Chapter 20
Homeowners
Insurance,
Section I
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Agenda
• Homeowners Insurance Basics
• Analysis of Homeowners 3 Policy
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Section
Section
Section
Section
Section
I
I
I
I
I
Coverages
Perils Insured Against
Exclusions
Conditions
& II Conditions
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20-2
Homeowners Insurance Basics
• Homeowners insurance forms, drafted by
the Insurance Services Office (ISO) are
widely used in the US
– They are designed for the owner-occupants of
family dwellings
– A policy can be used to cover the dwelling,
other structures, personal property, additional
living expenses, personal liability claims, and
medical payments to others
– Six forms are available
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20-3
Current Homeowners Policies
•
HO-2 (broad form): covers the dwelling, other structures, and personal
property on a named perils basis
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HO-3 (special form): covers the dwelling and other structures on a risk-ofdirect-physical loss basis. All direct physical losses are covered except
those losses specifically excluded. Personal property is covered on a
named perils basis
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HO-4 (contents broad form): covers a tenant’s personal property on a
named perils basis
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HO-5 (comprehensive form): provides open perils coverage (“all-risks
coverage”) on the dwelling, other structures and personal property. All
direct physical losses are covered except those losses specifically excluded
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HO-6 (unit owners form): covers personal property on a named perils
basis. A minimum of $5,000 of insurance is also provided on the
condominium unit that covers improvements and additions
•
HO-8 (modified coverage form): designed for older homes. Dwelling and
other structures are based on the amount required to repair or replace
using common construction materials and methods
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20-4
Exhibit 20.1
Comparison of
ISO
Homeowners
Coverages
(con’t)
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20-5
Exhibit 20.1 Comparison of ISO
Homeowners Coverages
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20-6
Analysis of the HO-3 Policy
• The HO-3 policy has two sections of coverage:
– Section I: Property Coverages
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Coverage A: Dwelling
Coverage B: Other Structures
Coverage C: Personal Property
Coverage D: Loss of Use
Additional Coverages
– Section II: Liability Coverages
• Coverage E: Personal Liability
• Coverage F: Medical Payments to Others
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20-7
Analysis of the HO-3 Policy
• The following persons are considered “insureds”
under the policy:
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Named insured and spouse
Resident relatives
Other persons under age 21
Full-time student away from home
Section II coverage also includes:
• Any person legally responsible for covered animals or
watercraft
• With respect to a motor vehicle covered by the policy (e.g.,
a riding mower), persons employed by the named insured
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20-8
Section I Coverages
• Coverage A covers the dwelling on the residence
premises and any structure attached to the
dwelling
– Materials intended for construction are included
– The coverage specifically excludes land
• Coverage B insures other structures on the
residence premises
– Includes a detached garage, tool shed, etc
– Structures that are rented out or used for a business are
excluded
– The amount of coverage is based on the amount of
insurance on the dwelling (Coverage A)
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20-9
Section I Coverages
• Coverage C insures personal property owned or used by an
insured
– Personal property is covered anywhere in the world
– The amount of coverage is 50% of the insurance on the
dwelling, which can be increased if desired
– Personal property is covered both on and off the premises
– Coverage for personal property at another residence, such as a
vacation home, is limited to 10% of Coverage C or $1000,
whichever is greater
– Certain types of personal property have maximum dollar limits
on the amount paid for any loss
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20-10
Exhibit 20.2 Special Limits of Liability
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20-11
Section I Coverages
– An insured can use a schedule to insure certain personal
property for a specific amount
– Coverage C also excludes certain types of property:
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Articles separately defined and specifically insured
Animals, birds, and fish
Motor vehicles
Aircraft and parts
Hovercraft and parts
Property of roomers, boarders, and other tenants
Property in a regularly rented apartment
Property rented or held for rental to others off the residence
premises
• Business records
• Credit cards, electronic transfer devices, or other access devices
(some coverage in Additional Coverages)
• Water or steam
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20-12
Section I Coverages
• Coverage D provides protection when the
residence premises cannot be used because of a
covered loss
– Coverage is 30% of the amount of insurance on the
dwelling (Coverage A)
– Additional living expense is the increase in living
expenses actually incurred by the insured to maintain
the family’s normal standard of living
• For example, the cost of renting a furnished apartment
– The policy pays the fair rental value for that part of the
residence that is rented to others, but is not fit to live in
– Coverage applies if the home is not damaged, but a civil
authority prohibits the insured from using the premises
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20-13
Section I Coverages: Additional
Coverages
• There are some additional coverages in Section I
– Coverages that provide additional insurance include:
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Removal of debris following an insured peril
Trees, shrubs, and plants, for a limited set of perils
Fire department service charge
Unauthorized use of credit card, electronic funds transfer card or
access device; forgery and counterfeit money
• Loss assessment charged against the named insured by a corporation
or association of property owners because of the direct loss of
property collectively owned by all members.
• Increased costs of construction or repair because of a law
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20-14
Section I Coverages: Additional
Coverages
– Coverages that do not increase the limit of insurance that
applies to the damaged property include:
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Reasonable repairs to protect the property from further damage
Removal of property that is endangered by an insured peril
Collapse of a building, for certain perils
Breakage of glass or safety glazing material
Landlord’s furnishings
Grave markers
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20-15
Section I Coverages
• A deductible of $250 applies to any loss
covered by Section 1 coverages
– Premiums can be reduced by increasing the
deductible
– In states that are vulnerable to natural
catastrophes, insurers can use percentage
deductibles
• Percentage deductibles for windstorm and hail losses
vary from 1% to 15% of the limit of insurance on the
dwelling
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20-16
Section I Perils Insured Against
• The dwelling and other structures are insured
against risk of direct physical losses
– All direct physical losses are covered unless specifically
excluded
• Personal property is insured on a named-perils
basis
– A direct physical loss is covered if it is caused by one of
the perils listed in the policy
• Named perils include fire, windstorm or hail, explosion, riot
or civil commotion, aircraft, vehicles, smoke, vandalism,
theft, etc.
– The peril must be the proximate cause of the loss
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20-17
Section I Exclusions
• The policy excludes:
– Concurrent causation losses
• If a single loss is caused by two or more perils that occur
concurrently or in any sequence, and one peril is covered under the
policy and the other peril is excluded, the entire loss is excluded
– Any loss due to an ordinance or law, except as described in the
Additional Coverages
– Property damage from earth movement
– Property damage from certain water losses
– Losses due to power failure
– Losses due to neglect
– Property damage due to war or nuclear hazard
– Any intentional loss
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20-18
Section I Conditions
• The insurer’s liability for a loss is limited to the insured’s insurable
interest at the time of loss
• The insured must perform certain duties after a loss occurs:
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Give prompt notice to insurer
Protect the property from further damage
Prepare an inventory of damaged personal property
Exhibit damaged personal property
File a proof of loss with 60 days after the insurer’s request
• Losses to personal property are paid on the basis of actual cash
value
– If the insured purchases a replacement cost endorsement, there is no
deduction for depreciation
• After giving notice to the insured, the insurer has the right to repair
or replace any part of damaged property with like property
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20-19
Section I Conditions
• Losses to the dwelling and other structures are
paid on the basis of replacement cost with no
deduction for depreciation
– If the dwelling is insured for at least 80% of replacement
cost at the time of loss, partial losses are paid in full
• Replacement cost is the amount necessary to repair or
replace the dwelling with material of like kind and quality at
current prices
– If the dwelling is insured for less than 80% of the
replacement cost, the insured receives the larger of
(1)the actual cash value of that part of the building damaged
or
amount of insurance carried
(2)
x loss
80% x replacemen t cost
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20-20
Section I Conditions
• Some insurers offer an extended replacement cost
endorsement, which pays an extra 20% or more above the
policy limits
• Under a guaranteed replacement cost policy, the insurer
agrees to replace the home exactly as it was before the loss
even if the replacement cost exceeds the amount of insurance
stated in the policy
• In the event of a loss to a pair or set, the insurer can elect
either repair or replace any part of the pair or set or to pay the
difference between the actual cash value of the property
before and after the loss
• The appraisal clause is used when the insured and insurer
agree that the loss is covered, but the amount of loss is in
dispute
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20-21
Section I Conditions
• If other insurance covers a Section I loss, the insurer will only pay the
proportion of the loss that is limit of liability bears to the total amount
of insurance covering the loss
– For example, the HO policy is excess over any amount payable under a
home warranty or service agreement
• The insurer is generally required to make a loss payment directly to
the named insured
• The mortgage clause is designed to protect the mortgagee’s insurable
interest
– If the mortgagee is named in the policy, the mortgagee is entitled to
receive a loss payment from the insurer to the extent of its interest,
regardless of any policy violation by the insured
• Concealment or misrepresentation of any material facts, fraudulent
conduct, and false statement relating to the insurance will void
insurance coverage
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20-22
Section I and II Conditions
• Some conditions apply to both Section I and Section II
coverages. These include:
– A liberalization clause to address issues with broadening coverage
– A waiver or change of policy provisions
• Must be in writing
– Terms and conditions for cancellation
– Terms for nonrenewal of the policy
– Assignment of the policy to another party
• Insurer must give written consent
– A subrogation clause to address recoveries from third parties
– Extension of policy terms to a legal representative upon the death
of the named insured or spouse
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20-23