Chapter 20 Homeowners Insurance, Section I. Copyright ©2014 Pearson Education, Inc. All rights...

Chapter 20

Homeowners Insurance, Section I

Copyright ©2014 Pearson Education, Inc. All rights reserved. 20-2

Agenda

• Homeowners Insurance Basics• Analysis of Homeowners 3 Policy

– Section I Coverages– Section I Perils Insured Against– Section I Exclusions– Section I Conditions– Section I & II Conditions


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


Current Homeowners Policies

• HO-2 (broad form): covers the dwelling, other structures, and personal property on a named perils basis

• HO-3 (special form): covers the dwelling and other structures on a risk-of-direct-physical loss basis. – All direct physical losses are covered except

those losses specifically excluded.

– Personal property is covered on a named perils basis



• HO-4 (contents broad form): covers a tenant’s personal property on a named perils basis

• 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



• 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


Exhibit 20.1 Comparison of ISO Homeowners Coverages


Exhibit 20.1 Comparison of ISO Homeowners Coverages (continued)


Analysis of the HO-3 Policy

• Section I: Property Coverages– Coverage A: Dwelling– Coverage B: Other Structures– Coverage C: Personal Property– Coverage D: Loss of Use– Additional Coverages


Analysis of the HO-3 Policy

• The following persons are considered “insureds” under the policy:– 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


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 in Coverage A


Section I Coverages

• Coverage C insures personal property owned or used by an insured– Personal property is covered anywhere in the

world, both on and off the premises– The amount of coverage is 50% of Coverage A,

but can be increased if desired– 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


Exhibit 20.2 Special Limits of Liability


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, for example:– 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


Section I Coverages

• Coverage D provides protection when the residence premises cannot be used because of a covered loss– Coverage is 30% of Coverage A– Additional living expense is the increase in living

expenses actually incurred by the insured to maintain the family’s standard of living

– 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


Section I Coverages: Additional Coverages

• Additional coverages in Section I include:– Removal of debris following an insured peril– Reasonable repairs to protect the property from

further damage– Trees, shrubs, and plants, for a limited set of

perils– Fire department service charge– Removal of property that is endangered by an

insured peril– Unauthorized use of credit card, electronic funds

transfer card or access device; forgery and counterfeit money


Section I Coverages: Additional Coverages

• Additional Coverages, continued– 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.

– Collapse of a building, for certain perils– Breakage of glass or safety glazing material– Landlord’s furnishings– Increased costs of construction or repair because

of a law– Grave markers


Section I Perils Insured Against

• The dwelling and other structures are insured for all direct physical losses unless specifically excluded

• Personal property is insured for a direct physical loss 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


Section I Exclusions

• The policy excludes:– Concurrent causation losses– Any loss due to an ordinance or law, except as

described in the Additional Coverages– Losses due to earth movement – Certain water losses – Losses due to neglect, power failure, or faulty

design– Losses which are intentional– Losses due to war, government action, failure to

act, or nuclear hazard– Losses due to certain weather conditions


Section I Conditions

• The insurer’s liability for a loss is limited to the insured’s insurable interest at the time of loss

• 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



• The insured must perform certain duties after a loss occurs:– 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



• 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

2.

LosscosttReplacemen80%

carriedinsuranceofAmountx

x



• Some insurers offer an extended replacement cost endorsement, which pays 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

• 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

• No legal action can be brought against the insurer unless all policy provisions have been met– Legal action must be started within two years



• The insurer has the right to repair or replace any part of the damaged property with like property

• 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

• Only losses that occur during the policy period are covered

• Concealment or misrepresentation of any material facts, fraudulent conduct, and false statement relating to the insurance will void insurance coverage


Section I and II Conditions

• Conditions that apply to both Section I and Section II include:– A liberalization clause to address issues with

broadening coverage– A waiver or change of policy provisions– Terms and conditions for cancellation– Terms for nonrenewal of the policy– Assignment of the policy to another party– 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

Chapter 20 Homeowners Insurance, Section I. Copyright ©2014 Pearson Education, Inc. All rights...

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