Chapter 6 – Homeowners Pricing and Endorsements

 

Introduction

 

With the exception of comments on a few endorsements that apply to only HO-4 or HO-6 policies, the discussion of Homeowners Policies in the preced­ing two chapters have focused on the standard, endorsed HO forms.  In prac­tice, however, Homeowners Policies generally contain a variety of endorse­ments. These endorsements may be add­ed to respond to an insured's special needs, to meet an insurer's underwriting requirements, or to satisfy insurance regulations. The effect of such en­dorsements is to modify the coverage provided under the standard unendorsed form.  In many cases, adding an endorsement also changes the pricing of the policy. Different types of endorsements have different effects on Homeowners Pricing. Therefore, a complete understand­ing of homeowners endorsements re­quire a knowledge of Homeowners Pricing, as well as, Homeowners Coverage. This chapter explains Homeowners Pricing and examines Homeowners Endorsements and their effect on both the coverage and pricing of the Home­owner Policy.

 

Homeowners Insurance Pricing

 

This discussion of the devel­opment of the homeowners premium focuses primarily on the HO-3 policy. The same pricing procedures apply to HO-1, HO-2 and HO-8, which contain, with some variations, the

com­plete package of Homeowners Policy Coverage­s. Examples of Homeowners

 

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Pricing presented in this chapter are based on information provided in the Homeowners Manual pre-pared by the Insurance Services Office (ISO).

 

Indivisible Base Premium - The Homeowners Policy has an indivisi­ble base premium, reflecting the fact that the policy consists of a package of coverages.  The base premi­um is the amount charged for the stan­dard package of coverages under a particular homeowner form without modifications. Once the key rating factors have been determined and the HO form and amount of coverage on the dwelling have been selected, the Homeowners Pricing procedure calcu­lates a single base premium for the entire policy.

 

Primary Rating Factors

 

The Primary Rating Factors that deter­mine the premium for a Homeowners Policy are the territory in which the dwelling is located, the quality of pub­lic fire protection and the dwelling construction.

 

While territory reflects both Property and Liability Loss potential, the fire protection and construction rating fac­tors reflect only property loss potential.  This is indicative of the fact that home­owners insurance is priced primarily on the basis of expected property loss frequency and severity.  Except for territorial differences, the homeowners premiums include what is in essence a "flat charge" for the Liability Coverage.

 

 

 

Territory - Each state is divided into rating territo­ries. Differences in territories represent different levels of exposure to loss with respect to the Property, Theft and Liabil­ity Coverages provided in the Homeowners Policy.

 

Frequently, urban and rural areas are separatedinto different territories. Urban areas are often characterized by higher crime levels and greater willing­ness of residents to file lawsuits.  On the other hand, rural areas are likely to have less fire protection than is provid­ed in cities. Different geographic areas may also represent different exposure levels to other perils, such as wind­storm. Rating territories are established on the basis of an analysis of historical data on insured losses.

 

Protection - This primary rating factor reflects the level of fire protection available for the insured dwelling.  It takes into account only the public fire protection.

 

Public Protection Classes

 

The Public Fire Protection Classes available to homeowners is provided by the local fire department.  Municipal Fire De­partments are graded on a scale from Class 1 (best protection) to Class 10 (least protection).  Properties located in areas graded Class 10 are referred to as unprotected.

 

Other Factors

 

Other factors considered in evaluating public fire protection for homeowners rating purposes are the distance of the dwelling to

 

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the nearest fire station and the distance to the nearest hydrant.  These conditional factors are considered in the event that two or more fire pro­tection classifications are indicated for a Municipality or Township.

 

If the distance from the dwelling to the fire station is 5 road miles or less and the hydrant is located within 1,000 feet, the lower Class would be used, 5 in this case.  If the distance from the dwelling to the fire station is five road miles or less but the hydrant is more than 1,000 feet away, then the higher classification would be used, 8 in this case.  If the distance to the fire station is more than 5 road miles, the property is considered unpro­tected, and Class 10 is used.

 

Construction

 

The Homeowners Manual divides dwell­ing into 4 construction categories: frame, masonry veneer, masonry and superior construction.

 

Frame - Frame construction consists of exter­ior walls, wood or other com­bustible mater­ials on combustible sup­ports or framing studs.  Stucco on wood and plaster on combustible sup­ports are considered frame.  Aluminum or plastic siding over frame is rated as frame but given a different coding for statistical purposes. Although frame construction is most susceptible to fire, it has excellent earthquake resistance characteristics and is widely used in earthquake-prone regions.

 

 

 

Masonry Veneer - A masonry veneer structure has exterior walls of combusti­ble construction veneered with brick or stone. Masonry veneer is typically rated the same as masonry, although a differ­ent statistical code is used.  Masonry veneer is more resistive than frame construction to fire but it is extremely susceptible to earthquake damage.

 

Masonry - Masonry construction, also referred to as ordinary construction, consists of exterior wall construction of masonry materials such as brick, stone, adobe, or similar materials, and the floors and roof are made of jointed combustible materials.  Masonry con­struction is less susceptible to loss from fire than frame or masonry veneer.

 

Superior Construction - In most cases because of cost considerations, superior construction is found in residential construction only in apartment houses and condominiums.  The following 3 types of construction are rated as superior:

 

• Non-Combustible construction which is distinguished by exterior walls, floors and roof constructed of and supported by metal or other non-com­bustible materials.

 

• Masonry Non-Combustible con­struction, which is distinguished by masonry enter-or walls and floor, and a roof of metal or other non-combustible materials.

 

• Fire-Resistive construction, which is distinguished by exterior walls, floors and roof constructed of masonry or other

 

 

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fire-resistive materials. Mostly the structures are built of rein­forced concrete. Most high-rise build­ings fall into this category.

 

Determining a Homeowners Policy Base

 

The homeowners base premium is cal­culated using the key premium and the key factors found in the Homeowners Manual.  The key premium is chosen from the manual on the basis of the Territory, Public Fire Protection, Con­struction, and Policy Form that apply to the covered dwelling.  The key factor is chosen from the manual on the basis of the Coverage A limit on the dwelling.  The base premium is calculated by multiplying the key premium by the key factor.

 

The first step in determining the base premium is to select the appropriate key premium. Second, find the key factor for a Coverage A amount of $100,000. The third step is to multiply the key premi­um amount by the key factor.  The product is the base premium.

 

There are 2 situations in which the base premium calculation is slightly more involved.  The first is when the Coverage A amount falls between the factors given in the key factor table, such as a Coverage A amount of $105,­000. The second is when the Coverage A amount is higher than the highest key factor shown in the Table.  The methods of handling these situa­tions are detailed in the Homeowners Manual.

 

 

 

 

Adjustments to the Base Premium

 

The base premium for a Homeowners Policy may need to be adjusted in some situations.  Such an adjustment would be necessary when additional rating factors must be considered and when the insured increases or decreases the standard deductible.

 

Additional Rating Factors - Two additional rating factors that apply only under certain circumstances may require an adjustment of the base premium.  An adjustment is required if the covered dwelling is of superior construction or if it is a townhouse or row house.

 

Superior Construction - Dwellings of Superior Construction, Non-Combustible, Masonry Non-Combustible, or Fire-Resis­tive earn a credit that is applied to the base premium.  All other things being equal, if the dwelling described above was of Superior Construction and earned a 15% credit, the adjusted annu­al pre­mium would be $347 x 0.85 + $294.95­ or $295 rounded to the nearest whole dollar.

 

Townhouse or Row House - These types of dwellings share one or more interior walls with neighboring dwell­ings.  As a result, their exposure to loss from a fire that starts in a neighboring residence is greater than that faced by single homes, which are physically separated from each other.  If a Home­owner Policy, other than a HO-4 or HO-6, is written to provide coverage on a townhouse or row house, the base premium may be increased to reflect the greater exposure to loss from fire that originates in an adjoining dwelling.  The increase is

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accomplished by multi­plying the base premium by a factor that is based on the total number of individual family units within the fire division containing the dwelling and the applicable fire protection class, as shown in Exhibit 1. In a group of townhouses in which the common walls are of adequate masonry construction from the basement to eighteen inch­es above the roofline, each townhouse would constitute a single fire division.  In such a case, no adjustment to the base premium would be required, since a factor of 1.00 applies. On the other hand, in a group of townhouses with no fire resistive walls between the units, the whole group of townhouses would constitute a single fire division and an adjustment to the base premium would be necessary.

 

An adjustment to the base premium for a townhouse is accomplished in the following manner.  Assume that the townhouse is one of six single-family units within one fire division and that the fire protection class is 2.  Referring to Exhibit 1, read down the left column to find the row that applies to six fami­ly units, which is now designated 5-8.  Next, choose the protection class that applies in this case classes 1-8 since the actual protection class is 2.  The factor shown for 5-8 family units in protection classes 1-8 is 1.25.  If the base premium is $200, the adjusted base premium for a policy covering this townhouse would be $200 x 1.52 = $250.

 

 

 

 

 

 

 

                                                

                          EXHIBIT 1

                                                 

 

Total No. of

Individual

Family Units         No. of                     Protection

within the              family                    Class

fire division           code                       1-8/9 & over

                                                

 

1 & 2                      (1&3)             1.00/1.00

3 & 4                         (2)                1.10/1.50

5-8                             (4)                1.25/1.30

9 & over                   (4)                Refer to Com­pany

                                                

 

Increase or Decrease in Deductible

 

The standard deductible for Homeown­ers Property Coverage is $250.  At the insured's option, this deductible may be increased to $500, $1,000 or $2,500.  The new base premium for these de­ductibles is calculated by multiplying the base premium by a factor deter­mined by the Coverage A limit and the deductible amount.  The increased deductible factors used by the IIA In­surance Company are shown in Exhibit 2.  Notice that the factors are all less than 1.0, meaning that an increase in the deductible results in a decrease in the base premium.

 

The $250 deductible may also be decreased to $100.  The base premium is multiplied by a factor of 1.15 to devel­op the premium for this lower deduct­ible.  The increase in premium is sub­ject to a minimum and a maximum additional charge.

 

 

 

 

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                          EXHIBIT 2

                                                 

HO-1, HO-2

HO-3, and HO-8                 Deductible

Coverage A Limit $500       Amount      

$1,000   $2,500

                                                

 

Up to $59,999                 .91   .83           .75

$60,000 to 99,999           .93   .85           .75

100,000 to 200,000         .95   .88           .75

200,001 to 250,000         .95   .88           .85

Over $250,000 refer to Company

                                                

Homeowners Endorsements

 

A variety of endorsements can be used to modify Homeowners Policies.  Some of the more widely used endorsements are discussed in this section.

 

The Need for Endorsements

 

A Homeowners Policy may be endorsed to meet the needs of insureds, the un­derwriting requirements of insurers, or state insurance regulations.

 

Insured's Needs - Endorsements may be used to customize the standard cov­erage under a particular HO form ac­cording to the needs of the insured.

 

Property and Liability Loss Exposure vary considerably from one household to another and, therefore, so do their insurance requirements.  Endorsements provide flexibility in meeting these individual needs.

 

 

 

 

 

 

Insurer's Underwriting Require­ments -  Homeowners Policies provide a very broad range of coverages to the insured.  An insurer may not be willing to extend this breadth of coverage, for insurance, on a dwelling located in an area where homes regularly suffer win­dstorm damage.  An endorsement ex­cluding windstorm damage may be required by an insurer as a condition to providing coverage on a dwelling locat­ed in such an area.

 

State Regulation Requirement - The laws of the various states often required that certain Homeowners Policy Provi­sions be amended. 

A series of HO endorsements have been developed by ISO to reflect the various modifications required by individual states.  These "Special Provisions" Endorsements typi­cally modify standard HO Policy provi­sions in ways that are advantageous to insureds.

 

Affected policy provisions often include one or more of the following Areas: Cancellation and Non-renewal, defini­tions such as "Actual Cash Value" and "Intentional Loss", Suit Against the Insur­er, Duties of the Insured, Loss Payment and Valuation of Property.

 

Effects of Endorsement

 

When Homeowners Endorsements are used, they affect the coverage provided by the basic policy and the premium charged for coverage.

 

 

 

 

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Effect on Coverage - Endorsements can be used to change many aspects of coverage under Homeowners Policies, including the following:

 

• Personal Property Covered
• Property Covered 
• Perils Covered
• Activities Covered
• Limits of Liability
• Insurance to Value Requirement
• Loss Settlement Valuation Method
• Applicable Exclusions

 

The Endorsements may affect coverage only under Section I, only under Sec­tion II or under both.

 

Effects on Premiums - When the cov­erage provided by an HO Policy is changed by an endorsement, the premium charged for the policy is often affected.  A change in premium may occur in one of 3 ways:  (1) adjusting the base premium, (2) making an additional premium charge for an increase in coverage and adding this charge to the base premium, or (3) giving credit for a decrease or restriction in coverage and subtracting the credit from the base premium.

 

Endorsements Affect Section I - Coverages

 

Some of the endorsements in this group modify all of the Section I coverages.  Others modify only 1 or 2 of the coverages.

 

 

 

 

 

 

All Section I Coverages

 

Two of the Homeowners Endorsements affect all of the Section I Coverages: Inflation Guard Endorsements and the Earthquake Endorsement.

 

Inflation Guard Endorsement (HO-04-04) - The Inflation Guard Endorsement in­creases the Limits of Liability for Cover­age A, B, C and D.  The Endorsement permits the insured to select the per­centage of annual increase, which ap­plies pro-rata throughout the policy year.  For instance, if the insured se­lects an 8% annual increase, at the end of six months the limits would be in­creased 4%.

 

Adding the Inflation Guard Endorsement requires an adjustment to the base pre­mium.  The pricing factor varies with the annual percentage in coverage se­lected (see Exhibit 3). As with other adjustments to the base premium, the base premium is multiplied by the ap­propriate pricing factor to determine the adjusted base premium.

 

Inflation Guard Endorsement Factors

                                                             

           EXHIBIT 3

                                                            

Amount of

Annual Increase Factor

                                                                   

4%                            1.02

6%                            1.03

8%                            1.04

 

Each additional

4% over 8%              add .02

                                                               

 

 

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Earthquake Endorsement (HO-04-54) - The Earthquake Endorsement adds back an excluded peril to the Section I cove­rages of the policy.  This Endorsement is priced by means of an addition to the base premium.

 

Earthquake Coverage is always written with as deductible.  In most areas, the deductible is 5% of the Limit of Liability for each applicable coverage section, subject to a $250 minimum.

 

The HO-04-54 Endorsement excludes loss resulting directly or indirectly from flood of any nature or tidal wave, whet­her caused by or resulting from an earth­quake.  Exterior masonry veneer may be either excluded or covered.  If ma­sonry veneer is covered, the entire structure is rated as masonry.

 

The Earthquake Endorsement rating process consists of 4 steps.  First, the appropriate rate table is selected.  These rate tables vary based on the HO form and the presence of endorsements modi­fying Limits of Liability.  Second, the earthquake zone is determined from the rate table.  Third, the rate per $1,000 of coverage is selected based on the con­struction class.  From construction has the lowest rate and masonry the highest; superior for fire-resistive construction is given an intermediate rate.  Fourth, the selected rate is applied to the Coverage A amount for all forms except HO-4 and HO-6.  With HO-4 and HO-6, the Coverage C limit is used as the rating basis.  The selected rate is also applied to any increased limits and other coverage options the insured may have selected.

 

 

 

Coverages A and B

 

Four of the endorsements that affect only Coverages A and B are discussed below:

 

• Premises Alarm or Fire Protection System           (HO-04-06)
• Ordinance or Law Coverage (HO-04-77)
• Other Structures - Increased Limits

      (HO-04-48)

• Special Loss Settlement (HO-04-56)

 

Premises Alarm or Fire Protection System (HO-04-16) - In order to encourage loss control on the part of the insured, premium credits are given for premises alarm or fire protection systems, such as central station reporting burglar or fire alarms.  The credit is applied by multiplying the base premium by the appropriate factor.  With a 5% credit, the factor would be 0.95, $100 x 0.95 = 95 adjusted base premium.

 

The endorsement acknowledges the installation of an approved alarms or automatic sprinkler system on the resi­dence premises for a premium credit. It also provides that the insured agrees to maintain this system in working order and to notify the insurer promptly of any change made to the system or its removal.

 

Ordinance or Law Coverage (HO-04-77) - Older buildings often do not conform to modern building or zoning codes. If the building is damaged, any repairs or new construction would have to con­form to the present zoning or building codes.  The basic coverage in the Hom­eowner Policy provides for repair or replacement of "like kind and

 

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quality".  If the present code requires more costly repairs, the insured has a potential gap in coverage.  This gap can become quite substantial if the code requires demolition of the damaged dwelling. Many city ordinances require demoli­tion of non-conforming buildings if they are damaged to 50% of their val­ue. Example:  Assume Mary's old non-conforming dwelling valued at $100,000 suffers a $50,000 fire loss.  The Homeowners Policy would pay for the $50,000 loss but, if the city ordinance re-quires that the building be demolished, Mary has suffered another $50,000 loss. This loss is not covered in the basic policy due to the effect of the build­ing ordinance, not the fire.

 

The Ordinance or Law Coverage Endorse­ment provides that, for an additional premi­um, loss for damage by an insured peril to covered property or the building containing the covered property will be settled on the basis of any ordinance or law that regulates the construction, repair or demolition of this property. This Endorsement changes the policy by changing the loss settlement valuation method employed.

 

The pricing process for this endorse­ment requires 3 steps: first, the Coverage A amount used in calculating the base premium must be equal to at least $96,000.00, calculated as ($100,000 + $20,000) x 0.80.  (To be fully cov­ered in the event of a total loss, howev­er, an insured should carry a Coverage A amount equal to 100% of the re-plac­ement cost of the dwelling plus demoli­tion and increase construction costs).

 

Second, the base premium is calculated in the normal manner, multiplying the key premium from the manual by the key factor that applies to the increased Coverage A limit as deter-mined above.

 

Third, the base premium calculated in the second step is multiplied by a factor of 1.10 to arrive at an adjusted base premium for the endorsement.  This pricing procedure applies to the HO-1, HO-2 and HO-8.

 

Other Structures - Increased Limits (HO-04-48) - The Limit of Liability for Coverage B - Other Structures can be increased from 10% of Coverage A by the additions for this endorsement.  The additional pre­mium developed for this endorse­ment is $2 per $1,000 of insurance.  Each struc­ture on the residence premis­es for which increased limits are sought is listed on the HO-04-48 en­dorsement and the Limit of Liability is shown.  The Limits of Liability shown on the endorse­ment are in addition to the 10% of Coverage A provided in the basic poli­cy.

 

Special Loss Settlement (HO-04-56) - The standard Homeowners Policy pro­vides Loss Settlement on a replacement cost basis if the Coverage A Limit of Liability represents the requirement and can be modified to 50, 60 or 70% of re­placement value as shown in the policy declarations.

 

The endorsement is typically used on a policy written to cover a home for which the re-placement cost is substan­tially greater than its market value.  Insurers are reluctant to issue Replace­ment Cost Coverage on such dwellings because of the potential for moral

 

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haz­ard.  By adding the HO-04-56 endorse­ment and purchasing a Coverage A limit in line with the dwelling's market value, an insured may obtain Replace­ment Cost Coverage for small and medi­um-sized losses. Example:   if a dwelling had a replacement cost of $100,000 but a market value of only $60,000, the insured could purchase a Homeowners Policy with a $60,000 Coverage A limit, endorsed with HO-04-56 to reduce the replacement cost requirement to 60%.  In this way, the insured could have Replace­ment Cost Coverage on dwelling losses up to $60,000 without the penalty for failing to insure 80% of replacement value, and the insurer would avoid providing coverage in excess of the dwelling's market value.

 

The Endorsement also provides for the settlement of losses to personal proper­ty, awnings, carpeting, household appliances, outdoor antennas, outdoor equip­ment (whether or not attached to build­ings), and non-building structures at Actual Cash Value at the time of loss but not more than the amount required to repair or replace.

 

The pricing procedure for HO-04-56 requires an adjustment of the base pre­mium.  The base premium is increased by varying amounts depending on the percentage of replacement value select­ed.  The next result is that the insured pays a higher base premium per $1,000 of coverage than would be the case if the standard 80% of replacement cover­age had been purchased.

 

 

 

 

 

Coverage C

 

The following are 4 of the endorse­ments that affect Coverage C - Personal Property:

 

• Coverage C increased Special Limits of Liability (HO-05-65)

 

• Scheduled Personal Property

      (HO-04-61)

 

• Special Personal Property Coverage       Form HO-03

 

Coverage C - Increased Special Limits of Liability (HO-4-65) - The blanket coverage on Personal Prop­erty under Coverage C has special Lim­its of Liability for particular types of property.  For an increased premium, these special limits may be increased. A similar endorsement (HO-04-66) is used for HO-3 policies that include the HO-00-15 endorsement described below.

 

Scheduled Personal Property (HO-04-61) - The Scheduled Personal Property Endorsement is used to provide coverage for risks of direct loss for certain spe­cial classes of scheduled property.  This endorsement is actually an Inland Ma­rine Personal Articles Floater.

 

Schedule Coverage may be provided for jewelry, furs, cameras, musical instru­ments, silverware, golfer's equipment, fine arts, post-age stamps and rare and current coins.  The rating for these coverages is based on Standard Inland Marine Rating Procedures. A different rate per $100 of value applies to each category of property.

 

 

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For Scheduled Musical Instruments, coverage applies only too amateur musi­cians. The endorsement states that the insured agrees not to perform with the covered instrument(s) for pay unless the policy specifically provides for such performance.  Coverage for professional musicians requires payment of a signifi­cantly higher premium.

 

The Endorsement provides only limited Named-Perils Coverage for breakage of fine arts. Upon the payment of an additional premium, specific fine arts articles may be covered on a Risks of Direct Loss basis.

 

 

The advantage of Scheduled Coverage under the HO-04-61 endorsement for these classes of special property are two fold.  First, the schedule coverage pro­vides Limits of Liability of any amount required.  The Homeowners Policy has limitations with respect to these types of property.  Second, the endorsement provides coverage for risks of direct loss.  Example: if Marie dropped her expensive camera into the surf while photograph­ing an ocean sunrise, the loss would not be covered under Coverage C of her Homeowners Policy.  If the camera were scheduled on the HO-04-61 endorse­ment, the loss would be covered.

 

When writing these classes of property on the HO-04-61, certain types of un­derwriting information must always be provided.  Each item should be careful­ly described and identified, including serial numbers where applicable. Ap­praisals should be periodically updated. Expensive jewelry items should be pho­tographed.

 

Special Personal Property Coverage (HO-04-90) - This Homeowners Policy Covers Person­al Property on an Actual Cash Value basis.  Therefore, if an insured's 4 year-old television set is stolen, the loss payment will be reduced by a deduc­tion for depreciation and will fall short of the amount required to replace the television with a new one.

 

The HO-04-90 Endorsement changes the basis of Loss Settlement for Personal Property from Actual Cash Value to Replacement Cost.  The endorsement also extends replacement cost coverage to certain articles or classes of property if they are separately described and specifically insured in the policy.  These types of property include jewel­ry, furs, cameras and related equipment, musical equipment, silverware, gold ware, pewter, and golfer's equip­ment.  The endorsement states that the payment at the time of loss will be no more than the least of the following amounts:

 

1.   replacement cost at the time of loss with  out deduction for depreciation.

 

2.   the full cost of repair at the time of loss.

 

3.   the Limit of Liability that applies to Coverage C, if applicable.

 

4.   any special Limits of Liability stated in                the policy.

 

5.   the Limit of Liability that applies to any item separately described and specifically       insured in the policy.

 

When the replacement cost for the entire loss under the endorsement is more than $500, the insurer will pay no more than the actual cash value until the actual repair or

 

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replacement is com­plete. After repair or replacement is complete the insurer may, within 180 days of the date of loss, make claim for the difference between actual cash value and replacement cost. This clause enables the insurer to ascertain that the insured actually replaces the property before payment is made on a replace­ment cost basis.  Since the insured receives new for old and is to that extent better off later after the loss, this provision is designed to reduce moral hazard.

 

The Homeowners Manual indicates a 15% increase in the base premium when the HO-04-90 Endorsement is added to a HO-2 or HO-3.  If the Coverage C limits are increased to 70% of Coverage A, as some insurers re­quired when this endorsement is added, the additional premium for the in­creased limit is added to the base pre­mium, which is then increased by 15%.  Even if the increase in Coverage C limits is not required, an inventory of replacement value of contents by the insured will most often show a need to in-crease the Coverage C limits for complete protection in the event of a total loss.

 

When the HO-04-90 Endorsement is added to either a HO-04 or HO-06, the base premium is increased by 35%.  This larger increase factor reflects the fact that the majority of the property coverage in the HO-4 and HO-6 forms is on personal property.

 

Endorsements Affect Section II - Cover­ages

 

Various endorsements are available to extend the Personal Liability Coverages of

Section II.  Many of these endorse­ments provide an opportunity to "buy back" coverage excluded in the basic homeowners contracts.  The following are among the endorsements that affect Section II of a Homeowners Policy:

 

• Watercraft (HO-24-25)
• Snowmobile (HO-24-65)
• Business Pursuits (HO-24-71)
• Personal Injury (HO-23-82)
• Additional Residence Rented to Others       (HO-04-70)

 

Watercraft (HO-24-75) - This Endorsement provides Liability and Medical Payments Coverage for certain watercraft. For an additional premium, Coverage E - Personal Liability and Cov­erage F - Medical Payments to Others are extended to bodily injury and property dam-age arising out of the ownership, maintenance, use, loading, or unloading of a water-craft described in the en­dorsement.  Losses arising out of en­trustment of the described watercraft are also covered.  Further coverage is provided for vicarious liability, whether or not imposed by statute, for the ac­tions of a child or minor using the described watercraft.

 

The Endorsement provides for the list­ing of the horsepower and description of watercraft powered by outboard engines or motors of more than 25 total horsepower and other watercraft with inboard or inboard/outdrive power.  Sailing vessels, with or without auxiliary power, that is 26 feet or more in length are described in a separate paragraph.  The descriptions and other information about the watercraft are used both for underwriting purposes and for rating.

 

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Watercraft, other than sailing vessels, are not covered while being operated in or practicing for a prearranged or orga­nized race.  With respect to watercraft with inboard or inboard/ outdrive motor power and sailing vessels, coverage does not apply to bodily injury to any employee of an insured arising out of an “in the course of employment by the insured” if the employee's principal duties are in connection with the main­tenance or use of the watercraft.  Many large inboard motor vessels have a paid captain or deck hand that operates and maintains the vessel.  An insured with such an employee would have to obtain separate coverage for the employee.  With respect to the same type of watercraft, no coverage is provided if the watercraft is used to carry persons for a charge or is rented to others.  Notice that the last two exclusions do not apply to watercraft with outboard mo­tors.

 

The additional premium for the Watercraft Endorsement is based on the type of vessel, its length and speed. The premium ranges from a nominal amount for outboard motors over 25 hp but less than 50 hp to hundreds of dollars for in­board or inboard/outboard motor-boats 26-40' long with a speed over 30 mph.

 

In some areas of the country, watercrafts are used only during part of the year and are stored or not in use the rest of the year.  The part of the year during which watercrafts are used is called the navigational period.  Although coverage in the HO-24-95 Endorsement must be written for the entire policy period, a pro-rata adjust­ment may be

 

made in the premium for the endorsement to reflect the naviga­tional period of each year.

 

Snowmobile Endorsement (HO-24-64) - Coverage may be provided for liability arising from the operation of owned snowmobiles by adding the HO-24-64 endorsement to a Homeowner Policy. The premium charge is a minimum premium for each snowmobile for any period within a policy year.

 

Business Pursuits (HO-24-71) - When this Endorsement is used, Cover­age E - Personal Liability and Coverage F - Medical Payments to Others apply to those specified in the Endorsement. When the insured is a teacher, liability for corporal punishment may be added for an additional charge.

 

There is no coverage for liability aris­ing out of business pursuits of the in­sured in connection with a business partnership that the insured owns or financially controls.  Liability arising out of professional services of any nature, other than teaching, is also ex­cluded, as is bodily injury to a employ­ee.  When the insured is a member of the faculty or teaching staff of any school or college, there is no coverage for liability arising out of the use of draft or saddle animals, aircraft, motor­ized land conveyances and watercraft when used for instructional purposes.

 

Personal Injury (HO-24-82) - This Endorsement may be used to add Personal Injury Coverage to Coverage E - Personal Liability.  Personal Injury is defined in the endorsement as injury arising out of false arrest, detention or imprisonment, malicious

 

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prosecu­tion; libel, slander, defamation of charac­ter, invasion of privacy, wron­gful eviction or wrongful entry.  The HO-24-82 Endorsement contains a spe­cial set of exclusions pertaining to this cover­age. These provisions exclude liability assumed by the insured under contract or agreement except for any indemnity obligation assumed by the insured un­der a written contract directly relating to the ownership, maintenance or use of the premises.

 

Further exclusions apply to injury caused while violating a Penal Law or Ordinance; injury directly or indirectly related to the employment of a person by the insured, injury arisen out of a business engaged in by the insured, civic or public activities performed for pay by an insured and injury to an insured.

 

Additional Residence Rented to Others (HO-24-70)

 

The definition of insured location under Coverage E - Personal Liability and Coverage F - Medical Payments to Others is broadened under the HO-24-70 Endo­rsement to include an additional resi­dence rented to others.  The residence may not house more than 4 families.  The Endorsement provides for the list­ing of the location of this additional residence and an indication of the num­ber of families that occupy it.

 

The premium charge for this coverage is an additional premium that varies by territory and by the number of families at the additional residence.  This charge varies

 

from a nominal amount for one family to over $200 for 4 families in some territories.

 

Endorsements Affecting Sections I and II

 

Certain endorsements affect both Sec­tion I and Section II of the Homeowners Policy.  The following 3 Endorse­ment that affect both the Property and Liability Coverage are discussed below:

 

• Permitted Incidental Occupancies - Residence Premises (HO-04-42)

 

• Home Day Care Coverage (HO-04-97)

 

• Additional Insured - Residence Premises (HO-04-41)

 

Permitted Incidental Occupancies - Residence Premises (HO-04-42) - If an insured owns a business conducted on the residence premises, Property and Liability Loss Exposure arising out of that business may be insured through the use of the HO-04-42 endorsement.  The business constituting the incidental occupancy is listed in the endorsement, which also provides the indication of whether the business is conducted in the dwelling or in a separate structure. The location of the business on the resi­dence premises affect the rating of the endorsement.

 

When the HO-04-42 Endorsement is added to the policy, the $2,500 Special Limit of Liability on Business Personal Property applies only to Business Per­sonal Property not used in the covered business. Consequently, in the event of a loss,

 

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Personal Property that is used in the business and is insured under the Endorse­ment is covered, along with the insured, up to the Limit of Liability for Coverage C. The En­dorsement provides that Coverages E and F shall apply to occurrences that arise out of the insured's incidental use of the premises for the business covered by the Endorsement.

 

Home Day Care Coverage (HO-04-97) - Home day care centers represent a special kind of incidental occupancy.  In recent years, increased litigation involving home day care centers has made this exposure difficult to under­write.

 

The number of persons receiving day care services is listed on the Endorse­ment.  As is the case with the Incidental Occupancies Endorsement, information is required about the location of the day care center, whether it is in the dwelling or in another structure on the residence premises. If another structure is involved, a Limit of Liability is indicated and a rating charge per $1,000 of coverage is made. The Endorsement extends the Coverage C Limit of Liability to property used in the day care business.  Thus, the $2,500 limit for Personal Property on the residence premises used for business purposes does not apply to the property used in the day care business.

 

When the HO-04-97 Endorsement is used, coverage under Section II of the Homeowners Policy applies to Bodily Injury and Property Damage arising out of the day care business.  However, there is no coverage for liability arising out of the use

 

of draft or saddle ani­mals, vehicles for use with those ani­mals, aircraft, motorized land convey­ances and water- craft.  Bodily injury to any employee of an insured, other than residence employee, is also excluded.

 

The Endorsement includes an annual aggregate Limit of Liability applying to both Coverages E and F. This limit applies regardless of the number of occurrences, insureds, claims made or persons injured.  A similar aggregate annual Limit of Liability applies under Coverage F for any one person.  There­fore, most that will be paid under Cov­erage F for medical expenses payable for bodily injury to any one person is the dollar amount shown in the declara­tions for Cover-age F. This does not increase the aggregate Limit of Liability.

 

Additional Insureds - Residence Pre­mises (HO-04-41) - The insured in a Homeowners Policy is usually an owner-occupant.  There are some other situations in which more than one person or entity may have an insurable interest in the dwelling. Example: Bob is a purchaser-occupant who has entered into a long-term install­ment contract for the purchase of a dwelling. However, title does not pass to Bob from Sally, the seller, until all the terms of the installment contract have been satisfied. Sally retains title until completion of the payments and in no way acts as a mortgagee. In this case, Bob could purchase a Homeowners Policy as named insured on the declarations page and Sally could be covered as an additional insured by using the HO-04-41 Endorsement. The Endorsement would show not only Sally's name but also the extent of her insurable interest.

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The Endorsement may also be used to cover the interest of the grantor of a life estate.  Additionally, if a two-fami­ly dwelling is co-owned by two per­sons, each of who has a distinct resi­dence with a separate entrance, only one of the co-owners may be shown as the named insured under the Homeowners Policy that insures the dwelling.  The interest to the co-owner not shown as the named insured may be partially protected by use of the HO-04-41 Endo­rsement but there would be no cover­age for bodily injury to an employee of the co-owner.

 

 

Chapter 6 - Review Questions

 

 

1.   What premium is the amou­nt charged for the standard package of coverag­es under an HO form without modifica­tions?

 

A.  Gross Premium

B.  Net Premium

C.  Base Premium

D.  All of the above

 

 

2.   What primary rating factor reflects both property and liability loss potential?

 

A.  Quality of public fire protection

B.  Territory

C.  Dwelling construction

D.  None of the above

 

 

 

3.   Endorsements can be used to change many aspects of coverage under a Homeowners Policy, such as:

 

A.  persons covered

B.  perils covered

C.  property covered

D.  all of the above

 

 

 

 4.   Many endorsements that extend to Personal Liability Coverage of Section II provide an opportunity to:

 

A.  "Buy Back" Coverage

B.  Exclude Coverage

C.  Lessen Coverage

D.  None of the above

 

 

 

5.   An endorsement that affects Sections I and II would be:

 

A.  Business pursuits (HO-24-71)

B.  Personal injury (HO-24-82)

      C.  Home day care coverage (HO-04-97)

D.  None of the above

 

 

 

Answers

 

1.  C

2.  B

3.  D

4.  A

5.  C