RISK MANAGEMENT FOR ENTERPRISES AND INDIVIDUALS Chapter 13 Multirisk Management Contracts:...

RISK MANAGEMENT FOR ENTERPRISESAND INDIVIDUALS

Chapter 13

Multirisk Management Contracts: Homeowners

1 - 2© 2010 Flat World Knowledge, Inc. 13 - 2© 2010 Flat World Knowledge, Inc.

Learning Objectives

In this chapter, we elaborate on the following:Types of homeowners policiesThe Homeowners Special Form (HO-3)Structure of the HO-3 and explanation of policy

languageHow to determine loss levelsEndorsements that supplement coverage in the HO-3


Learning Objectives

In this chapter, we elaborate on the following:Flood exposure and options for flood insuranceTitle risk as mitigated through title insurance policiesUse of umbrella liability policies as an extra layer of

liability protection.Strategies for acquiring the most suitable insurance at

the lowest relative cost


Packaging Coverage, Homeowners Policy Forms, And The Special Form (Ho-3)

Homeowners policies are sometimes referred to as package policies because they combine different types of coverage that were previously provided by several policies and a number of endorsements.

In today’s homeowners policies, packaging reduces cost and premiums by reducing administrative and marketing costs.

It also provides broader protection and eliminates many gaps in coverage.


Table 13.2 - Homeowners Policy Forms*


Figure 13.2 - Homeowners Policy Structure


Homeowners Policy Forms

The declarations page identifies the specifics that are unique to the insured, such as the covered location, and also lists policy limits, period of coverage, the name of the insurer, and similar information.

The policy jacket includes general, universal provisions, such as the title of the coverage, and acts to bind together the remaining policy parts.

The policy form is the substance of the contract, spelling out the specific coverage provisions.


Table 13.3 - Section 1: Homeowners Coverage


Table 13.4 - Essential Policy Terms


The Special Form (HO-3)

Section I—CoveragesCoverage A—Dwelling

The dwelling on the residence premises (i.e., the home being insured) plus structures attached to the dwelling, such as an attached garage, are insured.

Coverage B—Other StructuresThe exposures insured are structures on the residence

premises that are separated from the dwelling, such as a detached garage; does not apply to any structure used for business purposes or rented to any person.



Coverage C—Personal PropertyIncludes property you own as well as that belonging to

others while you are using it.Under the special limit of liability, dollar limits are placed on some

property for loss caused by any peril, and on other property for loss caused by theft.

Coverage D—Loss of UseLoss of use coverage protects you from losses sustained if

the premises cannot be lived in as a result of a direct loss to either the premises or neighboring premises.

Additional living expense is coverage provided if a loss covered under Section I of the homeowners policy renders the residence uninhabitable.

Covers only additional expenses.



Additional CoveragesDebris removalReasonable repairProperty removed from premises endangered by a covered

perilTrees, shrubs, and other plantsLoss under the credit card, fund transfer card, forgery, and

counterfeit money coverageLoss assessment provisionDirect physical loss to covered property due to collapse of a

building and loss caused to or by glass or safety glazing material

Landlord’s furnishings



Section I—Perils Insured AgainstCoverages A and B—Dwelling and Other Structures:

ExceptionsCollapse other than as provided in additional coverages.Six circumstances in which protection is not afforded under

the policy.Coverage is available only for those states that did not adopt

the ISO endorsement adding mold as a new exclusion.



Coverage C—Personal PropertyFire or lightningWindstorm or hailExplosionRiot or civil commotionAircraftVehiclesSmokeVandalism or malicious mischiefTheft



Falling objectsWeight of ice, snow, or sleetAccidental discharge or overflow of water or steamSudden and accidental tearing apart, cracking, burning, or

bulging of a water heating ortransporting applianceFreezingSudden and accidental damage from artificially generated

electrical currentVolcanic eruption



Section I—ExclusionsConcurrent causation: Doctrine that states when a

loss is caused simultaneously (concurrently) by two or more perils, and at least one is not excluded, the loss is covered.


Table 13.5 - Listed Exclusions


Table 13.6 - Section I—Conditions



Section I—ConditionsDuties After Loss

Give immediate notice to the company or its agent.Notify the police in case of theft.Notify credit card companies, if applicable.Protect the property from further damage, make reasonable and

necessary repairs to protect it, and keep an accurate record of repair expenditures.

Cooperate with the insurer’s investigations of the claim.Prepare an inventory of damaged personal property showing the quantity,

description, actual cash value, and amount of loss.Exhibit the damaged property as often as required and submit to

examination under oath.Submit to the company, within sixty days of its request, a signed, sworn

statement of loss.



Section I—ConditionsLoss Settlement

Personal property losses are paid on the basis of actual cash value at the time of loss, not exceeding the cost to repair or replace the property.

If the total amount of coverage equals at least 80 percent of the current replacement cost of your home, you are paid the full cost of replacing or repairing the damage up to the policy limits.



If the amount of coverage is less than 80 percent of the replacement cost, the insurer will pay the larger of

The actual cash value, which is replacement cost minus depreciation, or

That proportion of the cost to repair or replace, without deduction for depreciation, which the total amount of insurance on the building bears to 80 percent of its replacement cost.


Figure 13.3 - Determining Coverages



Section II—Liability CoveragesCoverage E—Personal Liability

To pay damages for which the insured is legally liable and to “provide a defense at our expense by counsel of our choice, even if the suit is groundless, false, or fraudulent.”

Coverage F—Medical PaymentsThe coverage is for losses incurred by others. The covered situations are

as follows: That of a person on the insured location with the permission of an insured That of a person off the insured location if the bodily injury arises out of a

condition on the insured location One caused by the activities of an insured One caused by a residence employee in the course of employment by the

insured One caused by an animal owned by or in the care of an insured



Section II—ExclusionsThe exclusions to Section II coverage in the

homeowners policy are found in the following separate subsections:Motor vehicle liabilityWatercraft liabilityAircraft liabilityHovercraft liabilityFurther exclusions to both coverage E and coverage FExclusions to coverage E onlyExclusions to coverage F only



Section II—Additional CoveragesClaim expensesFirst-aid expensesDamage to property of othersLoss assessment


Table 13.8 - Homeowners Section II Conditions



Sections I and II—ConditionsCancellationNonrenewalAssignmentSubrogation


Endorsements

Earthquake endorsementPersonal property replacement cost endorsementScheduled personal property endorsementBusiness pursuits endorsementPersonal injury endorsementMold endorsement


Other Risks

Flood RiskFlood insurance is required by law in order to get

secured financing to buy, build, or improve structures in areas that are designated Special Flood Hazard Areas (SFHAs).

The policy covers losses that result directly from river and stream and coastal and lakeshore flooding.

Flood insurance provides coverage for structures and (if covered) personal property or contents on an actual cash value basis.


Other Risks

Two layers of coverage are available—emergency coverage and coverage at actual rather than subsidized rates.

In September 1994, Congress enacted the National Flood Insurance Reform Act to:Provide for a substantial increase in the amount of flood

insurance coverage available.Increase the waiting period from five to thirty days before a

flood insurance policy is effective.Add an optional extension for mitigation insurance to help

policyholders rebuild their substantially, repetitively damaged homes and businesses according to the floodplain management code.


Other Risks

Flood insurance can be purchased through any licensed property or casualty insurance agent or from some direct writing insurers.

Federal disaster funds are given to victims of floods for assistance in rebuilding their lives, and is usually activated when an area is declared a disaster by the president.


Other Risks

Title RiskA title defect is a claim against property that has not

been satisfied.A title insurance policy protects the home buyer

against loss caused by a defect in the title that existed at the time the policy was issued.

It does not cover defects that come into existence after the policy is issued.


Personal Umbrella Liability Policies

Umbrella policies do not provide first-dollar coverage.

They pay only after the limits of underlying coverage have been exhausted.

Buyers of umbrella coverage are required to have specified minimum amounts of underlying coverage.


Personal Umbrella Liability Policies

Exclude the following:Obligations under workers’ compensation, unemployment

compensation, disability benefits, or similar laws.Owned or rented aircraft, watercraft excluded by the

homeowners policy, business pursuits, and professional services, unless there is underlying coverage.

Property damage to any property in the care, custody, or control of the insured, or owned by the insured.

Any act committed by or at the direction of the insured with intent to cause personal injury or property damage.

Personal injury or property damage for which the insured is covered under a nuclear energy liability policy.


Shopping for Homeowners Insurance

There are three steps to shopping for homeowners coverage:Figure out what you haveFigure out what you wantCollect your quotes and information about insurers

before making your final decision


Summary

HO-3 is the most popular homeowners policy.Endorsements that supplement coverage in the

HO-3 include earthquake, personal property replacement cost, scheduled personal property, business pursuits, personal injury, and mold.

The federal government offers flood insurance, through the National Flood Insurance Program (NFIP), to flood-prone communities.


Summary

Title insurance protects a home buyer against loss caused by a title defect that existed at the time the policy was issued.

Umbrella liability policies protect against catastrophic losses by providing high limits over underlying coverage.

RISK MANAGEMENT FOR ENTERPRISES AND INDIVIDUALS Chapter 13 Multirisk Management Contracts:...

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