apply only to Coverage F:

 

• residence employee off-premises

 

• bodily injury covered by Compensa­tion Law

 

• nuclear reaction, radiation or

      con­tamination

 

• other regular residents

 

Residence Employee Off-Premises - Medical payment coverage is not pro­vided in the case of bodily injury that is suffered by a residence employee while off the insured location un­less the inju­ry arises out of, or in the course of, employment by an insured.  This em­pha­sizes the fact that certain exclusions to Coverages E and F (discussed earli­er) do not apply to residence employees who suffer bodily injury arising out of and in the course of employment for the insured.

 

The phrase "for the insured" is impor­tant.  A part-time gardener who works once a week for the insured might be injured in the course of ordinary employment while working at some­one else's house.  Coverage would not be provided under the insured's policy because the injury, while arising out of the course of employment, did not arise out of employment for the insured. If the injury occurred while the gardener was purchasing seed for the insured at a hardware store, then coverage would apply.

 

70

Bodily Injury Covered By Compensa­tion Law - This exclusion is broader than the cor­responding exclusion appli­cable to Coverage E, which refers to benefits voluntarily pro­vided, or re­quired to be provided, by the insured. The Coverage F Exclusion refers to benefits voluntarily provided, or re­quired to be provided, under any Work­ers Compensa­tion, Non-Occupational Disability or Occupa­tional Disease Law. Thus, Coverage F Exclu­sion applies to anyone coming under the Coverage of such a law, regardless of who pro­vides, or is required to provide, the coverage.

 

The Nuclear Exclusion - Medical payments coverage does not apply to bodily injury arising from any nuclear reaction, radiation or radioactive con­tamination.  This exclusion applies whether the reaction, radiation or con­tamination was controlled or uncon­trolled and however it was caused. Any consequences of such an occur­rence are also excluded.

 

Other Regular Residents - Medical Payments Coverage is not provided for bodily injury to any person, other than a resident employee, regularly residing on any part of the insured location. This parallels the Coverage E Ex­clusion that applies to members of the in­sured's household.

 

Additional Coverages

 

Section II of the Homeowners Policy also provides four additional coverages related to an insured's liability expo­sures.  Any amounts paid under these additional coverages are in addition to the Limits of Liability shown on the dec­larations page for Coverage E and F.  Subject to certain limitations, coverage is provided for the following:

 

• Claim Expenses
• First Aid Expenses
• Damage to Property of Others
• Loss Assessment

 

Claim Expenses - Defense costs are consid­ered Claim Expenses and include those ex­penses incurred by the insurer and costs taxed against an insured in any case the insurer defends.  These defense costs can be consider­able and include the expenses of claim adjust­ers, defense, attorneys, investigators and ex-pert witnesses. These Claim Expenses rep-resent additional coverage beyond the Limit of Liability and do not count against it.  Therefore, there is no upper limit to the amount of Claim Expenses that might be paid under the policy.  Other claim expenses that are paid include the following:

 

1.   Premiums on bonds required in a suit       defended by the insurer but not for bond      amounts that are more than the Limit of         Liability for Coverage E.

 

2.   Up to $50 per day for expenses incurred by an insured, at the insurer's request, while assisting in the investiga­tion or defense of a claim or suit. The reasonable expenses include actual loss of earnings but not loss of other inco­me.

 

3.   Post judgment interests prior to the time the insurer tenders or deposits in court that part of the judgment that does not exceed the applicable Limit of Liability.

 

First Aid Expenses - Coverage is pro­vided to pay expenses for first aid to others incurred by an insured for bodily injury

 

71

under the policy.  This coverage does not extend to the named insured or any other insured.  This additional cover­age is separate from any medical pay­ments made under Coverage F and has no limits stated in the policy.

 

Damage to Property of Others - Re­placement Cost Coverage is provided at $500 per occur­rence for property damage to the property of oth­ers caused by an insured.  This cover­age is excess insurance over any amount recoverable under Section I of the poli­cy.

 

Property Damage to Property Owned by an insured is excludable from this cov­erage.  This additional coverage also does not pay for property damage:

 

1.   caused intentionally by an insured who is thirteen years of age or older.

 

2.   to property owned by, or rented to, a       tenant of an insured or a household    resident.

 

3.   arising out of a business engaged in by an            insured.

 

4.   arising out of any act or omission in connection with a premises owned, rented or controlled by an insured other than an insured location.

 

5.   arising out of the ownership, maintenance, use of aircraft, watercraft, motor vehicles or other motorized land conveyances.  A    motorized land con­veyance designed for off-road recre­ational use, not subject to   motor vehicle registration and not owned by an insured, is exempt from this exclu­sion and, therefore, would be covered.

 

Loss Assessment

 

The HO Policy will pay up to $1,000 for the insured's share of any Loss As­sessment charged by a Corporation or Association of Property Owners under certain conditions.  The assessment must be made as a result of bodily injury or property damage to which Section II of the policy would apply, or for liability for an act of a director, officer, or trust­ee acting in that capaci­ty.  The cover­age for Loss Assessment resulting from acts of a director, offi­cer, trust­ee of the Corporation or Association of Proper­ty Owners is pro­vid­ed only if that director, officer, or trustee is elected by the members of the Associ­ation or Cor­pora­tion and serves without pay.

 

This coverage is limited to Loss Assess­ment charged against the insured as owner or tenant of the residence premises.  Loss Assessment charges against the insured or a Corporation or Associa­tion of Property Owners by a govern­mental body is excluded.  Regardless of the number of assessments, the $1,0­00 limit is the most that will be paid for loss arising out of one accident or one covered act of a director, officer or trustee (an act involv­ing more than one director, officer, or trustee in a single act).  The Loss Assessment Exclu­sion under Coverage E, discussed previ­ously, does not apply to this coverage.

 

Conditions

 

Conditions under Section II are subject to certain policy conditions.  These conditions are listed below and de­scribed in the follow­ing paragraphs:

 

• Limit of Liability
• Severability of Insurance
• Duties after Loss

72

• Duties of an Injured Person under        Coverage F
• Payment of Claim under Coverage F
• Suit Against the Insurer
• Bankruptcy of an Insured
• Other Insurance under Coverage E

 

Limit of Liability - The Limit of Liability for Coverage E for all damages re­sulting from any one occurrence is the amount shown in the declarations re­gardless of the number of insureds, claims made or persons injured.  Example: assume that an insured's er­otict golf shot.  Damages payable is also re­stricted to the policy limit for a single occur­rence, regardless of the number of insureds under the policy who are held liable.  There­fore, if a husband and wife insured under an HO policy are each found liable for $75,000 in damages resulting from a covered oc­cur­rence, and the Section II - Limit of Liability is $100,000, the policy will pay only $100,000 of the combined $150,0­00 in damages.  In both of the above examples, defense costs would be paid in addition to the Limit of Liability.

The limit under Coverage F for all Medical Expenses for bodily injury to one person, as the result of one accident, is shown in the declarations. The basic limit is $1,000, therefore, in the case of the two injured golfers; each would be eligible for separate $1,000 limits under Coverage F, while the occurrence would be subject to a single limit of $100,000 under Coverage E.

 

Severability of Insurance - Insurance in a HO Policy applies separately to each insured.  The concept of Severabil­ity of Insurance can be illustrated by a New Hampshire case in which the seve­nteen-year old son of an insured alleg­edly assaulted

another minor.  The parents of the insured child sued both the son and his parents, alleging that the parents, through their neglect, al­lowed the assault to occur.  The insurer denied coverage for both the son and his parents, relying on the exclusion regarding "bodily injury...which is expected or intended by the insured".  The court agreed that there would be no coverage for the son because cover­age of intentional acts is ex­cluded.  Howev­er, the court found that there would be coverage for the parents be­cause the suit alleging their negligence would not be affected by the exclusion that ap­plied to their son. Because the policy re­quired that the insurer respond to the suit against the parents, even though it does not re­spond on behalf of their son.

 

In some situations, both the named in­sured and another party for which the policy pro­vides coverage may be sued for different actions or omissions that result in one occur­rence. Example: an insured loaned a canoe to a local scout troop.  The policy would provide liability coverage on the canoe. If a scout was injured while using the ca­noe, the scout could make a claim against the named insured, alleging poor main­tenance of the canoe and against the scout troop, alleging im­proper supervision of the use of the canoe. The in­surer would respond on behalf of both the insured and the scout troop.  However, the limits of liability would not be increased even though two separate insureds were involved.

 

Duties After Loss - In case of an acci­dent or occurrence, the insured has certain duties.  Not all of these duties will necessarily apply to a given occur­rence.  The insured's Duties After a Loss are as follows:

 

73

1.   To give written notice to the insurer or its            agent as soon as practical, setting forth the    identity of the policy and name of the insured.  The notice should also include reasonable available infor­mation on the time, place and circum­stances of the accident or occurrence and the names and addresses of any claimants and witnesses.

 

2.   To promptly forward to the insur­ance company every notice, demand, summons,         or notice of suit frequently has a time limit during which an an­swer may be entered.  Failure to answer will result in a      default judgment.  Therefore, the claimant might prevail with a groundless suit.

 

3.   To assist the insurance company, at its request, to make settlement and to enforce any right of contribution of indemnity against any person or organi­zation who might be liable to an in­sured.  The insured must also assist with the conduct of suite by attending hearings and trials, by securing and giving evidence and obtaining the atten­dance of witnesses. This section asks the insured to cooperate vigorously in the defense of any suit, just as the in­sured would if there were no insurance available.

 

4.   When claims are made for damage to the property of others, the insured, at the insurer's request, must submit a sworn statement of loss within 60 days after the loss.  If the damaged property is still in the    insured's control, it must be shown to the        insurer on request.

 

 

 

 

5.  The insured must not voluntarily make payment, assume obligation, or incur expense other than for first aid to others at the time of bodily injury. Any other voluntary payment or as­sumption of liability on the part of the insured is at his/her own expense.

 

Duties of an Injured Person Under Coverage F - Under Coverage F - Medi­cal Payments to Others, the injured person, or someone acting for that per­son, must send the insurer a writ­ten proof of claim as soon as is practical.  The insurer may require the proof of claim to be written under oath.  The injured person must also authorize the insurer to obtain copies of medical reports and records.  The final duty for the injured person is to submit to a physi­cal exam by a doctor selected by the insurer when and as often as is reasonable.

 

Payments of Claim Under Coverage F - When a claim is paid under Cover­age F, medical payments to others, such payment does not constitute an admis­sion of liability by an insured or the insurer.  Medical pay­ments claims are often paid in situations where the in­sured feels a moral obligation to a guest or other person on his/her premises although no legal liability exists. This provi­sion points out that payment under Coverage F does not mean that the claimant can auto­matically collect under Coverage E.

 

Suit Against Insurer - The first provi­sion of this condition states that no legal action can be brought against the insurer unless there has been compli­ance with the policy provisions.

 

 

 

74

The second provision states that no one has the right to add the insurer as a party to any

action against an insured.  This means that a claimant, or a co-defendant involved in a lawsuit against the insurer, cannot name the insurer as a party to that lawsuit.

 

A jury might be swayed by its decision regard­ing the award of damages by knowing that an insurance company, rather than the individual defendant, was responsible for payment.

 

A third provision states that no action with respect to Coverage E can be brought against the insurer until the obligation of the insured has been de­termined by a final judgment or an agreement signed by the insurer.  An action may be brought at that time to compel the insurer to pay.

 

Bankruptcy of an Insured - Bankrupt­cy or insolvency of an insured does not relieve the insurer of its obligations under the policy.  Recall that Section II - Coverages is de-signed to pay damages for which the insured is legally liable.  An insured that is bankrupt is not like­ly to be able to pay damages for which he/she may be liable.  As a matter of social policy, liability insurers have assumed the obligation of paying-cov­ered liability damages on behalf of the insured, even though, in the absence of insurance, the in­sured could not pay the damages because of personal bankrupt­cy.

 

Other Insurance - Coverage E - Cov­erage E - Personal Liability is excess over any other valid and collectible primary insurance.  This provision does not apply with respect to insurance specifically written

 

 

as excess over the limits of liability provided by the HO policy.  Example:  assume that an insured carries the basic $100,000 Cov­erage E limit.  An excess policy pur­chased by the insured for $1,000,000.  Excess of loss of $100,000, would be recognized as specifically written excess insurance.

 

Common Policy Conditions

 

Certain conditions in the Homeowners Poli­cies, referred to as the "common conditions", apply to both Section I and Section II.  Like the Section I condi­tions, these common condi­tions outline the rights and responsibilities of the insured and the insurer.  The common policy conditions are as follows:

 

• Policy Period
• Cancellation or Fraud
• Liberalization Clause
• Waive or Change of Policy Provi­sions
• Cancellation
• Non-renewal
• Subrogation
• Death of Named Insured

 

Policy Period

 

Homeowners Policies cover only losses that occur during the policy period.  The Section II coverage is on an occur­rence basis, meaning that the claim does not have to be filed during the policy period as long as the occurrence giving rise to the loss occurs during the policy period.

 

Concealment or Fraud - Coverage is not provided for an insured that has intentionally concealed any material fact or circumstances relevant to the insurance policy, either

 

75

before or after a loss. Concealment or misrep­resenta­tion must be intentional and material in order for the insurer to void the policy. A fact of circumstanc­es is considered to be material if it would affect the insurer's un­derwriting of the policy had the insurer been aware of it.

 

The policy will also be voided if any insured has made false statements or engaged in fraudulent conduct relat­ing to the policy.

 

Liberalization Clause

 

If the insurance company adopts a revision that would broaden the cover­age under the policy without additional premium, the broad­ened coverage will automatically apply to the policy on the date the revision is implemented in the insured's state. The implementation date must fall within 60 days prior to the inception of the policy or during the policy period. The Liberalization Clause does not apply to changes that are im­plemented be­cause a subsequent edition of the policy has been introduced.

 

Waive or Change of Policy Provisions - A waiver or change of any policy pro­vision must be in writing by the insurer in order to be valid.  A request by the insur­er for an appraisal or examination does not waive any of the insurer's rights. Example:  if an insurer requests to examine damage property follow­ing loss, the insurer's request does not waive its right to deny coverage if its investigation determines that the cause of the loss is not a covered peril.

 

 

 

 

 

 

Cancellation

 

The insured may cancel a Homeowners Policy at any time by returning it to the insurer or by informing the insurer in writing of the date the cancellation is to take effect.  The insurer may cancel the policy only under certain condi­tions.  If a HO policy is canceled, the pre­mium for the period from the date of cancella­tion to the expiration date is refunded on a pro-rata basis, regardless of who cancels.

 

The insurer may cancel the policy at any time for non-payment of premium, provided the insured is generally given 10 days written notice.  Also, during the first 60 days of the policy term, the insurer may cancel for any reason by providing ten day's written notice.

 

If the policy has been in effect for 60 days or more, including subsequent renewals, then the insurer may cancel only under two circum­stances: if their has been a material mis­repre­sentation of fact, which, if known to the insurer, would have caused it not to issue the policy.  The insurer also may cancel if there has been a substan­tial change in the risk since the policy was issued.  After the policy has been in effect for 60 days or more, 30 days written notice of cancellation is required.

 

Non-Renewal

 

The insurer may elect not to renew the policy for any reason.  Non-renewal requires 30 days written notice. Proof of mailing is considered sufficient proof of notice for either cancella­tion or non-renewal

 

 

76

Assignment

 

Assignment of the policy to another person or persons is not valid without written consent of the insurer.  This follows from the fact that an insurance policy is a personal contract be­tween the insurer and the insured.

 

Subrogation

 

An insured may waive in writing befo­re a loss, all rights of recovery against any person.  Such waivers are often found in property leases. If the insure­d's right has not been waived in writing prior to a loss, the insurer may require an assignment of rights of recov­ery for a loss to the extent that payment is made by the insurer.

 

The policy requires the insurer to sign and deliver all related papers and to cooperate with the insurer if an assign­ment of subrogation rights is sought.  Subrogation does not apply under Sec­tion II - Medical Payments to Others or to Damage to Property of Others.

 

Death of Named Insured

 

In the event of the death of the named insured or resident spouse, the legal representative of the deceased is in­sured, only with respect to the premises and property of the deceased covered under the policy at the time of death.  The policy does not extend to the deceased's entire estate, which might include property not insured under that particular Homeowner's Poli­cy.

 

This condition includes a revised defini­tion of "insured". In the event of the death of the

 

 

named insured or spouse, the new definition of insured includes any member of the named insured's household at the time of the insured's death, but only while that household member is a resident of the residence premises. With respect to property of the named insured, in the event of the named insured's death, the definition of insured includes the person having proper temporary custody of the proper­ty until a qualified legal representative is appointed.

 

 

Chapter 5 - Review Questions

 

 

1.   What types of loss exposures do tenants face?

 

A.  Loss to Additions and Alterations

B.  Loss to Personal Property

C.  Legal Liability

D.  All of the above

 

 

 

2.   Personal property includes such items as furniture, bedding, clothing, TVs and stereos.  Such items often are referred to as:

 

A.  belongings

B.  items

C.  contents

D.  Real property

 

 

 

3.   The HO-4 does not provide cover-age for:

 

A.  Additions and Alterations

B.  Dwelling and Other Structure

C.  Personal Property

D.  Legal Liability

 

 

 4.   What form is designed to meet the unique insurance requirements of owners of condominium units and cooperative apartments?

 

A.  HO-6

B.  HO-4

C.  HO-3

D.  HO-8

 

 

 

5.   What coverage provides liability for the named insured and members of the named insured's household who are relatives?

 

 

A.  Coverage F

B.  Coverage E

C.  Coverage B

D.  None of the Above

 

 

 

Answers

 

1.  D

2.  C

3.  B

4.  A

5.  B