Chapter 8 – Homeowners Coverage Recommendations
"A wise man will make more opportunities than he finds." Francis Bacon
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Introduction
As we finish our study of Homeowners Policies, we will offer a general view of the various forms available and then make specific recommendations.
Most consumers who own a home have Homeowners Insurance. The problem is there is a good chance that very few of these homeowners have really given their coverage any thought. The time most homeowners think about their Homeowners Policy is when the premium arrives or when a tree crashes through the living room, a fire barbecues the kitchen or a burglar absconds with the family silver.
Homeowners Insurance can help ease the financial pain. It can also add to one's frustration and distress if a loss is endured only to find that the insurer has another ordeal in store for the victim. The problem is, until it comes time to make a claim, it is difficult to know whether the insurer will provide a Fair and Fast Settlement.
The potential problems for Fair and Fast Settlement does not rest entirely on the insurers shoulders. The homeowners must be aware of their coverages and existing gaps (if any exist).
Homeowners Insurance is designed to provide full coverage for Dwelling, Contents
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and Liability Exposures. It safeguards individuals against these types of exposures
through a multiple combination of coverages provided by: a Fire Policy on a building and its contents, a Comprehensive Personal Liability
Policy and Theft Coverage. The basic concept of Homeowners Coverage is to require certain minimum amounts of coverage on both the Dwelling and the Contents and to include Theft Coverage and Personal Liability Insurance on a mandatory basis. There are multiple forms to cover homeowners, renters and condominium dwellers.
The insurance professional’s role in evaluating Homeowners Coverage is to review Homeowner Policies to ensure adequacy and appropriateness for the client, as well as, to verify that any changes are needed. It is important to check that no gap exists between the various Casualty Coverages. Many clients are under-insured with policies that have inefficient premiums.
Clients frequently do not understand the difference between replacement cost and market value and are confused about who and what is covered and for how much.
How does one go about purchasing a Homeowners Policy? With several policy types to choose from, the insurance professional needs to become familiar with each, to
ensure that the client is purchasing the most suitable forms. As the forms were discussed extensively in previous chapters, we will give a "thumb nail" summary of each. All forms will provide 2 sections of coverage. Section I provides coverage on the Insured's Own Property and can vary accordingly. Section II Provides Liability and Medical Payments Coverage, which is identical under all forms.
Picking the Right Policy
Insurance companies offer 6 basic types of Homeowners Insurance Policies.
HO-1 - This "basic" Homeowners Policy protects the client's home against 11 named perils. That is rarely enough, so many states are phasing out this type of coverage.
HO-2 - The "broad" Homeowners Policy covers the client's home against 17 named perils. A variation of HO-2 is available to most mobile home owners. This type of policy generally costs 5-10% more than the HO-1 Coverage as it protects property from fire, wind and living in the path of the moving St. Helen’s volcano, burst pipes and a short circuited electrical system.
HO-3 - The "special" Homeowners Policy protects the client's home against all perils except those specifically excluded by the contract. It typically costs 10-15% more than the HO-1 Policy. Some of the exclusions are earthquakes, sewer backups, floods and wars.
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Many companies also offer a "Guaranteed Replacement Cost" Policy, which goes a step further than a standard HO-3. It offers to pay the full amount needed to replace the home and its contents, even if that exceeds the policy limit. Despite its name, however, many companies set limits for this coverage, paying only up to 120-150% of the policy's face value. The limit for Contents Coverage is generally set at 75% of the home's replacement cost, as opposed to the standard 50% on other policies. (This type of policy, usually written as a form of HO-3, offers coverage similar to what was formerly called HO-5, a policy that has been phased out by most companies).
HO-4 - The Renters Policy generally protects the possessions of tenants in a house or apartment against 17 named perils. It also provides Liability Coverage but does not protect the actual dwelling, which should be covered under the landlord's policy. Renters who do not want Liability Protection can opt for a policy that covers only Personal Property.
HO-6 - The policy for Co-op and Condominium owners provides coverage for Liability and Personal Property, much like HO-4. While insurance purchased by the Co-op or Condominium Association covers much of the actual dwelling, individuals wanting coverage for improvements must write them into a HO-6 policy. If the client adds a porch for instance, he/she will need an Endorsement.
HO-8 - Primarily for older homes, this policy covers the same perils as HO-1 but insures the house only for repair costs or its Actual Cash Value, not its Replacement Cost because the cost of rebuilding with the materials and details of the original would make Replacement Cost Coverage prohibitively expensive. A HO-8 policy pays to restore the damaged property but not necessarily with the same kind or quality of materials as the original. Perils covered would be the 11 risks commonly used for HO-1 Policies. This means burst pipes and faulty wiring are excluded.
Insuring Against Other Risks
Some perils are generally not covered by any of the standard Homeowners Policies. Chief among them: floods and earthquakes. Residents of areas prone to crime, fires and windstorms may also find insurance companies unwilling or unable to sell them policies. For owners of high-risk homes, there are several options.
Flood Insurance - The National Flood Insurance Program, administered by the Federal Emergency Management Agency (FEMA), offers Flood Insurance through the Federal Government and some 85 private insurers. To qualify, homeowners must live in one of 18,300 flood-prone communities that have taken specific steps to control flood damage. Rates vary according to the structure of the house and its vulnerability to flooding. The average annual premium is about $308, which provides around $85,000 in coverage.
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While FEMA estimates as many as 11 million buildings may be at risk of flooding, only 2.6 million are currently insured for it. An estimated 90% of the homes in the 1992 Midwest floods were not insured for flood damage. For homeowners who might be tempted to wait until a flood alert is sounded, take note: there is a 5 day waiting period between the time a Flood Policy is purchased and when it becomes effective.
Earthquake Insurance - Most insurance companies offer Earthquake Coverage as an Endorsement on Homeowners Policies. Premiums can run as high as 50% of a home’s regular coverage but rates vary according to the vulnerability of the house. Wood-frame homes, which tend to withstand quakes better than bricks, cost much less to insure.
Windstorm Insurance - Most policies include insurance for windstorm damage. However, companies may exclude coverage for the peril if a house is unusually vulnerable to windstorms by virtue of its location. Seven coastal states currently have Beach and Windstorm Insurance Plans to pick up where the regular policies leave off. Those states are: Alabama, Florida, Louisiana, Mississippi, North Carolina, South Carolina and Texas.
High-Risk Policies - Insurers may refuse to sell Full Replacement Cost Coverage for homes they deem to be particularly vulnerable to fire, crime or other perils. Unsafe wiring, unrepaired structural damage or a history of vandalism may make a home uninsurable at some companies.
For people who have difficulty obtaining insurance in the standard market, 31 states and the District of Columbia offer fair access to insurance requirement plans. Fair Plans are operated by private insurers, which share the losses and profits in proportion to their business in the State. Fair Plan Policies are often more expensive and less comprehensive than standard Homeowners Insurance.
Residents of high-crime areas who have the required security devices also may qualify for insurance with the Federal Crime Insurance Program. The policy covers only losses due to burglary or robbery.
Coverage Types
Homeowners Policies provide coverage for a broad range of perils with the successive forms covering more. There are several types of Section I Coverage. Remember as previously noted, Coverage A covers the Dwelling and provides protection on the dwelling itself. That includes structures attached to the dwelling and material and supplies located on the premises or adjacent to the premises, which are intended for use in construction, alteration or repair of the dwelling.
It is also used to cover a home under construction. Land is not covered. Generally, land is valued at 20% of the total purchase price of a house. The client's dwelling amount of coverage should only reflect 80% of the total value of the home.
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Coverage B covers Other Structures. This includes the garage and other detached (separate from the dwelling with a clear space) structures and equals 10% of the Coverage A amount. It may include non-building structures as fences, patios or even a swimming pool. It excludes buildings used for business purposes, except for the rental to anyone if used exclusively for garage purposes.
Coverage C, which provides for Contents Coverage under HO-2 and HO-3, is 50% of the amount of coverage on the dwelling. Under forms HO-4 and HO-6, the minimum coverage on contents is $6,000. The Contents Insuring Agreement on all forms is identical.
The client must be aware that Personal Property limitations exist under a HO policy. Jewelry, watches, fur, and precious/semi-precious stones lost by theft are indemnified up to $1,000 per item. Coverage in excess of this amount needs to be secured by an endorsement, which provides first dollar coverage for those higher-priced items anywhere in the world, examples would include a mink coat and a diamond engagement ring. If more coverage is desired on a particular item, one can "schedule" or specifically list that item for additional coverage. This is for high-priced items, such as jewelry, furs, silverware, etc. and should be insured for the covered amount (which should be in line with the replacement cost basis). The actual invoice for an older item or an appraisal is needed.
Coverage D is Loss of Use Coverage and provides for Additional Living Expenses and Loss of Rental Income. Under Form HO-2 and HO-3, coverage is 20% of the amount of the dwelling. Under HO-4, coverage is 20% of the Contents Coverage, and under form HO-6 it is 40% of the amount of the contents. It also provides protection against loss involving both the part of the premises occupied by the insured and any part rented to others. The Additional Living Expense Coverage pays for the necessary increase in living expenses incurred by the insured to continue as nearly as is practical the normal standard of living of the household when the premises were rendered uninhabitable by an insured peril. Payment is made only for the period required to repair or replace the damage, or if the insured permanently relocates, for the period required to settle the house elsewhere.
Basic Recommendations
This section is in 2 parts, "Saving Money on Homeowners Premiums" and "The Proper Amount of Homeowners Coverage to Purchase". We end the chapter with ideas on get-ting a Fair Settlement if disaster does strike.
"Saving Money on Homeowners Premiums"
Many of the underwriting factors that go into setting prices are out of the control of clients but not all of them. As with Auto Insurance and other lines of coverage, there are some direct steps one can take to reduce the premium paid for this important protection.
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Shop Around
The Homeowners Insurance field is an extremely profitable one for the insurance industry. In fact, it is one of the most profitable types of insurance in the industry markets. In 1988, over $17 billion worth of premiums were collected in the United States alone. This provided very large profit for the insurance companies. One of the duties of an insurance professional is to recognize this fact and try to obtain the best coverage for the most affordable premium for clients.
Consumers should put the competitive marketplace to work for them. By guiding the consumer to obtain at least 3 competitive bids for the needed protection, the insurance professional is providing badly needed service to clients. It is important to obtain quotes from financially secure companies by using Best Insurance Reports.
Do Not Over Insure
A large part of what clients pay in premiums is determined by the amount of coverage selected. Some significant dollars can be saved by taking a close look at the following:
The Size of the Deductibles - The basic Homeowners Insurance deductible is usually $250. If one can afford to pay a higher deductible amount in the event a claim occurs, a large savings can be had.
The Size of the Liability Protection - If the basic Liability Protection is sufficient to suit needs, it would be prudent not to pay for higher levels of protection.
The Amount of Money to Replace the Dwelling - It would be wise to be insured for an amount sufficient to rebuild the dwelling should it be destroyed. However, many people make the mistake of insuring in an amount equal to the entire value of the property, including the land. Thus, they are paying more than they have to for protection.
Investigate Discounts
There are several discounts available to consumers of Homeowner's Insurance.
Multiple Policy Discount - If one used the same company to write Homeowner's Auto and Umbrella Policies, a discount should save as much as 15% on the premiums.
Safety Device Discount - If the house is fitted with smoke detectors, the consumer should be sure to inform the insurance company. The same goes for burglar alarms.
Smoker's Discount - Smokers have a high likelihood of seeing their homes go up in smoke than non-smokers. Some companies recognize this fact by reducing premiums if one does not smoke.
Fire-Resistance Material Discount - A house constructed of fire-resistant materials can significantly reduce the chance of fire. This may result in reduced premiums.
Mature Homeowners Discount - Some companies reward longevity by reducing the premiums on Homeowner's Insurance.
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Loyal Customers Discount - Usually the insurance industry is impersonal when it sets rates, however, some company’s reward longtime customers with discounts.
Excluding Coverage for Wind and Hail - In some areas of the country, the danger from wind and hail is substantial. In these locales, a significant amount of homeowner's premiums go to cover these perils. If the consumers want to take a chance, one can save on premiums by agreeing to exclude these coverages.
A Word On Endorsements - Endorsements allow consumers to add to coverages in order to protect individual needs. As we have seen, the basic policy covers a wide range of insurance protection. However, it is not complete. One may wish to add the following protection through endorsement.
Home-Office Coverage - The basic Homeowner's Policy will cover $2,500 worth of business equipment. If a client works out of their home and has business equipment in excess of the amount, he/she may wish to increase this protection.
Personal Articles Floater - The basic coverage for Personal Property Loss is sometimes inadequate to fully protect valuables such as jewels, fur coats or antique furniture. If one has valuables such as these, they may wish to specifically identify them with the company and establish their value. As noted, this is done by appraisal or using purchase receipts. It would be prudent to keep receipts, photographs, schedules or other proof of value of Personal Property in
a safe and secure place. A bank safety deposit box is ideal, however, many individuals would rather keep that material at home. If this is done, it is wise to store it in a fireproof safe or container.
Increased Blanket Coverage - If the total of an individual's Personal Property is worth more than the policy's basic coverage that will apply to a loss, one can increase the Blanket Coverage. To determine the value of property, an individual should obtain a Personal Property Inventory Form.
Buy Replacement Cost Insurance - Unless clients make other arrangements, if they suffer a loss to Personal Property, they will be paid what it is worth as of the date of the loss. This is often less than replacement cost as depreciation is deducted from the payment. If a client chooses, he can pay for coverage that will replace the lost items regardless of their actual worth on the date of loss.
Building Code Coverage - Many older homes no longer meet current building and safety codes. In such cases, if the home is substantially damaged, local law may require that the entire building be demolished and rebuilt. The only problem is that the policy coverage will not be enough for this demolition and rebuilding process, leaving homeowners with a coverage GAG. If such a situation does apply, one should investigate purchasing an endorsement that will pay for the cost of rebuilding as dictated by local building and safety codes.
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How Much Coverage Is Needed?
It is important to buy enough insurance to cover the cost of rebuilding the home. That may bear little relation to its market value. A finely crafted 19th century house in a run down 20th century neighborhood could cost far more to rebuild than it cost to buy. A modest home on a prime piece of real estate might be rebuilt for a faction of its purchase price. If the limit of the Homeowners Coverage is based on the mortgage, one should be sure that it is enough to cover the current cost of rebuilding.
To determine the rebuilding cost, it would be prudent to work with a client to calculate the current cost of construction for a house similar to the clients. Another option would be to hire a professional appraiser to do it. A general way to estimate home rebuilding cost would be to multiply the square footage of the home by the current building cost per square foot for similar homes in the area. Usually, a real estate agent, or builder association can provide this vital information.
Most insurance companies recommend that the homeowner insure the home for 100% of the rebuilding cost, including the foundation. Though very few homes are totally destroyed it does happen, as victims of the 1991 fire in Oakland, California can attest, as foundations melted in the 200° heat. If the home is not covered for 100% of its replacement, a homeowner might not receive enough insurance money to replace it with a house of similar size or quality in the event of total loss.
All homeowners should buy insurance for at least 80% of the home's replacement value. If less is purchased, the homeowner forfeits the right to collect the full replacement value of the insured property, even for a partial loss. Example: if the replacement cost of a home is $100,000 and there is a fire in the kitchen that causes $10,000 in damage, the homeowner will collect $10,000, as long as they have at least $80,000 in insurance.
The safest bet is to buy a Guaranteed-Replacement Cost Policy, which will generally pay up to 20 or 50% more than the face value of the policy to rebuild the home. With such a policy, the insurer automatically adjusts the amount of insurance each year to keep up with rising construction costs in the area. The policy also protects against the unexpected, such as a sudden increase in construction costs due to shortage of building supplies (a problem for hurricane Andrew victims). Companies that offer this option usually require that the homeowner insure the home for 100% of its replacement cost to begin with. Owners of high-risk or older homes may not be eligible for this type of policy.
Inflation
Homeowners should have a policy that automatically adjusts the amount of coverage to reflect rising construction costs in the area. This is called an Inflation-Guard Clause. Some insurers offer this protection free, others charge $2 to $5 a year.
Personal Property
It is important for the homeowner to establish the value of property in order to
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simplify the claim process. All homeowners should take an inventory of their personal possessions by going from room to room and listing the valuable items that are owned. The insurance agent should provide an inventory form. Some information that is needed would be serial numbers (usually found on the bottom or back of appliances), the approximate purchase dates and prices paid. It also is a good idea to photograph or videotape possessions as well. Of course, the proper storage place for any inventory, appraisals and pictures of videotapes would be in a safe place away from the home, such as in a safe-deposit box.
Once the homeowner estimates Personal Property, the next step is to total all estimates and find a precise number that it would cost to replace such possessions. Most policies cover personal possessions for 50% of the insured value of the house. Example: the house is covered for $100,000, the insurer will pay up to $50,000 for loss or damage of its contents. For a higher premium, it would be possible to increase that coverage to 75%.
Replacement Cost Coverage on Contents
There are 2 ways to insure Personal Property. An Actual Cash-value Policy pays the amount needed to replace the item, minus depreciation. Example: a fire destroyed a sofa that costs $1,000 fire years ago, only $750 would be paid, assuming it had a 10-year life and would cost $1,500 to replace at today's prices. A Replacement Cost Policy would pay $1,500. For most people, Replacement Cost Coverage on property is worth the extra 10 to 15% that companies typically charge for it.
Other Structures and Landscaping
Most policies cover a structure that is detached from the house, such as a gazebo or free standing garage for up to 10% of the total insured value of the home. To qualify as "separate", a structure must be separated from the main house by a clear space connected, at most, by a fence or utility line. Any structure that is connected by something more substantial, such as a shared roof, is not considered separate, and should be figured into the total value of the house. Trees, plants and shrubs are generally covered for no more than 5% of the insurance on the house. They also are not covered for as many perils; wind damage, for instance, is usually excluded.
How Much Liability Coverage is Needed?
The Homeowners Policy offers Liability Protection for Bodily Injury and Property Damage that covers injuries or damage caused by the homeowner, a member of the family or a pet. The insurance covers the injured persons claim and the cost of defending the homeowner if he/she is sued. The protection applies not only at home but also elsewhere in the United States and Canada.
Most policies provide $100,000 in Liability Insurance but some companies offer $200,000 or $300,000 in coverage as part of their basic policy. To increase the limits from $100,000 to $300,000 would only increase the premium by approximately $10 per year. If the homeowners' assets are much greater than the liability limits of
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his/her Homeowner's Policy, it would be prudent to purchase an additional "Umbrella" Policy that will extend the Liability Coverage to $1 million or more. It starts paying after the regular policy has reached its limit. Umbrella Policies also extend the Liability Coverage to the Personal Auto Policy.
Umbrella Policies provide broader coverage than Typical Homeowner's Policies. In addition to Bodily Injury and Property Damage, they cover false arrest, wrongful eviction, libel, slander, defamation of character and invasion of privacy. Such policies usually cost about $150 to $200 a year for $1 million in coverage.
HO-3 and HO-15 Endorsements
Homeowner's insurance is probably the broadest coverage most clients will ever buy. Therefore, it is imperative to buy the right amount and keep it up-to-date with changes in the value of one's property.
As a general rule, the insurance professional would be providing a much-needed service to his/her clients by making the following recommendations to clients.
As noted, the Replacement Coverage Provision on the homeowner's form is important
to the insured because it encourages keeping insurance coverage in line with increasing home value. Homeowners Comprehensive Form HO-15 provides a Special Personal Property Coverage Endorsement. Form HO-15 provides Open Peril Coverage on contents and is used with form HO-3 to provide such coverage on both the building and the contents.
Receiving a Fair Settlement
A tree crashed through the living room; a fire cooked the kitchen; a burglar swiped the silver! How does the homeowner get a fair settlement from the insurer?
Report any Burglary or Theft to the Police - Most policies require that the homeowner present a police report in order to be reimbursed for the loss. Homeowners Policies generally cover possessions even if the homeowner is not in the house, so it is important to file a police report if, for example, bags are stolen from a hotel room.
Make Temporary Repairs - If the home has been damaged in a storm or fire, use plastic or boards to cover up any holes in the roof or walls to prevent further weather-related damage. Most insurance companies will reimburse the homeowner for the cost of temporary repairs, so save any receipts for materials. Also, the homeowner should not make permanent repairs before consulting with the agent or claim adjuster.
Contact the Insurer - When the homeowner reports the loss, the insurer will either send a "proof of loss" form to complete or arrange
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for an adjuster to visit the home. Either case, the homeowner should document the loss as thoroughly as possible. If an inventory is pre-pared before the loss, the task will be easier.
The homeowner should make a list of everything stolen or damaged, including a detailed description of each item, the date of purchase and what it would cost to replace, any relevant receipts, bills, photographs or serial numbers from appliances and electronic equipment will help establish the value of the losses. The adjuster may want to see all damaged items, so do not throw anything out.
Also, the homeowner should take photographs or videos of any damage to the house or other buildings on the property. The homeowner should make a list of everything to show the adjuster, from cracks in the walls to the missing roof tiles. Generally, the homeowner has a year to amend the claim if additional damages or losses are found.
Read Your Policy - It is important for a homeowner to know his coverage to receive all he is entitled to.
Verify The Adjuster's Estimate - Before the homeowner accepts a settlement for repairs to the home, it is wise to get a written bid from a licensed contractor to make sure the adjuster's estimate is realistic. The homeowner should bring in a public adjuster (one who is not affiliated with any insurance company) to make an estimate. The public adjuster would then negotiate with the insurer's adjuster for the homeowner.
Keep Careful Records - The homeowner should make copies of all information given to the insurer in connection with the claim. Also, it would be prudent to hold onto everything the insurer gives the homeowner. It is also a good idea, for the homeowner to take notes of all meetings and conversations the homeowner has with the agent, insurer or claims adjuster.
Do Not Settle for Unfair Settlements - If the homeowner cannot reach an agreement with the adjuster, contact the agent or the insurer's Claim Department Manager. If this action does not satisfy the homeowner, the next step is to ask for an independent appraisal or arbitration process to resolve the dispute. This decision is usually binding. It does not close the door to mediation or litigation on other issues, such as bad faith.
If the homeowner relied on the insurer or agent to set the policy limits and to keep those limits updated, only to find himself/herself under-insured when filing a claim, it is possible to have the policy upgraded retroactively. If any questions persist during the settlement process, the homeowner may consult with a lawyer specializing in Insurance Law or contact the State Department of Insurance.
Chapter 8 - Review Questions
1. For the most part, homeowners really do not give their Homeowners Coverage any thought until:
A. premiums arrive
B. claim occurs
C. both A and B
D. neither A or B
2. Section I, in the Homeowners Policy, provides coverage on the insured's:
A. Automobile
B. Lawn ornaments
C. Own property
D. None of the above
3. The "Special" Homeowner's Policy that protects the clients home against all perils except those specifically excluded by contrast is known as:
A. HO-2
B. HO-3
C. HO-6
D. HO-1
4. What peril is generally not covered by any of the Standard Homeowners Policies?
A. Fire
B. Wind
C. Ice
D. Earthquake
5. All of the following are good ways to lower Homeowners Insurance costs except:
A. shop around
B. increase the deductible
C. lower the deductible
D. all of the above
ANSWERS
1. C
2. C
3. B
4. D
5. C