Trieschmann, Hoyt & Sommer
Risk Management for Homeowners
Chapter 15
©2005, Thomson/South-Western
Chapter Objectives
• List the basic coverages in a homeowner’s policy and the limits of
liability for each
• Identify property that is excluded from the homeowners’ policy and the
special dollar limits for certain types of property
• Describe how additional living expense losses are determined and
how the loss settlement clause in the homeowners’ policy operates
• Explain the doctrine of concurrent causation and its role in property
insurance policies
• Identify the perils insured in homeowners’ policies
• Identify and explain optional endorsements to the homeowners’ policy
• List the coverages in the comprehensive personal liability section of
the homeowners’ policy and identify the major exclusions
• Determine appropriate insurance coverages for a personal risk
management program
2
Introduction
• Traditionally, homeowners’ insurance has been a very
stable branch of the insurance industry
• Premiums tend to increase each year at a moderate rate
• This line of insurance is not as sensitive to losses as
personal auto
• However, occasionally events occur that dramatically
impact homeowners’ insurance, as in 1992
–
–
–
–
Hurrican Andrew: Over $19 billion in losses
Hurricane Iniki quickly followed
Hailstorms in Texas and Oklahoma: $450 million in damages
Los Angeles riotL: $500 million in damages
– Losses combined push the combined ratio of (losses plus
expenses) ÷ premiums from an average of 111 to 156
– Dozens of insurers went bankrupt
3
Introduction
• The homeowners’ sector still not fully recovered
from the setback
• For all practical purposes, homeowners’
insurance is a necessity
– You cannot obtain a mortgage to purchase a home
unless you can prove that you have a valid
homeowner’s policy
– You must maintain that policy or a similar one
• Homeowners in southern Florida and Hawaii
have had availability problems
– Florida: new laws passed to make insurance available
in coastal areas
4
Introduction
• Table 15-1 shows 10 most costly
catastrophes from insured losses in U.S.
history
– These losses are all quite recent
– Six are wind related
– All but the terrorist attacks of 9/11 are
primarily losses to residential property
• Thus, are paid mostly by homeowners’ insurance
5
Table 15-1: Ten Most Costly U.S.
Catastrophes
6
Homeowners’ Program:
Development
• The most comprehensive protection for owner-occupied,
one- to four-family residences is found in the
homeowners’ program
• An outgrowth of several attempts by the insurance
industry to develop policies to provide a more balanced
and adequate program of insurance for the average
homeowner
– At lower cost than will be available if the coverages were
purchased separately
• Homeowners’ policy was developed in 1958 by the MultiPeril Insurance Conference
– Major revisions have resulted in today’s homeowners’ policy:
•
•
•
•
Is written in easy-to-understand English
Is multiple-line
Requires a minimum amount of coverage to be purchased
Costs less than if coverages are purchased separately
7
Concise Language
• The current version of the homeowners’
policy is much easier to read than earlier
versions
• Today’s version is 40% shorter and much
easier to understand
• Even the size of the print has been
increased 25% so that it is easier to read
8
Multiple-Line
• A basic objective of the homeowners’ program
– To provide an opportunity for the homeowner to
purchase in one policy any of the many variations of
coverage
• Coverage is provided for
– Both the home and personal property
– Broad named-perils or open-perils protection is
offered
– Coverages such as personal liability and medical
payments to other persons are included
9
Minimum Amount of Coverage
• Provides a definite minimum amount of
coverage acceptable to the user
• A single indivisible premium is charged
– The insured cannot pick and choose among
specific coverages
10
Lower Cost
• Because the insured is buying a package
of coverages, costs are lower
• The savings results from a broader range
of perils being insured
– Which gives the insurer a better spread of
loss exposures and lower administrative
expenses
• Allows insurers to charge substantially less for the
total package than if the coverages were
purchased separately
11
Outline of Homeowners’ Coverages
• Certain coverages are mandatory in the homeowners’
program, but
• Sufficient flexibility still exists in the amounts required to fit
the needs of most people
• Basic coverages of the homeowners’ program are
12
Outline of Homeowners’ Coverages
• Table 15-2 summarizes the coverage offered by most of the primary
homeowners’ forms
– Designated HO-2, HO-3, HO-4, HO-5, HO-6, and HO-8
• A dwelling must be owner-occupied to qualify for dwelling coverage
in this program
– Minimum dwelling coverage as specified by the insurer must be
purchased
• The term limited named perils means
– Fire, lightning, windstorm, hail, explosion, riot, civil commotion, aircraft,
vehicles, smoke, vandalism and malicious mischief, theft, and volcanic
eruption
• Open perils is the new name for what used to be called all-risk
coverage
• Coverage is for any direct loss to property except for certain losses
specifically excluded in the policy
13
Table 15-2: Basic Coverages of
Homeowners’ Program
14
Outline of Homeowners’ Coverages
•
•
HO-2, HO-3 and HO-5 forms are all for owner-occupants and differ primarily
in terms of the perils they cover
HO-4 form is for tenants
– Commonly called renter’s insurance
•
HO-8 form was developed because many people are moving back into older
neighborhoods and renovating houses
– The market value of the home might be $100,000, but its replacement cost could
be twice that
– The standard homeowners’ policy would encourage the policyholder to insure at
least 80% of replacement value
• However, insurance companies were reluctant to do this because of the potential moral
hazard, so coverage was unavailable for such older dwellings
– Insureds cannot collect on a replacement cost basis—instead they collect on a
cost-to-repair basis
• No deduction is made for depreciation, and repairs may not be made with like labor and
material
– The rates are high compared to other forms
• The insured must pay more for less coverage, but they have homeowners’ insurance
available where previously it was not
15
HO-3 Coverage A—Dwelling
• Coverage A is for the dwelling on what the policy calls
the residence premises
– The one- to four-family dwelling where you reside, other
structures and grounds of that location, or that part of any other
building where you reside and that is shown as the residence
premises in the declarations
• Includes structures attached to dwelling
– Such as a patio roof, a carport or an attached greenhouse
• Dwelling coverage also involves materials and supplies
located on or next to the residence premises
– For use in the construction, alteration, or repair of the dwelling or
of other structures on the residence premises
16
HO-3 Coverage B—Other
Structures
• Other structures are defined as those separated
from the dwelling by clear space or connected
by only a fence or utility line
• A garage that is not attached to the dwelling is
an example of such a structure
– As is a greenhouse or a tool shed
• Coverage B is designed for structures for
personal use
– Other structures used for business purposes or held
for rental are not protected
17
HO-3 Coverage C—Unscheduled
Personal Property
• Covers personal property owned or used by an
insured while anywhere in the world
– Subject to exclusions
• Types of property protected include such items
as
– Jewelry, kitchen appliances, furniture, clothes,
stereos, video cassette recorders, televisions,
currency, guns, and bicycles
• Besides the insured’s property, property of
others while on the residence premises is
protected
– If the insured requests it
18
HO-3 Coverage C—Unscheduled
Personal Property
• Personal property that is taken to a secondary
residence while the insured is temporarily
residing there is insured for the full limit of
Coverage C
• For most families, Coverage C does not have to
be modified when one or more children go to
college
– Each child’s property would be covered for 10% of the
Coverage C amount
• Certain types of personal property are excluded
and others have dollar limitations
19
HO-3—Property Excluded
• Articles separately described and specially insured in this or any other
insurance (Such as an expensive camera, watch, or a diamond ring)
• Animals, including birds and fish
• Motorized land vehicles (Except those not licensed for road use that
service an insured’s residence or assist the handicapped)
• Sound equipment while in an automobile
• Aircraft and hovercraft and their parts
• Property of roomers, boarders, and other tenants (Except those
related to an insured)
• Property contained in an apartment regularly rented or held for rental
• Property rented or held for rental to others away from the residence
premises
• Books of account, drawings, or other paper records, or electronic data
processing tapes, wires, records, desks, or other software media
containing business data
20
HO-3 Coverage D—Additional
Living Expenses
• Covers the increased cost of living that
results from an insured peril damaging the
residence premises and making them
uninhabitable
• The insured is allowed to maintain his or
her normal standard of living
– However, only the increased cost of living is
covered
• Table 15-3 shows an example
21
Table 15-3: Additional Living
Expense Example
22
HO-3 Coverage D—Additional
Living Expenses
• Pays for loss of rental income less rental
expenses
– This lost income would arise from a situation in which
the insured rented a basement room to someone and
fire made it uninhabitable
• For many home owners in south Florida,
coverage D limits were exhausted after
Hurricane Andrew
– Little rental property was available and what could be
found was expensive
– Repair time was much longer than normal because
the demand for repair was much greater than the
supply
23
HO-3 Additional Coverages
• Debris removal
– Included in the limit of liability
– However, when the limit has been exhausted, an additional 5%
may be used to pay for debris removal
• Reasonable repairs
– Repairs made by the insured to protect the property from further
loss, after loss from an insured peril has occurred
• Are covered by the policy
• However, this provision does not increase the insured’s limit
• Trees, shrubs, and other plants
– Up to 5% of the coverage A limit can be used to pay for loss to
trees, shrubs, and other plants
• Subject to a limit of $500 for any one item
24
HO-3 Additional Coverages
• Fire department service charge
– In situations where the insured lives in a rural area
and a city fire department makes a charge for
responding to a call
• The policy will pay up to $500 for such charges
– The charge must resolve from an insured peril, and no
deductible applies to the coverage
• Removed property
– If property must be removed from the premises due to
an insured peril
• The removed property provision gives all-risk coverage
during removal and 30 days thereafter
25
HO-3 Additional Coverages
• Credit card, electronic funds transfer card,
forgery and counterfeit money
– Although federal law limits a person’s liability to $50
per lost credit card
• A stolen or missing wallet full of cards can lead to loss of
several hundred dollars
• However, if the unauthorized user is a member of the
insured’s household, no coverage exists
– Coverage exists for forged or altered checks, fundtransfer cards, and counterfeit money accepted in
good faith
• No deductible applies to any of these items
• The insurer will pay defense costs for court suits brought
against the insured under the credit card or forgery coverage
26
HO-3 Additional Coverages
• Collapse
– Covered if resulting from
•
•
•
•
•
The perils insured against in coverage C, personal property
Hidden decay and hidden insect or vermin damage
The weight of contents, equipment, animals, or people
The weight of rain that collects on the roof
The use of defective materials or methods in construction or
remodeling
– If the collapse occurs during remodeling
– Collapse caused by an earthquake, mudslide, or flood are not
covered
• Glass or safety glazing material replacement
– Provides coverage for breakage of glass or safety glazing
material (safety glass) of a covered building, storm door, or storm
window
27
HO-3 Additional Coverages
• Landlord’s furnishings
– If the insured rents out part of the residence premises
as an apartment
• The insured’s appliances, carpeting, and other furnishings in
the apartment are covered for the coverage C perils, except
theft
• Loss assessment
– Provides the insured $1,000 of coverage if he or she
is assessed for damage to property that is owned by
an association of property owners of which the
insured is a member
– The damaged property must be collectively owned by
all members of the owners’ association
• The peril causing the loss must be covered under coverage A
28
HO-3 Additional Coverages
• Ordinance or law
– Up to 10% of the limit for coverage A is provided as
additional insurance for increased costs resulting from
an ordinance or law related to repair of a covered
structured damage by a covered peril
• Grave markers
– Policy will pay up to $5,000 for loss to grave markers
on or away from the residence premises
• As long as the loss is caused by a coverage C peril
29
Loss Settlement Clause
• Determines how the items will be valued for
adjustment purposes
• The homeowners’ policy provides replacement
cost coverage on the dwelling and actual cash
value (ACV) coverage for personal property
• The law settlement clause helps classify certain
items as to whether recovery is on an ACV basis
or on a replacement cost basis
30
Loss Settlement Clause
• When a loss occurs to a building or other
structure under coverage A or B
– The insured can make a claim on either an ACV or
replacement cost basis
• It may sometimes be to the insured’s advantage
to collect on an ACV basis because of the
policy’s coinsurance clause
– If the claim is filed on a replacement cost basis, then
an 80% coinsurance requirement applies
• The insured can choose the basis of the claim
after the loss occurs
31
Pair-and-Set Clause
• When part of a set or one of a pair is lost, this
clause is used to determine the loss payment
• The insurance company will pay only for the
difference between the ACV of the item before
and after the loss
– The loss of one of a pair of items, such as diamond
earrings, is not a total loss
– Only the difference in value of the earrings before and
after the loss is paid
• In many cases an insurance company will take
possession of the remaining item and pay a total
loss or replace the item
32
Perils Covered in Homeowners’
Insurance
• HO-3 gives
– Open-perils coverage on the dwelling and
other structures
– Broad named-perils coverage on unscheduled
personal property
33
Open-Perils Dwelling Exclusions
• Open-perils coverage includes all physical
losses except certain specifically excluded
losses
• To determine what is insured, you must
investigate the exclusions
• Homeowners’ policies with open-perils
coverage contain a number of exclusions
34
Open-perils Dwelling Exclusions
• Freezing
– Loss caused by freezing of plumbing, heating, or air
conditioning systems is excluded
• While the dwelling is vacant, unoccupied, or under
construction
• Unless heat is maintained or the water system is shut off and
the water pipes are drained
• Fences, pavement, patios, and similar structures
– When fences, pavement, patios, swimming pools,
foundations, retaining walls, bulkheads, piers,
wharves, or docks are damaged by freezing, falling,
or the weight of ice or snow, no coverage exists
35
Open-Perils Dwelling Exclusions
• Buildings under construction
– No theft coverage exist for materials and supplies
– Coverage begins when the dwelling is completed and occupied
• Vacancy beyond 60 days
– When a building is vacant for more than 60 days, coverage for
vandalism, malicious mischief, breakage of glass, and safety
glazing materials is suspended
– For the purposes of this coverage, a dwelling under construction
is not considered vacant
• Mold, fungus, or wet rot
– Generally excluded
– However, an exception provides coverage for mold, fungus, or
wet rot that is hidden within the walls, floors, or ceilings of a
structure
• If the loss results from water or steam from a plumbing, heating, or
air conditioning system, or a household appliance
36
General Open-Perils Exclusion
• Open-peril contracts have one exclusion provision that is
almost universal to such coverage
• Excluded by this clause are such things as
–
–
–
–
–
–
–
–
–
Wear and tear
Inherent vice
Latent defect
Mechanical breakdown
Rust, mold, and wet or dry rot
Contamination
Smog
Smoke from agricultural smudging or industrial operation
Settling, cracking, shrinking, bulging, or expansion of
pavements, patios, foundations, walls, floors, roofs, or ceilings
– Loss due to birds, vermin, rodents, insects, or domestic animals
37
All-Property Exclusions
• Several general exclusions apply to all property including
–
–
–
–
–
Earth movement
Flood and several other types of water damage
War
Intentional loss
Neglect by the insured to protect the insured property from loss
at and after the time of loss
– Spoilage
• Spoilage resulting from the interruption of electrical power or other
utility service caused by an off-premises event is not covered
• However, if lightning strikes the power line pole on the premises and
causes power interruption
– Then the policy will pay for the ensuing loss
38
Concurrent Causation
• This doctrine greatly expanded coverage under openperils insurance policies
– So that if a peril is not excluded, it is covered
• The courts held that even if an excluded peril such as
flood, earthquake, or contamination occurred
– Coverage would exist if a concurrent event occurred and that
concurrent event was not excluded
• Because of the court’s decision on concurrent causation
and a similar decision on the collapse peril
– Today’s insurance policies have a rather lengthy exclusion with
respect to events that might result from concurrent causation
39
Named-Perils Protection
• Fire and lightning
– The fire must be a hostile fire
• Outside normal confines
– Direct loss caused by fire also includes such losses as damage
from water or chemicals used to fight the fire and broken
windows or holes chopped into the roof by firefighters
• Windstorm and hail
– Certain types of property are excluded such as
• Watercraft and their trailers, furnishings, equipment, and outboard
motors except when inside a fully enclosed building
• When windstorms as such as Hurricane Andrew occur, insureds
may seem helpless
– However, as citizens, insureds can require strong enforcement of
building codes
– Much of the damage from Andrew could have been prevented if
existing building codes had been enforced
40
Named-Perils Protection
• Explosion
– The term explosion is undefined in the policy and thus is broadly
interpreted by the courts (It would include a natural gas explosion as
well as a sonic boom)
• Riot and civil commotion, aircraft, and vehicles
– These terms are undefined in the HO-3 form
– Damage to trees, shrubs, and plants by a vehicle driven or owned by a
resident of the residence premises is excluded
– Aircraft include self-propelled missiles and space craft
• Smoke
– This peril only includes sudden and accidental damage from smoke
– Loss caused by smoke from agricultural smudging or industrial
operations is excluded
• Vandalism or malicious mischief
– Typically involves the concept of willful intent to damage the property
– However, the HO-3 form does not mention this limitation (So a liberal
definition of the term can be assumed)
41
Named-Perils Protection
• Theft
– The policy states that the theft peril “includes attempted theft and loss of
property from a known location when it is likely that the property has
been stolen”
– In the case of loss, the police must be notified if the insured expects to
collect under the policy
– The insured is required only to show that theft of the item is a
reasonable explanation of the loss
– It is not the intent of the insured to pay for property that the insured
simply loses
– No coverage exists if any insured steals the property
– Limitations on the premises
• Any materials or supplies used in the construction of a dwelling are not
covered for theft until the building is completed and occupied
• No coverage is available for any property in that part of the residence
premises rented by the insured to another unless they are an adult relative
– Off-premises limitations
• Restrictions exist involving trailers and campers, watercraft, secondary
residents, and student property
42
Named-Perils Protection
• Falling objects
– Falling objects does not pertain to property inside the building
unless the roof or an exterior wall is first damaged by the falling
object
• Weight of ice, snow, or sleet
– Coverage applies only to contents inside the dwelling
– The roof would have to collapse from the weight of ice and snow,
and then the contents would have to be damaged, for coverage
to exist
• Accidental discharge or overflow of water or steam
– The overflow or accident must come from within a plumbing,
heating, or air-conditioning system or from within a household
appliance
– Coverage does not exist for the appliance from which the steam
or water escaped nor for loss due to freezing, overflow, or
discharge that occurs off the residence premise
43
Named-Perils Protection
• Sudden and accidental tearing apart, cracking, burning,
or bulging of a steam, hot water, or air-conditioning
system or an appliance for heating water
– The obvious example of this peril is a water heater that explodes
– No coverage for freezing is provided under this peril
• Freezing
– Covers freezing of a plumbing, heating, or air-conditioning
system or a household appliance
– No coverage exists if a dwelling is unoccupied
• Unless the insured takes reasonable care to maintain heat in the
building or shuts off the water supply and drains the system and
appliances of water
– Many people might expect to see most of this type of damage in
the northern part of the United States
• However, much of the destruction occurs in the South as the
buildings are not designed for freezing temperatures
44
Named-Perils Protection
• Sudden and accidental damage from artificially
generated electrical current
– An air conditioner damaged by a power surge would be covered
by this peril
– However, the policy specifically excludes loss to a tube,
transistor, or similar electronic component
• Stereos, televisions, and PCs are the main targets of this exclusion
• Volcanic eruption
– A fairly new coverage for the homeowners’ program
– Addresses problems that arose after the eruption of Mount Saint
Helens
– Loss caused by earthquake, land shock waves, or tremors is not
covered
45
Optional Property Endorsements to
Homeowners’ Policies
• Many property endorsements are available
• Personal risk managers must decide
which, if any, of these endorsements are
appropriate for their circumstances
46
Earthquake
• The peril of the earthquake is catastrophic in nature
• However its frequency is so low that few people
purchase the coverage even though they should
• The endorsement eliminates a loss from flood or tidal
wave cause by an earthquake and loss to exterior
masonry veneer
• Two earthquake deduction endorsements are available
– A 5% deductible
– A 10% deductible
• Most often found in the western states where earthquakes are most
likely
• On a dwelling with a replacement cost of $150,000 the deductible
would be $15,000
– Perhaps this is why some people do not purchase earthquake
insurance
47
Inflation Guard
• When inflation occurs at a rapid pace, the problem of
maintaining adequate property limits has to be
addressed
• It as not uncommon for construction costs to rise 10%
per year
• When replacement cost protection is desired, an 80%
coinsurance clause must be maintained
– And policy limits need to be adjusted periodically
• However, if one adjusts only once a year
– Problems can arise because the loss may occur right before it is
time to increase the policyholder’s limit
• The inflation guard endorsement is a partial solution
– A person’s limit is raised a set percentage every three months
48
Guaranteed Replacement Cost
• Applies to the dwelling and provides the policyholder
with full replacement cost at the time of the loss
• The policyholder is required to insure 100% to value
when the policy is purchased
– And increase the stated value as requested by the insurer
• Most versions of this endorsement limit the policy to 125
to 150 percent of the stated value
– May or may not increase the limits for coverages B, C, and D
• An attractive endorsement and a good way to eliminate
the potential coinsurance problem that can occur when a
hurricane or tornadoes strikes a city and building costs
explode during the rebuilding period
49
Personal Property Replacement
Cost
• Before 1980 an individual could not purchase
replacement cost coverage on an unscheduled
basis on personal property in the homeowners’
program
• In 1980 a new endorsement was introduced
– The insured could collect the smallest of four amounts
for personal property
•
•
•
•
Replacement cost at the time of loss
Full repair costs of the time of loss
Any special limits of liability pertaining to coverage C
The limit of liability for unscheduled personal property and
coverage C
– Which is usually 50% of the dwelling coverage
50
Personal Property Replacement
Cost
• Certain types of property are excluded from the
replacement cost recovery including
–
–
–
–
Fine arts, paintings, and antiques
Memorabilia and collectors’ items
Property that is not kept in working condition
Obsolete property
• Usually no payment is made until the item is
actually repaired or replaced
– Unless the loss is less than $500
51
Unit Owners, Building Additions,
and Alterations
• Designed to meet the special needs of condominium unit
owners
– Who, in many states, hold an indivisible interest in the
condominium complex and ownership of the air space inside
their units
• Called the bare wall doctrine
– The unit owner owns everything inside the bare walls, except for some
electrical and structural items
• By endorsement, limits may be increased and coverage
can be placed on an open-peril basis
• The insurance protection on the condominium itself and
swimming pools, tennis courts, and other buildings
associated with the condominium complex is carried by
the condominium association
52
Special Personal Property
• Provides open-perils coverage for personal
property
• Has numerous exclusions
– Such as enforcement of building laws or ordinances,
earthquake, flood, war, and intentional loss
• Several exclusions are unique to the special
property form
– Such as breakage of eyeglasses, glassware, statuary
marble, and porcelain, collision, repair or refinishing
of personal property, and dampness of atmosphere or
extreme changes in temperature
53
Inboard Watercraft
• Generally classified as yachts for insurance
purposes
• Insured on an ocean marine package policy that
gives coverage on the boat and on liability
arising from collision with other vessels
– Appropriately called a yacht policy
• Insured perils with respect to the hull include, but
are not limited to, collision, windstorm, fire, and
theft
54
Outboard Watercraft
• The outboard watercraft policy is not uniform
• Typically, the policy covers outboard motors and
outboard motorboats used for personal pleasure
• Coverage applies while on the water and onshore
• Insured perils may be on an open-perils or a broad
named-peril basis
• Open-perils approach is the most popular
– The boat, its motor or motors, its equipment, and its trailer are
covered
– Recovery is on an ACV basis
– No replacement cost protection is available
– The premium rate can be expensive, but high deductibles may
be used to help lower the cost
55
Flood Insurance
• Flood insurance for residential properties is
generally administered by the Federal
Emergency Management Association (FEMA)
– Underwrites losses and works through private
vendors and insurance agents to market and service
the policies
• To be eligible, a community must apply and
– Conduct extensive floodplain studies
– Make floodplain maps
– Develop a floodplain management program
• FEMA program is attractive to insureds because
the federal government subsidizes the rates
56
Flood Insurance
• The peril of flood is defined in the policy as including the
following
– Overflow of inland or tidal waters
– Unusual and rapid accumulation of runoff of surface waters from
any source
– Mudflow
– Collapse or subsidence of land along the shore of a lake or
similar body of water as a result of erosion or undermining
caused by waves or currents of water exceeding anticipated
cyclical levels that result in a flood as previously defined
• Definition covers water damage from hurricanes along
Atlantic and Gulf coasts, flash floods in desert areas,
mudslides in California, and unusual erosion around the
Great Lakes and the Great Salt Lake
• Table 15-4 shows the limits of the federal insurance
program
57
Table 15-4: Federal Flood
Insurance
58
Personal Articles Floater (PAF)
• An open-perils contract designed to give
broad coverage to valuable personal
possessions including such items as
– Personal jewelry, furs, fine arts, cameras,
golfer’s equipment, musical instruments,
silverware, and stamp and coin collections
59
Mobile Home Endorsement to
Homeowners’ Policy
• Millions of year-round mobile home units
exist in the U.S.
• The number of mobile homes has
increased significantly and the quality of
their construction has improved
• Construction codes are more demanding,
units are often permanently attached to a
foundation, and mobile home parks have
been upgraded
60
Mobile Home Eligibility
• The mobile home endorsement is designed for
mobile home that is
–
–
–
–
–
A portable unit
Built to be towed on its own chassis
Comprised of frame and wheels
At least 10 ft. wide and 40 ft. long
Designed for year-round living
• The unit is supposed to be used for private
residential purposes and may be occupied by
the owner or a tenant
61
Mobile Home Coverage
• The term mobile home means
– The unit itself, equipment originally built into it, steps, and oil or gas tanks
connected to it for the purpose of furnishing heating or cooking
• Mobile home coverage has been made a part of the homeowners’
approach
• Coverage A is for the mobile home unit and must be for at least
$10,000
– Recovery is on a replacement cost basis
– Carpeting and appliances are considered part of the coverage
• Coverage B is for separate structures and is 10% of coverage A
– Subject to a minimum of $2,000
• Coverage C is unscheduled personal property and is 40% of A
– Subject to a $4,000 minimum
• Coverage D is for additional living expenses and is 20% of coverage A
• If the insured does not want replacement cost, or if the insurer does not
want to offer it
– Endorsement MH-0401 can be used to change the basis of recovery from
replacement cost to ACV
62
Shopping Tips for Homeowners
• It pays to shop around for a homeowners’ policy
• Following are some tips for covering property with a
homeowners’ policy
– Buy adequate limits
– Determine if the property is in a flood plain or earthquake zone
– Make a complete written inventory of personal property on a
room-by-room basis and videotape the room
– Determine the value of personal property and, if needed,
increase the limit of coverage C
– Purchase replacement cost coverage on personal property
– Identify and insure valuable jewelry, guns, stamp and coin
collections, and fur coats with a personal article floater
– Have adequate limits for business property
– Is best to insure outboard and/or inboard motors under a
separate policy
– Choose a deductible that matches your situation
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Personal Liability and Medical
Payments Insurance
• Coverage E provides comprehensive personal
liability (CPL) protection
– Basic amount of coverage is $100,000
• Coverage F provides medical payments to
others
– Basic amount of coverage is $1,000
• If additional protection is needed, the limits may
be raised
• If catastrophic loss limits are desired
– A personal umbrella policy should be purchased
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HO-3 Coverage E—Personal
Liability
• Provides liability coverage for bodily injury and
property damage claims against an insured
• It also provides standard supplementary benefits
including
– Defense costs
– Premiums on appeal bonds
– Reasonable expenses incurred by the insured at the
request of the insured to aid in the investigation or
defense of a suit
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Damage to the Property of Others
• The insurer promises to pay up to $500 per occurrence
for damage to the property of others caused by any
insured
• It is not necessary to prove liability due to negligence
• The insurer will not pay for the following
– Property damage covered under section I of this policy
– Property damage caused intentionally by any insured who is 13
years of age or older
– Damage to property owned by any insured, or owned by or
rented to any tenant of any insured, or owned by or rented to a
resident of the insured’s household
– Property damage arising out of
• Business pursuits
• Any act or omission in connection with premises loaned, rented, or
controlled by any insured, other than the insured location
• The ownership, maintenance, or use of a motor vehicle, aircraft, or
watercraft
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Persons Insured
• In the homeowners’ program the terms you and your
refer to the named insured
• The insurance company is identified as we, us, and our
• The term insured in the policy means the following
members of your household
– You
– Your resident relatives
– Any other person under the age of 21 who is in the care of any
person previously named
– For liability coverage it also means with respect to animals or
watercraft to which this policy applies
– With respect to any vehicle to which this policy applies
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Exclusions
• Intentional losses expected or intended by one of the
insureds
• Loss arising out of business activities or the rental of an
insured location
• Loss arising out of rendering or failing to render
professional services
• Liability loss arising out of any premises owned or rented
to any insured that are not insured premises under the
CPL policy
• Exclusions regarding motor vehicle liability, watercraft
liability, aircraft liability, and hovercraft liability
• Liability losses due to war
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Exclusions
• Loss resulting from liability assumed under unwritten
contracts
– Types of liability losses resulting from business contracts
• Damage to property owned by or rented to the insured or
in the insured’s care
• Bodily injury to any person eligible to receive workers’
compensation benefits
• Lawsuits between insureds covered by the CPL
• Losses arising out of the transmission of communicable
disease by an insured
• Losses arising out of sexual molestation, corporal
punishment, or physical or mental abuse
• Losses arising out of the use, sale, manufacture,
delivery, transfer, or possession by any person of a
controlled substance
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HO-3 Coverage F—Medical
Payments to Others
• The coverage applies to bodily injury
– To a person on the insured location with the
permission of the insured or
– To a person off the insured location if the bodily injury
• Arises out of the condition on the insured location or the
ways immediately adjoining
• Is caused by the activities of the insured
• Is caused by a residence employee in the course of the
residence employee’s employment by insured or
• Is caused by an animal owned by or in the care of an insured
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HO-3 Coverage F—Medical
Payments to Others
• The insurer agrees to pay the necessary
medical expenses incurred or medically
ascertained within three years from the date of
the accident
• Coverage for medical payments to others
– The named insured and regular residents of the
insured household are not covered for medical
expenses
• Coverage is on a no-fault basis
• The subrogation clause does not apply to
medical benefits
– An injured party may collect medical payments and
still sue a negligent third party
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HO-3 Coverage F—Medical
Payments to Others
• The description of coverage E refers to the insured
location which is defined to include the residence
premises as well as
– The part of any other premises, other structures, and grounds
used by you as a residence and that is shown in the declarations
or that is acquired by you during the policy period for your use as
a residence
– Any premises used by you in connection with the premises
included in residence premises or in the previous item
– Any part of premises not owned by any insured but where any
insured is temporarily residing
– Vacant land owned or rented to any insured, other than farmland
– Land owned by or rented to a insured on which a one- or twofamily dwelling is being constructed as a residence for the
insured
– Individual or family cemetery plots or burial vaults of any insured
– Any part of premises occasionally rented to any insured for
other-than-business purposes
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HO-3 Coverage F—Medical
Payments to Others
• Coverage for medical payments to others has a
number of exclusions
– All the relevant exclusions discussed under personal
liability also apply to medical payments coverage
– Injury to a resident employee is excluded if it occurs
off the premises and is not in the course of
employment
– Workers’ compensation-related losses are not insured
– Losses resulting from radiation or radioactive
contamination are not covered
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Optional Liability Endorsements to
the Homeowners’ Policy
• Watercraft liability
– When an insured owns a watercraft that is larger than
those covered by the CPL
• The policy may be endorsed to cover such boats
• However, because physical damage to the vessel cannot be
covered in the homeowners’ policy
– Most people insure their watercraft exposure in a separate
policy
• Personal injury
– Basic CPL does not insure loss resulting from slander,
false arrest, malicious prosecution, defamation of
character, and the like
– CPL can be endorsed to cover these exposures
through the personal liability endorsement
74
Optional Liability Endorsements to
the Homeowners’ Policy
• Business pursuits
– CPL can be endorsed to give limited business pursuits coverage
– Protection is only available for the business specified on the
endorsement
– The insured cannot be the owner or have financial control of the
business
– Teachers are likely persons to purchase this coverage
– The endorsement can be modified to cover liability resulting from
corporal punishment
• Business insurance coverage
– Many new technology companies have their start in the home of the
company’s founder
• This exposure can be insured through the whole business insurance
coverage endorsement
• Business must be solely owned by the named insured and resident relatives
• Bodily injury, personal, and advertising liability may be insured, as well as
products
• No professional liability coverage is provided
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Personal Umbrella
• Certain persons, such as physicians, corporate executives, and
successful business owners
– Need broad coverage and high limits to protect their assets in today’s
litigation-conscious society
• The personal umbrella is designed to do this
• The umbrella is designed to give protection against catastrophic
losses
– It assumes an underlying CPL exists, as well as certain other coverages
– The umbrella will not contribute on a loss until the limit of these policies
has been exceeded
• Umbrellas are purchased by people who need to protect large
accumulations of assets and/or high incomes
• However, insurers will not sell the policy to all such people
– Sometimes certain categories of persons have been deemed
unattractive for the purpose of selling personal umbrellas, such as
• Assigned-risk drivers, professional politicians, professional entertainers,
newspaper reporters, editors, and publishers, labor leaders, and athletes
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Limits of Liability and Self-Retained
Limits
• The minimum limit for an umbrella is $1
million above the self-retained limit
(deductible) or the required property
coverage
• Policies may be purchased with limits as
high as $10 million
• A $1 million policy can cost as little as
several hundred dollars
77
Underlying Limits
• Umbrellas require certain types and
amounts of underlying insurance
• Table 15-5 shows some typical underlying
limit requirements
78
Table 15-5: Typical Underlying Policy
Limits Required for Umbrella Policies
79
Umbrella Contract Provisions
• Umbrella policies are not standardized and their
content has significant variation
– Personal injury
• Definition has a much broader meaning than that used in
primary coverages
• Includes bodily injury, property damage, libel, slander,
defamation of character, invasion of privacy, humiliation,
wrongful eviction, wrongful entry, malicious persecution, false
imprisonment, wrongful detention, and false arrest
– Property in the insured’s care, custody, or control
• Property owned by or rented to the insured is excluded
• However, with respect to other nonowned property the
umbrella is designed to provide some protection
– For example, if you borrow your neighbor’s expensive digital
recorder and break it, the umbrella will cover the loss
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Umbrella Contract Provisions
• Incidental business pursuits
– Typically, insured’s umbrella will cover this, but often it
is no broader than the underlying primary coverage
– If an insured is on the board of directors of a religious,
charitable, or a civic nonprofit corporation, coverage
is often given
• No coverage exists if the board of directors is for business
purposes
• Automobiles
– Some umbrellas give broader coverage than
underlying auto policies; however, many do not
– With the business auto section some umbrellas
provide bodily injury liability coverage for the
operation of trucks in a business situation
81
Dwelling Program (Not
Homeowners)
• Monoline (property only) program
designed to provide coverage for
properties that cannot be insured under
the homeowners’ program
– Or where the insured does not want to
purchase a homeowner’s policy
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Underwriting Eligibility
• To meet the criteria used in determining eligibility for a
dwelling policy, the property must be one of the following
– A dwelling used exclusively for dwelling purposes
• Not excluded are incidental occupancies, such as
– Offices, private schools, music or photography studios, small service
occupancies
– The dwelling should not have more than five rooms for boarders
in total
– A one- to four-family dwelling in a townhouse or rowhouse
structure
– Household and personal property in an apartment or private
living quarters of the insured
– A dwelling used as a temporary residence while in the course of
constructing a permanent residence
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Property Insured
•
•
•
•
A = dwelling
B = other structure
C = unscheduled personal property
In the broad and special form, two additional
coverages apply
– Fair rental value
• Includes the rent the building could have earned if a covered
loss had not made it unfit for use
– Additional living expense
• May be added by endorsement to the basic dwelling form
• Table 15-6 summarizes the three forms available
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Table 15-6: Dwelling Program
Covered Perils
85
Insured Perils of Dwelling Forms
• The basic form is quite limited in its perils coverage
– Unendorsed, this form insures against fire, lightning, removal,
and internal explosion
• Coverage may be modified to include
– Windstorms, hail, explosion, riot, civil commotion, aircraft,
vehicles, and smoke
• This collection of perils is often written together and called extended
coverage
• Vandalism and malicious mischief can also be added
• The broad form and the special form are much like their
homeowners’ counterparts, HO-2 and HO-3, with respect
to insured perils
• A personal liability supplement is available
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Farmowners’-Ranchowners’ policy
• Designed to cover
– The dwelling and commercial structures on the farm
– The personal and commercial liability that might arise from living
and working on the farm
• The main farm dwelling must be a one- or two-family
dwelling used exclusively for residential purposes
• The standard incidental office, professional and private
schools, and studio activities are excepted
• The farm dwelling does not have to be owner-occupied
– But it must not be vacant
• The farm owner may occupy the dwelling and not
operate the farm
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Risk Management—Personal Lines
• A reason commonly given by a business for not
self-insuring is
– “The firm may not have a sufficient number of
homogeneous exposure units so situated that
aggregate losses to which they are subject can be
predicted with insufficiently narrow limits”
• For the same reason, little self-insurance takes
place in personal lines
• However, risk management principles of loss
control and loss retention should and can be
practiced
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Loss Control
• The purchase of smoke detectors is a very wise
investment
• A house alarm system is another good option
• All doors should have deadbolt locks
• The police will periodically check homes of residents
who are on vacation or away for a while
• The insured, when going on vacation, should leave with
a friend or neighbor a set of house keys, a travel
itinerary, and a telephone number where they can be
reached
• Valuable stamp and coin collections should be kept in
safe deposit boxes
• Minimal amounts of cash should be kept in the dwelling
• Good lighting should be provided around the house
89
Loss Control
• College students should take the following loss
prevention steps to protect personal property
– Keep your doors locked
– Engrave valuable electronic equipment and bikes with
an identification number
– Leave very expensive items at home
– Protect your notebook computer at all times
– Secure desktop computers to furniture
– Backup all important data
– If you have to leave your book bag unattended
• Don’t put anything in it that you can’t afford to lose
90
Loss Retention
• In the personal lines area, about the only
reasonable loss retention step a homeowner can
take is the use of deductibles
• A deductible of $250 or more deserves attention
• The problem with higher deductibles in
homeowners’ insurance
– Sometimes the insured receives little premium
savings
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Claims-Settling Procedure
• An important precaution that should be taken to
reduce losses is to identify possessions before
loss occurs
• If one cannot remember what was lost, it is quite
difficult to recover losses from the insurer
• Take several pictures and videos of the items in
the room and put the pictures in the safe deposit
box
• Make an inventory of clothing, furniture,
silverware, appliances, and jewelry and place
the list in a safe deposit box
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Claims-Settling Procedure
• The insurance company pays the insured on a
replacement cost basis only after the insured
replaces or repairs the damaged dwelling
• The only exception to this rule is with losses less
than $2,500 and less than 5% of the amount of
insurance on the building
– However, the contract states that the policyholder
may collect immediately on an ACV basis and later
make replacement cost recovery
• By filing the ACV claim first, insureds receive their cash
sooner so that they can pay the contractor or invest the
money in some interest-bearing security while the house is
being rebuilt
• It seems logical to most people to exercise this option
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Open-Perils Versus Broad NamedPerils Coverage
• HO-3 gives a open-perils coverage on the
dwelling and other structures
– Whereas HO-2 only covers broad named perils
• HO-3 costs more, and consequently you should
receive better coverage
• One advantage of an open-perils form
– The burden of proof is placed on the insurance
company
– It has to prove the loss was excluded
• The insured must only prove an accidental loss occurred
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Open-Perils Versus Broad NamedPerils Coverage
• Numerous cases have occurred where
HO-3 gave coverage and the HO-2 did not
• Most of those cases are situations in
which falling objects damaged the dwelling
without causing exterior damage
– In named-perils coverage, exterior damage
must occur before damage by a falling object
to an interior portion of the dwelling is covered
– In the open-perils coverage, no exterior
damage has to occur
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