DWELLING & HOMEOWNERS EXPOSURES AND INSURANCE. SANDI KRUISE INSURANCE TRAINING

Transcription

1 DWELLING & HOMEOWNERS EXPOSURES AND INSURANCE SANDI KRUISE INSURANCE TRAINING

2 DWELLING & HOMEOWNERS EXPOSURES AND INSURANCE First Edition Copyright 2004 WRITTEN BY: Sandi Kruise, CPCU, CPIW PUBLISHED BY: Sandi Kruise Insurance Training P O BOX 786 BONITA, CA Copyright , All Rights Reserved. No portion of this book may be reproduced in any manner whatsoever without express written permission of the publisher Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 1

3 TABLE OF CONTENTS PERSONAL INSURANCE EXPOSURES LOSS EXPOSURES OF INDIVIDUALS AND FAMILIES PROPERTY LOSS EXPOSURES Property Exposed to Loss Real Property Personal Property Causes of Loss Affecting Property Financial Consequences of Property Losses LIABILITY LOSS EXPOSURES Law and Liability Insurance Tort Liability Negligence Intentional Torts Absolute Liability Contractual Liability Statutory Liability PERSONAL RISK MANAGEMENT BASICS OF PERSONAL RISK MANAGEMENT HOW A PERSONAL RISK MANAGEMENT PROGRAM WORKS INSURANCE AS A RISK MANAGEMENT TECHNIQUE OTHER TECHNIQUES TO TREAT LOSS EXPOSURES Avoidance Loss Control Noninsurance Transfer Retention PERSONAL INSURANCE POLICIES TYPES OF PERSONAL INSURANCE POLICIES OVERVIEW OF HOMEOWNERS POLICIES PACKAGE POLICY TWO SECTIONS SECTION I-PROPERTY Coverage A-Dwelling Coverage B-Other Structures Coverage C-Personal Property Coverage D-Loss of Use SECTION ON II-LIABILITY Coverage E-Personal Liability Coverage F-Medical Payments to Others HOMEOWNERS FORMS BASIC, BROAD AND SPECIAL DEFINED Basic Form Broad Form Special Form THE HOMEOWNER POLICY FORMS CURRENTLY AVAILABLE ARE: Basic Form (HO 1) Broad Form (HO 2) Special Form (HO 3) Contents Broad Form (HO 4) Comprehensive Form (HO 5) Condominium Unit Owners Form (HO 6) Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 2

4 Modified Coverage Form (HO 8) ELIGIBILITY Dwelling And Contents Coverage (HO 1, HO 2, HO 3, And HO 8) Contents Coverage (HO 4 and HO 6) SPECIAL ELIGIBILITY REQUIREMENTS Dwellings Under Construction Secondary and/ or Seasonal Residences INELIGIBLE FOR HOMEOWNERS POLICIES Farm Property Mobile Homes/Trailer Homes/House Trailers Incidental Businesses POLICY MODERNIZATION -- HOW THE HOMEOWNERS POLICY EVOLVED HOMEOWNERS POLICY DECLARATIONS PAGE Name And Mailing Address Of The Named Insured Policy Period Insured Location Limit For Each Coverage, A Through F Forms And Endorsements That Apply To The Policy Premium Deductible Amount Applicable To Section I Mortgagee Name And Address Countersignature Date And Agent's Signature HOMEOWNERS DEFINITIONS "You" And "Your", "We," "Us," And "Our" Insured Location Insured Bodily Injury Property Damage Business Residence Premises Occurrence Residence Employee Personal Injury Voluntary Property Damage COVERAGE AGREEMENT (INSURING AGREEMENT) SECTION I - PROPERTY COVERAGES COVERAGE A - DWELLING COVERAGE B - OTHER STRUCTURES % Of The Amount Written For Coverage A Used In Whole Or In Part For Business Rented Or Held For Rental PROPERTY WHICH IS LIMITED OR NOT COVERED COVERAGE A & B COVERAGE C - PERSONAL PROPERTY Coverage C Applies To Covered Property Worldwide The Coverage C Limit Personal Property Valuation SPECIAL LIMITS OF LIABILITY Money Or Related Property, Coins And Precious Metals Other Than Tableware Securities, Manuscripts And Other Valuable Papers Watercraft, Including Their Trailers And Equipment Trailers Not Used With Watercraft Property On The Residence Premises Used For Business Purposes Property Away From The Residence Premises Used For Business Purposes Electronic Apparatus, While In, On Or Away From A Motor Vehicle Portable Electronic Apparatus While Not In or Upon a Motor Vehicle THE NEXT THREE LIMITATIONS APPLY ONLY TO THE PERIL OF THEFT: Jewelry, Watches, Furs, And Precious And Semiprecious Stones Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 3

5 Silverware, Goldware Or Pewterware Firearms PROPERTY NOT COVERED Articles Separately Described and Specifically Insured Elsewhere Animals, Birds or Fish Motor Vehicles Or Other Motorized Land Conveyances Aircraft And Parts Property Of Roomers Or Boarders Property In An Apartment Rented Or Held For Rental To Others By An "Insured" Property Rented Or Held For Rental To Others Off The Residence Premises Business Data Credit cards or fund transfer cards COVERAGE D - LOSS OF USE Additional Living Expense Fair Rental Value Loss of Use Due to Civil Authority SECTION I ADDITIONAL COVERAGES Debris Removal Reasonable Repairs Trees, Shrubs And Other Plants Fire Department Service charge Property Removed Credit And Fund Transfer Cards, Forgery And Counterfeit Money Loss Assessment Collapse Glass Or Safety Glazing Materials Landlord s Furnishings Building Additions And Alterations Ordinance or Law (added in multistate revisions): CAUSES OF LOSS PERILS INSURED AGAINST COVERAGE C - PERSONAL PROPERTY Named Perils Fire Or Lightning Windstorm Or Hail Explosion Riot Or Civil Commotion Aircraft Vehicles Smoke Vandalism Or Malicious Mischief Theft Falling objects Weight Of Ice, Snow Or Sleet Accidental Discharge Or Overflow Of Water Or Steam Tearing Apart, Cracking, Burning Or Bulging Freezing Damage From Electrical Current Volcanic Eruption PERILS INSURED AGAINST FOR COVERAGES A AND B Special Form - All-Risk Coverage COVERAGES A AND B EXCLUSIONS Collapse Freezing of a Plumbing, Heating, Air Conditioning, or Sprinkler System, or a Household Appliance Freezing, Thawing, Pressure, or Weight of Water or Ice Theft of Construction Materials Vandalism and Malicious Mischief to Vacant Dwellings Natural Deterioration Smoke From Agricultural Smudging or Industrial Operations Pollutants Animals Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 4

6 EXCEPTION TO EXCLUDED PERILS SECTION I GENERAL EXCLUSIONS Ordinance or Law Earth Movement Water Damage Power Failure Neglect War Nuclear Hazard Intentional Loss Concurrent Causation Exclusions Weather Conditions Acts or Decisions Faulty Workmanship PROPERTY CONDITIONS SECTION I PROPERTY CONDITIONS Insurable Interest And Limit Of Liability Your Duties After Loss Give prompt notice: Notify the police: Notify the credit card or fund transfer card company: Protect the property from further damage: Prepare an inventory: Verify the loss: Sign a sworn proof of loss: Loss Settlement Actual Cash Value Coverage C and Miscellaneous Items Broad Evidence Rule Replacement Cost Coverages A and B Loss To A Pair Or Set Glass Replacement Appraisal Other Insurance Suit Against The Insurer Option To Repair Or Replace Property Loss Payment Abandonment Mortgage Clause No Benefit To Bailee Nuclear Hazard Recovered Property Volcanic Eruption Period HOMEOWNERS SECTION II: LIABILITY COVERAGES Section II Minimum Limits COVERAGE E PERSONAL LIABILITY Prejudgment Interest Defense Costs Coverage COVERAGE F MEDICAL PAYMENTS TO OTHERS Medical Expenses Include: Minimum Limit Insured Locations Persons Covered and Not Covered Residence Employees Medical Payments To Others Coverage Is No-Fault Coverage Time Limitation SECTION II ADDITIONAL COVERAGES Claim Expenses Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 5

7 Expenses We Incur Premiums on Bonds Reasonable Expenses Postjudgment Interest First-Aid Expenses Damage to Property of Others Loss Assessment Coverages SECTION II EXCLUSIONS COVERAGE E AND F EXCLUSIONS - APPLYING TO LIABILITY AND MEDICAL PAYMENTS Expected or Intended Injury or Damage Business Activity Insured's Premises Rented To Others Professional Services Locations That Are Not Insured Locations Motor Vehicles Watercraft Aircraft War And Warlike Actions Communicable Disease Sexual Molestation and Physical or Mental Abuse Controlled Substances EXCLUSIONS THAT APPLY ONLY TO COVERAGE E - PERSONAL LIABILITY Loss Assessment Liability Assumed Under Contract Damage to the Insured's Property & Property in the Insured's Care Bodily Injury to Persons Eligible for Other Benefits Nuclear Liability Bodily Injury To An Insured EXCLUSIONS THAT APPLY ONLY TO COVERAGE F - MEDICAL PAYMENTS TO OTHERS Residence Employee Off Premises Bodily Injury Covered By Compensation Law Nuclear Reaction Injury To Residents CONDITIONS SECTION II CONDITIONS Limits Of Liability Severability Of Insurance Insured's Duties After Loss Duties Of An Injured Person - Coverage F-Medical Payments To Others Suit Against Insurer Bankruptcy Of An Insured Other Insurance-Coverage E-Personal Liability SECTIONS I AND II CONDITIONS Policy Period Concealment Or Fraud Section I Concealment or Fraud Section II Concealment or Fraud Liberalization Clause Waiver Or Change Of Policy Provisions Cancellation The Insured cancels The Insurer cancels Nonrenewal Returning unearned Premium Assignment Subrogation Legal Representative of Deceased Insured COMPARISON OF COVERAGE UNDER HOMEOWNERS FORMS Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 6

8 HO 3-SPECIAL FORM (HO 00 03) COVERAGES AND AMOUNTS PERILS COVERED SPECIAL FORM (HO 3)--OPEN PERILS OTHER HOMEOWNERS FORMS PERILS COVERED COMPREHENSIVE FORM (HO 5 OR HO 3 PLUS HO 15) HO 1 BASIC FORM (HO 00 01) Eligibility And Minimum Limits Basic Form Named Perils HO 2 BROAD FORM (HO 00 02) Eligibility And Minimum Limits Perils Covered Broad Form (HO 2) PERILS COVERED TENANT BROAD FORM (HO 4) & CONDO UNIT OWNER FORM (HO 6) HO 4 CONTENTS BROAD FORM (HO 00 04) Eligibility and Minimum Limits Section I Property Coverages Section II Liability Coverages HO 6 UNIT OWNERS FORM (HO 00 06) Eligibility And Minimum Limits Unit-Owners' Coverage Needs The HO 6 Differs From The HO 3 In The Following Ways: Perils Covered Loss Settlement Other Insurance Loss Assessment HO 8 MODIFIED COVERAGE FORM (HO 00 08) Eligibility And Minimums ACV Settlement On The Dwelling The HO 8 Differs from the HO 3 in the Following Ways: HOMEOWNERS ENDORSEMENTS Additional Limits of Liability for Coverages A, B, C, and D (HO 04 11) Increased Limit on Business Property (HO 04 12) Incidental Motorized Land Conveyances (HO 24 13) Special Computer Coverage (HO 04 14) Special Personal Property Coverage (HO 00 15) Functional Replacement Cost Loss Settlement Endorsement (HO 05 30) Unit-Owners Coverage C (HO 17 31) Unit-Owners Coverage A (HO 17 32) Unit-Owners Rental to Others (HO 17 33) Loss Assessment Coverage (HO 04 35) Structures Rented to Others (HO 04 40) Additional Insured-Residence Premises Endorsement (HO 04 41) Permitted Incidental Occupancies Endorsement For Residence Premises (HO 04 42) Permitted Incidental Occupancies At An "Other Residence" (HO 24 43) Residence Premises-Three Or Four Family Dwelling (HO 04 44) Inflation Guard (HO 04 46) Guaranteed Replacement Cost (GRC) Extended Replacement Cost (ERC) Other Structures-Increased Limits (HO 04 48) Increased Limit on Personal Property in Other Residences (HO 04 50) Credit Card, Fund Transfer Card, Forgety and Counterfeit Money Coverage (HO 04 53) Earthquake (HO 04 54) Special Loss Settlement Endorsement (HO 04 56) Scheduled Personal Property Endorsement (HO 04 61) Snowmobile (HO 24 64) Coverage C Increased Special Limits Of Liability (HO 04 65) Additional Residence Rented To Others (HO 24 70) Business Pursuits (HO 24 71) Watercraft (HO 24 75) Ordinance Or Law-Increased Amount Of Coverage (HO 04 77) Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 7

9 Actual Cash Value Loss Settlement Endorsement (HO 04 81) Personal Injury (HO 24 82) Personal Property Replacement Cost (HO 04 90) Home Business Insurance Coverage Endorsement (HO 05 90) Coverage B - Off Premises (HO 04 91) Specific Structures Away From the Residence Premises (H ) Water Back Up And Sump Overflow (HO 04 95) Home Day Care Coverage (HO 04 97) Refrigerated Property Coverage (HO 04 98) MISCELLANEOUS OTHER ENDORSEMENTS State-Specific Endorsements HOMEOWNERS POLICY UNDERWRITING & RATING HOMEOWNERS COVERAGE HOMEOWNERS INSURANCE PREMIUMS How Insurance Companies Use Premium Dollars Loss Costs Expenses, Contingencies And Profit DEVELOPING A HOMEOWNERS PREMIUM Factor Rating DEVELOPING A BASE PREMIUM Territory Protection Class Construction Coverage Amount Policy Form Adjusting The Base Premium Change In Deductible AGENT S RESPONSIBILITIES DWELLING POLICIES INTRODUCTION POLICY MODERNIZATION COMPONENTS OF A DWELLING POLICY DWELLING PROPERTY COVERAGE Eligibility Permitted Incidental Occupancies Persons Insured THREE DWELLING FORMS COVERAGES OTHER COVERAGES BASIC FORM COVERAGES Coverage A--Dwelling Coverage B--Other Structures Coverage C--Personal property Coverage D--Loss Of Fair Rental Value PERILS COVERED BASIC FORM Fire, Lightning, And Internal Explosion EXTENDED COVERAGE (EC) & VANDALISM OR MALICIOUS MISCHIEF (V&MM) Riot and Civil Commotion Explosion Vehicles Smoke Aircraft Windstorm Hail Volcanic Eruption Vandalism and Malicious Mischief (V & MM) OTHER COVERAGES Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 8

10 Property Removed Other Structures Debris Removal Reasonable Cost For Repairs Tenant's improvements, alterations, and additions Fire Department Service Charges Worldwide Personal Property Coverage Rental Value Or Combined Rental Value And Additional Living Expense CONDITIONS Loss Settlement Our Option Deductible Clause Pair Or Set Loss Payment Other Insurance Recovered Property Cancellation and Nonrenewal Liberalization Clause BROAD FORM, SPECIAL FORM Coverages And Perils Insured Against Coverage E--Additional Living Expense OTHER COVERAGES Lawns, Trees, Shrubs, And Plants Collapse Of A Building Breakage Of Glass Or Safety Glazing Material REPLACEMENT COST CLAUSE PERILS COVERED BROAD FORM Explosion Vehicle Vandalism Or Malicious Mischief Damage To Covered Property Caused By Burglars, Falling Objects Weight Of Ice, Snow Or Sleet Accidental Discharge Or Overflow At The Described Location Of Water Or Steam Sudden And Accidental Tearing Apart, Cracking, Burning, Or Bulging Sudden And Accidental Damage From Artificially Generated Electrical Current, Sudden And Accidental Damage From Smoke From Fireplaces Collapse Freezing PERILS COVERED SPECIAL FORM Dwelling And Other Structures (A And B) Personal Property (C) EXCLUSIONS -- PROPERTY AND LOSSES NOT COVERED Land Other Structures Used For Business Other Structures Rented Or Held For Rental Cancellation Of A Lease Or Agreement Accounts, Bank Notes, Bills, Bullion, Coins Animals, Birds, Or Fish Aircraft And Parts Boats Credit Cards And Fund Transfer Cards Motor Vehicles Motor Vehicle Equipment And Accessories Data Power Interruption Earth Movement Water Damage Neglect War Nuclear Hazard Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 9

11 Losses Caused By The Insured Ordinance Or Law Weather Conditions Faulty, Inadequate, Or Defective Acts, Decisions, Or The Failure To Act Or Decide DWELLING ENDORSEMENTS Inflation Guard Automatic Increase in Insurance Dwelling Under Construction Condominium Unit Owners Coverage Sinkhole Collapse Ordinance Or Law Coverage The Water Back Up And Sump Overflow Theft Coverage Personal Liability And Medical Payments To Others THEFT COVERAGE BROAD THEFT COVERAGE Perils Insured Against Definitions On-Premises Coverage Off-Premises Coverage Newly Acquired Principal Residence Automatic Removal Coverage Special Limits of Liability Property Not Covered Theft Conditions LIMITED THEFT COVERAGE On-Premises Coverage Only Special Limits of Liability Property Not Covered PERSONAL LIABILITY SUPPLEMENT KEY LIABILITY DEFINITIONS PERSONAL LIABILITY COVERAGES Personal Liability Coverage L Medical Payments -- Coverage M ADDITIONAL COVERAGES Claim Expenses First Aid To Others Damage To The Property Of Others EXCLUSIONS LOSSES NOT COVERED War Or Warlike Action An Occurrence Expected Or Intended By An Insured Rendering Or Failure To Render Professional Services Any Business Engaged In By An Insured Transmission Of A Communicable Disease By An Insured Sexual Molestation, Corporal Punishment, Or Physical Or Mental Abuse Controlled Substances Rental Or Holding For Rental Not an Insured Location Excluded Vehicle, Watercraft, or Aircraft Entrustment By An Insured Of An Excluded Vehicle, Watercraft, Or Aircraft Exclusions Which Apply to Coverage L -- Personal Liability Exclusions Which Apply to Coverage M -- Medical Payments to Others Exclusions Which Apply to Damage to the Property of Others CONDITIONS Bankruptcy Other Insurance Insured's Duties in the Event of a Covered Occurrence Payment of Medical Payments Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 10

12 ALLIED LINES FLOOD INSURANCE EARTHQUAKE INSURANCE FAIR PLANS PERSONAL INLAND MARINE INSURANCE Personal Inland Marine Forms Personal Articles Form Personal Property Form Personal Effects Form MOBILE HOME COVERAGE WATERCRAFT INSURANCE FARM COVERAGES PERSONAL UMBRELLA INSURANCE Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 11

13 PERSONAL INSURANCE EXPOSURES LOSS EXPOSURES OF INDIVIDUALS AND FAMILIES A loss exposure, or simply exposure, is any condition or situation that presents the possibility of a financial loss. All individuals and families face loss exposures. How they handle those loss exposures varies according to individual preference, resources, knowledge, and often ignorance. Personal loss exposures exist when personal resources are subject to losses that might adversely affect an individual's or a family's financial condition. Personal loss exposures include property and liability loss exposures as well as "human" loss exposures such as death, illness, and disability. This text examines loss exposures that can cause property and liability losses that are often insured under Homeowner and Dwelling policies. Purchasing a home is often the single largest financial investment an individual or family ever makes. And, since the value of real estate property frequently increases over time, the owner s financial interest in the property also may increase. Along with its investment value, home ownership carries with it a potential exposure to financial loss from unpredictable events such as: A fire or windstorm damages a home, making the residence uninhabitable and forcing the family into temporary living quarters. Thieves steal the homeowner s personal property. An injured person sues the homeowner for medical expenses and for pain and suffering resulting from an injury incurred when they slip and fall on the insured s walkway Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 12

14 PROPERTY LOSS EXPOSURES A property loss exposure is any condition or situation that presents the possibility that a property loss will happen. All property loss exposures consist of three elements: The property exposed to loss The possible causes of loss The financial consequences of loss. A property loss results when property is destroyed, damaged, stolen, lost, or otherwise suffers a decrease in value because of a particular cause of loss (peril). Property Exposed to Loss Property is any item with value. Property can be divided into two basic categories: real property and personal property. Property losses can affect real property, such as houses and other structures, and personal property, such as household contents, business personal property, and mobile property such as autos and boats. Real Property Real property will probably represent the family s greatest property loss exposure. Real property consists of land as well as buildings and other structures attached to the land or embedded in it. A family might own several types of real property that give rise to property loss exposures. In addition to the home, the land on which their home is built would also be considered real property. In addition, items embedded in the land, such as underground pipes or foundations, and any separate structures on their land, such as a storage shed or detached garage. Other types of real property may also create property loss exposures. For example, ownership of vacation homes or rental properties as well as common areas of condominium property, such as land, swimming pools, and recreational areas. Personal Property Personal property consists of all tangible or intangible property that is not real property. For the purpose of identifying and insuring personal property loss exposures, personal property can be divided into the following categories: Dwelling contents such as furniture, appliances, kitchenware, groceries, clothing, sports equipment, tools, and many other items common to the use of a dwelling as a home. High-value personal property such as money, such as silverware, jewelry, furs, and firearms and property with unusual or intrinsic value such as antiques, works of art, and coin or stamp collections. Since many insurance policies limit the amount of coverage available for such items under the category of dwelling contents, they usually require an endorsement or separate policy Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 13

15 The value of these items must be established (usually by an appraisal) when insurance is purchased. Business personal property such as office furniture and computer equipment used for business purposes. Most personal insurance policies limit or exclude coverage for business personal property, so endorsements or separate insurance coverage might be necessary for these exposures. Motor vehicles, trailers, watercraft, and aircraft are typically excluded (or covered only up to a certain limit) in policies covering dwellings and their contents. There are special insurance contracts designed for these exposures. Causes of Loss Affecting Property A cause of loss (also known as a peril) is the actual means by which property is damaged or destroyed. Examples are fire, theft, collision and flood. All types of property are exposed to numerous causes of loss, many of which can be insured against, but not all. It is important to identify all possible causes of loss that property may be exposed to, not just those that can be insured. Financial Consequences of Property Losses When a loss happens to property, an individual or family suffers one or more of the following consequences: Reduction in value of property, the difference between the value of the property before the loss and after the loss. Increased expenses, in addition to normal living expenses, that are necessary because of the loss. Increased expenses would include the cost of moving to a hotel while the damaged dwelling is being repaired. Lost income that results if income-producing property, such as a rental dwelling, is damaged. LIABILITY LOSS EXPOSURES A liability loss exposure is any condition or situation that presents the possibility that a liability loss could happen. A liability loss is a claim for money damages because of injury to another party or damage to their property. As disastrous as a severe property loss might be, the potential for loss created by a liability loss exposure is even greater. In a society, such as the United States, where the legal climate encourages lawsuits, individuals and families face a severe risk to assets from the possibility of being sued or being held responsible for someone else's injury or damages. To understand liability loss exposures, consider two elements of such exposures: Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 14

16 The possibility of a claim for money damages A liability loss exposure involves the possibility that one party, claiming injury or damage, will bring a claim for money damages against another party allegedly at fault for the injury or damage to another s property, resulting in potentially large financial consequences. The financial consequences that might occur from a liability loss The financial consequences of liability claims can include costs of investigation and defense, as well as money damages if the defense is not successful or if the claim is settled out of court. Many liability claims are settled before they reach court. In cases settled out of court, parties to the claim negotiate the amount paid in damages, and the costs of investigation and defense are usually reduced. Since settling out of court is usually less expensive than going through a potentially long trial, insurance companies often try to reach out-of-court settlements. When a court orders an individual to pay liability damages, the amount of the damages is based on the loss the injured party suffers. The court is not concerned with the financial resources of the party at fault or with their ability to pay the damages. As a result, all of an individual's or family's savings and property are exposed to loss. When a liability claim occurs, all of an individual's current assets, plus his or her future income and assets, may be required to pay for liability damages. Law and Liability Insurance Law can be divided into two broad categories: Criminal law deals with crimes against society such as murder, rape, and theft; involves the violation of local, state or federal laws; and/or conduct that endangers the public welfare. Criminal acts are almost never covered by insurance. Civil law deals with the rights and duties of citizens, including actions between two or more individuals, which do not necessarily involve violation of criminal laws. The liability portion of the Homeowners policy is concerned with civil law. Several types of claims fall under civil law, but the most common involve tort liability, contractual liability, and statutory liability. Tort Liability A tort is a wrongful act, other than crime or breach of contract, committed by one party against another. When injury or damage results from a tort, the injured party has the right under civil law to seek payment from the wrongdoer. A person might face a claim for tort liability on the basis of negligence, intentional torts, or absolute liability. Negligence In liability insurance, the most common type of tort involves negligence. Negligence is acting differently from the way a reasonably prudent person would act under similar circumstances. An individual is negligent when he or she fails to exercise the appropriate degree of care under given circumstances. In order to avoid legal liability, homeowners must exercise a high degree of care to protect others from harm Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 15

17 Injured persons must prove that another party was negligent before they can collect damages. In order to prove negligence, an injured party must prove that all four legal elements of negligence have occurred. 1. A Legal Duty Owed to Another Person. For example a homeowner with a swimming pool on their property has a duty to protect others, especially children, from injury due to that pool. 2. A Breach of That Duty. A homeowner with a swimming pool neglects to lock the gate leading to the pool area. 3. Actual Damages Resulting From The Breach. A child enters the property through the unlocked gate, falls into the pool and is injured. 4. The Breach of Duty Must Be the Proximate Cause of the Damages Suffered. The child s medical expenses and pain and suffering are a direct result of the homeowner neglecting to lock the gate to the pool area. Intentional Torts An intentional tort is a deliberate act that causes harm to another person, such as libel or slander. Regardless of whether the harm itself is intended, the intentional act can create liability. For instance calling a neighbor a thief and a liar during a heated argument at a homeowners association meeting causing their reputation to suffer. Absolute Liability Absolute liability involves the right of recovery in cases where inherently dangerous activities result in injury or harm to another. Absolute liability does not involve proof of negligence. For example, a person who keeps a dangerous animal as a pet will be held liable if that animal bites a neighbor, regardless of how carefully the owner confines it. Contractual Liability Contractual liability is liability assumed from another when an individual enters into a contract or agreement. For example leases for homes and apartments, as well as rental agreements for autos, power tools, and other equipment, typically contain provisions that transfer the financial consequences of liability losses from one party to another. Statutory Liability Statutory liability is liability imposed because of the passage of a statute or law. These laws vary by state, homeowners, and as well as insurance agents, should know the laws that apply in the state or states in which they live and work. Tort Reform The tort liability system, based on fault, is the traditional and most commonly used method in the United States of seeking compensation for injured persons. Critics have attacked the tort liability system in recent years, arguing that this system is unfair and has many defects. Many believe that the United States needs a new system for compensating injured persons. Tort reform is the gradual process of proposing, debating, and passing legislation that reduces legal costs or settlement awards resulting from negligence lawsuits. An example of tort-reform that has been implemented in several states is no-fault auto insurance Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 16

18 PERSONAL RISK MANAGEMENT Risk management is the process of making and carrying out decisions that will decrease the adverse effects of potential losses. Personal risk management is applying the risk management process to the exposures of individuals or families. Risk management helps people identify loss exposures and decide how to protect against potential losses before they happen. Those who engage in risk management can minimize worry and ease the harmful effects of losses that do occur. BASICS OF PERSONAL RISK MANAGEMENT Personal risk management is often unplanned and unintentional. The typical individual or family does not pay much attention to risk management. They are likely to consider insurance as the only way to handle their loss exposures and to expect insurance to take care of all their exposures for them. They are not likely to identify all their loss exposures, study alternatives or select and implement other techniques. They are even less likely to monitor and revise their decisions. Some customers expect their insurance agent or an insurance company representative to serve as their risk manager. Although trained insurance personnel can help clients identify their loss exposures and suggest appropriate insurance coverages, customers, not insurance companies, should select the desired coverage forms and endorsements. Insurance professionals should offer customers several coverage options and then let them choose the ones they want and can afford. Insurance personnel should not select coverages for the customer, or they might become involved in errors and omissions (E&O) claims. Customers who think an insurance professional gave them misleading or incorrect advice might bring an E&O claim against the insurance agency or company they believe to be responsible. Errors and omissions (also known as E&O) are negligent acts (errors) committed by a person in the conduct of the insurance business that give rise to legal liability for damages. E&O claims can also arise from a failure to act (omission) that creates legal liability. Agents can, and should, purchase professional liability insurance to protect themselves from the consequences of these claims. In spite of the increase in liability, there are many advantages to the producer who advocates a good risk management program in his or her sales approach: It necessitates account selling and leads to larger premiums The account becomes less vulnerable to takeover by a competitor because the producer handles all of a family's insurance coverages Account retention is increased The producer has the satisfaction of knowing that the client is being well served Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 17

19 HOW A PERSONAL RISK MANAGEMENT PROGRAM WORKS Personal risk management can minimize worry and ease the harmful effects of a loss. management involves the following steps: Risk Identifying and analyzing loss exposures Examining alternative risk management techniques Choosing the appropriate techniques Implementing the chosen techniques Monitoring and revising the plan Good risk management means addressing all exposures. Before risks can be managed, a client must to identify and analyze their loss exposures. The use of a risk management tool such as a questionnaire or checklist can help to generate the information needed to recommend the coverages that the producer believes will best protect the insured. It can also document the discussion between the agent and the insured that may be of assistance in defense of an E&O claim in the future. One of the best ways for clients to identify property loss exposures is to make a complete home inventory, listing all of their possessions, when they were acquired and the price. They can also take pictures or videotapes of every room in their home. Many insurance companies and agents offer inventory forms to help in this process. The completed inventory should be kept off the residence premises so it is not destroyed if a loss to the premises occurs. The client should also list and evaluate their personal activities that could cause liability claims. INSURANCE AS A RISK MANAGEMENT TECHNIQUE Personal insurance can protect against many typical loss exposures the average person or family faces. It can be an excellent risk management technique for individuals and families, as long as they understand that insurance will not cover all their loss exposures and that they must use other techniques as well. Unfortunately, many individuals think insurance is the only technique available to handle loss exposures, and they do not explore other possibilities. Many also think that insurance should cover all losses, no matter what the cause or the circumstances. In reality, insurance covers only certain losses, and other risk management techniques are appropriate for treating many loss exposures. OTHER TECHNIQUES TO TREAT LOSS EXPOSURES Although insurance is a very effective risk management technique, an individual or family should also consider using one or more of the following additional risk management techniques, either as an alternative to, or in combination with, insurance: Avoidance Loss control Noninsurance transfer Retention Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 18

20 Avoidance One way of handling loss exposures is avoidance. Avoidance involves the decision to ward off certain loss exposures by not participating in an activity or by not purchasing an object that might result in losses. If a homeowner is successful in avoiding an exposure, neither insurance nor any of the other risk management techniques will be necessary. For example, since the homeowner s policy does not cover flood damage to either their home or its contents, a homeowner could avoid exposure to flood losses purchasing a house in an area that is not subject to flooding. That way they would not need insurance or any other flood control measures. Unfortunately, avoidance isn t possible or practical for most everyday exposures. For example, not owning a home avoids some risks but the client may assume additional risks as a renter. Since most losses cannot be avoided, homeowners will need to employ one or more of the following techniques: Loss Control Loss control means taking measures to reduce the frequency or severity of losses. Loss control is one of the most important and often overlooked personal risk management techniques. Controlling loss exposures involves both loss prevention and loss reduction. Loss prevention measures seek to control the frequency of losses (how often losses occur). Loss prevention measures, such as installing deadbolt locks, help to control loss frequency but do little, if anything, to reduce the cost of losses that do occur Loss reduction measures, such as limiting the amount of cash kept in a home, help to reduce loss severity (the amount of damage caused by losses). Loss reduction cannot prevent losses, but it can help to reduce the dollar amount of losses that occur. Noninsurance Transfer A noninsurance transfer is the act of transferring loss exposures from one party to another party that is not an insurance company. By use of a contract, such as a lease, individuals can transfer the potential consequences of a loss exposure to another party by contract. For example, homeowners can transfer property and/or liability exposures to the tenants in the lease. The tenants might then purchase property and liability insurance on the house to transfer this exposure to the insurance company Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 19

21 Retention Retention is a risk management technique that involves using the financial resources of an individual or family to pay for the consequences of a loss. Retention can be intentional or unintentional. By intentionally choosing higher deductibles on their homeowners and auto policies, the insured could save substantial premium dollars. However, they must be prepared to pay the greater deductible amount for each loss that occurs. Unintentional retention occurs when insureds do not purchase coverage for a particular exposure, either because they do not know that their policies exclude these perils or because they do not know that specific insurance is available to cover them. If individuals or families do not transfer their loss exposures to an insurance company or to someone else, they retain their losses and must pay for such losses with their own resources. If the agent has not explained the exclusions and limitations clearly, or has not offered optional coverages or endorsements, the insured may pursue an E & O claim against the agent after finding out that his or her loss Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 20

22 PERSONAL INSURANCE POLICIES An insurance policy is a written agreement between two "parties." One party is the insured, and the other party is the insurer (the insurance company). An insurance policy is also a legally binding contract. As with all contracts, an insurance policy describes the rights and obligations of each party. In addition, the policy identifies how much the insured must pay to receive those rights (the premium), and how much the insurance company is obligated to pay if certain events occur (the limits of insurance.) Personal insurance is a subject that affects all of us, both in our professional and in our personal lives. Personal insurance consists of the insurance coverages designed to transfer the financial consequences of personal losses from individuals and families to an insurer. Without insurance, most of us could not buy our homes, finance our cars, pay our hospital and medical bills, or prepare for financial emergencies. Although all individuals and families are different, most people have similar coverage needs for their property, their personal possessions, and their exposure to potential liability losses. In order to keep the cost of personal insurance reasonable, personal insurance policies are designed to cover the loss exposures of the average person or family. If personal policies included unlimited coverage on all categories of property, insurance premiums would be higher than most people could afford or would be willing to pay. It is fair for those persons who own valuable or unusual items to pay an additional premium to insure them. TYPES OF PERSONAL INSURANCE POLICIES This course examines two of the many policies used to insure loss exposures for individuals and families: the Homeowners policy (HO) and the Dwelling policy (DP). Some of the other policies that provide important protection for individuals and families, include: Personal Automobile policy Mobilehome insurance Farm insurance Flood insurance Inland marine insurance Watercraft insurance Umbrella policies Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 21

23 OVERVIEW OF HOMEOWNERS POLICIES The homeowner s policy is a versatile insurance contract that provides a broad set of coverages designed to meet the property and liability needs of many individuals and families. The homeowner s policy is a useful tool for insuring real property and personal property owned by individuals and families as well as their personal liability exposures. Homeowner s policies provide coverage that is broad in scope, easy to modify, flexible and relatively inexpensive. PACKAGE POLICY The homeowner s policy includes coverages for a home, its contents, and the occupant s liability. It provides the most appropriate coverage for many individuals and families by including a broad range of coverages that can be modified to meet policyholders' specific needs. Traditionally, homeowners obtained coverages by buying several different policies (property, theft and liability). Contemporary Homeowners policies are multi-line, or package policies, which mean property and casualty coverage are combined in the same policy. It usually results in better protection, fewer insurance gaps or overlaps and lower premiums than if the coverages were purchased separately. Another reason homeowners insurance is considered a package policy is that the insured person must purchase all coverages the insurance company has packaged together. No individual Coverage may be eliminated. TWO SECTIONS A homeowner s policy includes two major coverage sections, Section I Property and Section II -- Liability. A policy form carefully describes: Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 22

24 SECTION I Property Coverages The property covered The perils insured against The perils excluded The insured s responsibilities under the policy The insurer s responsibilities under the policy SECTION II Liability Coverages The potential liability situations covered and excluded The additional related expenses that are covered The insured s responsibilities under the policy The insurer s responsibilities under the policy The responsibilities of injured persons Conditions applicable to both property and liability coverages. SECTION I-PROPERTY Section I specifies the property covered, the perils for which property is covered, and the exclusions and conditions that apply to property coverages. The policy begins with segments that establish the policy insuring agreement and the definitions for words used. Coverage A-Dwelling Provides coverage on the structure of the home, and any attachments (such as an attached garage), for an indicated amount of insurance. Coverage is usually provided on a replacement cost basis (not included in HO 4). Coverage B-Other Structures Provides coverage on a garage or other appurtenant private structures not attached to or part of the home (not included in HO 4 or HO 6). Coverage C-Personal Property Covers the homeowner's personal property (also referred to as Contents) both on and off the premises. Coverage D-Loss of Use Provides additional living expense coverage if the home is damaged as well as loss of rental value under certain circumstances Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 23

25 SECTION ON II-LIABILITY Section II-Liability Coverages, provides similar information regarding liability coverages, exclusions, and conditions. Coverage E-Personal Liability Provides coverage for bodily injury and/or property damage for which the insured is legally liable, including defense costs. Coverage F-Medical Payments to Others Covers reimbursement of reasonable medical expenses for injuries sustained by a third party as a result of the insured's activities, whether or not the insured is legally liable. HOMEOWNERS FORMS A necessary part of a Homeowners Policy is a preprinted policy form developed and issued by the insurer. There are six different Homeowners forms to vary the extent of coverage, each of which provides various levels of coverage but some forms are not available in all states. The forms differ in regard to property Coverages (Section I) only, not liability coverage (Section II), which is identical in all 1991 Homeowners forms. These differences will be reviewed in detail in a later section of this text. The homeowner s policy includes a core of mandatory coverages designed to fit a typical family's fundamental needs. Each policy form is designed to serve different insurance needs. Property insurance for the residence and its contents is provided by HO 1, HO 2 and HO 3, HO 5 (HO 3 plus HO 15) and HO 8. HO 4 and HO 6 do not provide any major forms of property insurance for the residence. All forms provide liability insurance and require minimum amounts of coverage. Although Homeowners Policies are standardized and preprinted, they must be flexible enough to meet a variety of needs. In addition to the different HO forms, dozens of endorsements are available for optional modifications of the coverage included in the HO forms. The endorsements offer a significant degree of flexibility, thereby tailoring a policy to most individual needs. BASIC, BROAD AND SPECIAL DEFINED The terms basic, broad and special as used in these forms have very specific meanings in regard to the particular perils that are covered in the property Coverage section of the Homeowners Policy. The Basic, Broad and Special forms represent increasing degrees of coverage for the property portion of the Homeowners Policy. The liability portion is identical in all forms. Basic Form Insures against 10 perils specifically listed in the policy. Provides the minimum coverage available. Broad Form Insures against the 10 perils of the Basic form plus 6 additional perils for a total of 16. Provides more extensive coverage than the Basic form under all the described perils Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 24

26 Special Form Insures the insured s dwelling, against all perils not specifically excluded rather than listing perils. For the insured s personal property, it lists the perils of the Broad form. Provides the most extensive Coverage of all three forms. THE HOMEOWNER POLICY FORMS CURRENTLY AVAILABLE ARE: Basic Form (HO 1) The Basic Form (HO 1) provides coverage on both the dwelling and personal property against fire, lightning, Extended Coverage perils, and V&MM. In addition, it insures against breakage of glass and theft. In many areas, the HO 1 is no longer available. Broad Form (HO 2) The Broad Form (HO 2) provides "named perils" coverage on the insured dwelling, other structures, and personal property. It covers all of the HO 1 perils, but broadens certain perils and covers additional perils as well. This broad coverage applies to both the dwelling and personal property. Special Form (HO 3) The Special Form (HO 3) covers personal property for the same set of named perils as the Broad Form, but provides All Risk coverage on the dwelling and other structures. This open perils coverage for loss to the dwelling provides coverage for any peril that is not specifically excluded. Contents Broad Form (HO 4) The Tenants form (HO 4) insures tenants people who do not own the building where they reside. It provides broad form coverage for personal property only and no coverage at all for the dwelling. Comprehensive Form (HO 5) The Comprehensive Form (HO 5) provides Special ("all risk") coverage for both the residence and its contents. The form is available from a limited number of insurers, but the identical coverage is available by attaching a Special Personal Property Coverage endorsement (HO 15) to the HO 3 form. Condominium Unit Owners Form (HO 6) The Condominium Form (HO 6) provides Broad coverage on the personal property of condominium residents, similar to that provided under the HO 4. It provides very limited coverage for the condominium building since the building is usually insured by the condominium association. Modified Coverage Form (HO 8) The Modified Homeowners Form (HO 8) is designed for older homes with replacement values that may far exceed their market values not meeting HO standards. It provides similar coverage to the HO 1. However, certain restrictions on coverage and settlement of losses have been added to this form Sandi Kruise Insurance Training, Sandi Kruise Inc, All rights reserved. 25