BASICS OF HOMEOWNERS INSURANCE

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2 BASICS OF HOMEOWNERS INSURANCE Researched and written by Irina Kerr

3 BASICS OF HOMEOWNERS INSURANCE Copyright 2010 by CyberCE, Inc dba WCS Publishing ISO Forms Copyright Insurance Services Office, Inc. Used by permission. Cover Images 2002 by Holland Carney All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any storage and retrieval system, without the written permission of CyberCE dba WCS Publishing, except where permitted by law. CyberCE, Inc dba WCS Publishing P.O. Box 1876 Bullhead City, AZ This book is produced in the United States of America.

4 Preface Homeowners insurance is a part of Property & Casualty insurance. A home is one of the biggest assets a person owns. That is why it is so important to protect a house and its contents against catastrophic loss. This course deals with various aspects of Homeowners and Dwelling policies. You will learn various types of coverages, types of dwelling and homeowners policies, details on discounts and deductibles typical for these types of policies. The text will provide you with a detailed knowledge of various aspects of ISO standard forms of Dwelling Policy 3 Special Form and Homeowners 3 Special Form, since these two policies provide the broadest coverage and are widely used in practice. You are not supposed to memorize all the details of the policy. The object of the book is to help you understand the provisions of the policy in several main aspects, namely the house itself, other structures on the property, personal property, loss of use, miscellaneous coverage, liability coverage and optional coverage available on the market. I hope that various situations and quizzes will help you understand the main provisions of policies, exclusions and conditions. The text also introduces you to earthquake and flood insurance specifics. It also has material on various endorsements that can be added to a standard insurance homeowners or dwelling policy to extend coverage or to custom-tailor coverage for specific needs. In addition, we will cover material on small business and home business insurance, extended insurance coverage that can be added to a policy or purchased as a separate policy, like floaters, endorsements, umbrella policies, general liability policies, etc.

5 INDEX Introduction CHAPTER I 1 GENERAL ASPECTS OF DWELLING AND HOMEOWNERS INSURANCE Overview The House Personal property Liability coverage Types of Homeowners Policies Types of Coverage Endorsements Homeowners Insurance Discounts Deductibles Exclusions Summary Quiz Answers CHAPTER 2 BASICS OF POLICY PROVISIONS Declaration page Definitions Property Coverage Perils Insured Against Coverage B Other Structures Coverage C Personal Property Special Limits of Liability Property Not Covered Coverage D Loss of Use Additional Coverages Debris Removal Reasonable repairs Loss Assessment Collapse Glass or Safety Glazing Material Landlord s Furnishings Summary Quiz Answers CHAPTER 3 DWELLING INSURANCE POLICIES Eligibility Coverage A Coverage B Coverage C Coverage D

6 Coverage E Multiple Locations Coverage A Dwelling Coverage B Other Structures Coverage C Personal Property Coverage D Fair Rental Value Coverage E Additional Living Expense Other Coverages World-Wide Coverage Reasonable repairs Property Removed Trees, Shrubs and Other Plants Fire Department Service Charge Collapse Glass or Safety Glazing Material Summary Quiz Answers CHAPTER 4 DWELLING POLICY SPECIAL FORM PERILS INSURED AGAINST, GENERAL EXCLUSIONS, CONDITIONS Coverage C Personal Property Perils General Exclusions Conditions Summary Quiz Answers CHAPTER 5 HOMEOWNERS-3 SPECIAL FORM PERILS INSURED AGAINST, GENERAL EXCLUSIONS, CONDITIONS Overview Coverage A Dwelling and Coverage B Other Structures Coverage C Personal property Perils Exclusions Conditions Summary Quiz Answers CHAPTER 6 HOMEOWNERS-3 SPECIAL FORM SECTION I CONDITIONS Insurable Interest and Limit of Liability Duties of the Insured After Loss Inventory Actual Cash Value vs. replacement Cost Loss Settlement

7 Appraisal Other Insurance No Benefit to Bailee Nuclear Hazard Clause Recovered Property Summary Quiz Answers CHAPTER 7 HOMEOWNERS-3 SPECIAL FORM LIABILITY COVERAGES Coverage E Personal Liability Coverage F Medical Payments to Others Exclusions Coverage E Personal Liability Coverage F Medical Payments to Others Section II Additional Coverages Claim Expenses First Aid Expenses Damage to property of Others Loss Assessment Section II Conditions Limit of Liability Severability of Insurance Duties After Loss Duties of an Injured Person Coverage F Medical Payments to Others Payment of Claim Coverage F Medical Payments to Others Sections I and II Conditions Policy Period Liberalization Clause Waiver or Change of Policy Provisions Cancellation Nonrenewal Assignment Subrogation Death CHAPTER 8 INSURANCE FOR RENTERS AND OWNERS OF APARTMENTS, COOPERATIVE APARTMENTS OR CONDOMINIUMS Overview Renters insurance Homeowners 6 Mobile Home Insurance Costs of avoiding an insured peril Summary CHAPTER 9 NEW HOMEOWNERS 2000 FORM Overview

8 Changes Introduced in ISO Homeowners 2000 Insurance Program Section I Property Coverages Coverage C Personal Property Special Limits of Liability Section I Additional Coverages Section I Perils Insured Against Section I Conditions Section II Liability Exclusions Section II Additional Coverages Section II Liability Exclusions Other Changes Summary CHAPTER 10 RATING, GRADING AND EARTHQUAKES Territory or Location Type of Construction Earthquake Insurance Supplemental Coverage Options Premium calculation Coverage for the House Summary CHAPTER 11 FLOOD INSURANCE Overview General Rules for Flood Insurance Policy Policies and Products Available Building Property Eligibility Eligible Risks for Building Coverage Ineligible Property Examples of Ineligible Risks Policy Effective Date Coverage Miscellaneous Rules Exclusions Loss Settlement Summary of Significant Changes in the Dwelling Form Summary CHAPTER 12 BUSINESS INSURANCE Overview Risk Management for Small Business General Aspects Insurance coverage for different businesses Business property Actual Cash Value Replacement Coverage Agreed Amount

9 Alternative Risk Funding insurance Perils insured against Liability coverage Business Property Coverage Liability Coverage for Small Business General Liability Protection Bodily Injury Personal Injury Property damage Advertising Injury Medical Payments Druggists Professional Liability Coverage Printers Professional Liability Coverage Summary CHAPTER 13 HOME BUSINESS INSURANCE Homeowners Insurance Endorsements Business Owners Policy (BOP) Computer Coverage Summary CHAPTER 14 EXTENDED COVERAGE Coverage C Increased Special Limits of Liability Scheduled Personal Property Endorsement(floaters) Endorsements Umbrella policies General Liability policy Workers Compensation GLOSSARY ISO FORMS

10 1 INTRODUCTION Property/casualty insurance is insurance on homes, cars, and businesses. Technically, property insurance protects a person or business with an interest in physical property against its loss or the loss of its income-producing abilities. Casualty insurance mainly protects a person or business against legal liability for losses caused by injury to other people or damage to the property of others. Homeowners and Dwelling Property insurance is a part of Property/Casualty insurance. Homeowners insurance, like auto insurance, is really a package of coverages. It does not only protect the house; it also covers for the loss of personal possessions and belongings anywhere in the world. It also covers legal liability in case someone should sue the insured for some accident that occurred on his/her property. A home is probably the biggest asset a person owns, and anyone will want to insure it against a catastrophic loss. Fire is the most common calamity that homeowners insurance covers. It also covers personal possessions in the home. The insured pays for the package with one premium. Homeowners policies cover the liability of all members of the family, as well as pets. Two perils are not covered under any homeowners policy: Earthquake Flood damage The Federal government provides special policies for individuals to protect their homes in the event of those calamities. This course will help you to learn all the details of dwelling and homeowners insurance. It is not necessary to memorize all the details. The main objective is to understand the policy and the eligibility requirements, to know the terms and conditions of these policies and to understand the policy coverages, so that you are able to apply them and to explain to your customers the advantages of each package.

11 2 CHAPTER 1 GENERAL ASPECTS OF DWELLING AND HOMEOWNERS INSURANCE Overview Property can be insured with a dwelling policy. There are three major dwelling policies commonly known as DP-1, DP-2, and DP-3. The major problem with such types of policies is that none of them provide liability coverage or any theft coverage, as homeowners insurance does. If a person is doing some construction work and a post falls and damages a neighbor s house, no coverage is provided for the damage, though the person is legally liable for it. To be protected against such accidents a dwelling policy owner will have to purchase supplemental liability coverage. To be protected against losses related to theft, a special endorsement must be added to a dwelling policy, for which additional premium will be charged. You wonder who would need a dwelling policy at all? One of the major reasons for purchasing a dwelling policy is for the house, which a person owns but does not occupy. Another reason is that a person may not qualify for homeowners insurance. This book will go into more detail about dwelling policies later. Homeowners insurance provides three major benefits: Protects the home Protects personal property Provides liability coverage The house The main purpose of homeowners insurance is to protect the home and other structures, like a shed or a garage. The house is often the most important investment a person will ever make, and even a relatively small amount of damage may set a homeowner back financially if he/she doesn t have insurance. Personal property In addition to protecting the home, the typical homeowners policy covers personal property as well. Personal property consists of the contents inside the home. For example furniture, clothing, stereo, computer, equipment, jewelry, and some other items as sporting equipment, garden tools, appliances, etc. An important aspect of homeowners insurance is that coverage is not limited to property damaged on the premises, but applies to personal property anywhere in the world. This aspect of homeowners insurance is known as off-premise protection.

12 3 Liability coverage Besides insuring the property, the typical homeowners policy includes liability protection Liability protection provides coverage for the damage caused inside or outside of the house. Unlike the random perils that govern the property (for example, explosion, theft), the trigger for this coverage is homeowners negligence, which includes medical payments to third parties, and homeowners legal costs for any lawsuits brought against him/her. The importance of this coverage may not be as obvious as that of property coverage. However, it protects homeowners against potential personal injury lawsuits. If a person comes over to the house for a cup of coffee and breaks his/her leg on the property, the insurance will cover his/her medical bills and other costs, if any, if the homeowner is held responsible. Types of Homeowners Policies Homeowners insurance is substantially standardized throughout the United States. There are several basic types of policies. They are labeled HO for homeowners, with a number. The number designates different policy packages. Available policies are classified according to the risks that are covered. HO 1 provides basic coverage. It is also known as Homeowners 1. It is one of the cheapest homeowners policies and mainly covers the following: Fire, lightning and smoke damage Windstorm and hail Burglary and theft Explosion Glass breakage Vehicle or aircraft damage Riot and civil commotion Vandalism and malicious mischief Bodily injury liability Damage to property of others Cost of legal defense in liability cases Medical payments Personal property located at home Personal property away from home, while traveling Additional living expenses HO 2 is also called the broad form policy. It adds several additional coverages not available under HO 1. The premiums for this policy are also higher. The following additional risks are covered under this policy:

13 4 Falling objects Damage from weight of ice or snow Water damage from the house s plumbing system Freezing of the plumbing system Electrical damage to appliances Rupture of water heaters and heating systems HO 3 is considered the most popular form of homeowners insurance. It is known as the Special Form policy or Homeowners 3 Special Form. This policy covers for all risks of physical loss except those specifically excluded. Here are some of examples of exclusions: Normal wear and tear Mechanical breakdown Vandalism, if the home has been unoccupied for more than 30 days Continuous water seepage over a specified time period One of the main differences between HO 2 and HO 3 is that the coverage for personal possessions is not as extensive as the coverage for the home. Under HO 3 contents coverage is only for the perils named in HO 2. HO 4 is a special policy for people who rent or for owners of cooperative apartments. It is also known as Contents Broad Form. This policy will be discussed later in detail. HO 5 is considered the most expensive homeowners policy. It is also known as the Comprehensive Form policy. It is also called an All Risks policy. HO 5 covers both the dwelling and the personal possessions from anything and everything except for the risks specifically excluded. Those exclusions are typically: Flood Earthquake War Nuclear accident HO 6 is a policy for owners of condominium apartments, and is also known as Unit-Owners Form. There is no HO 7 policy. HO 8 is a special policy and is designed for owners of older structures that cannot be replaced today. It is also known as Modified Coverage Form.

14 5 (Source: Insurance. What do you need? How much is enough? David W. Kennedy, pp ) Types of Coverage While policies vary by company and from state to state, the homeowners policy is essentially a combination of mandatory and optional coverages combined in a single package. Each policy can be tailored to meet the insured s specific and individual needs. There are several basic areas that are protected in the property section of a homeowners policy: The house itself Other structures on the property (such as a garage and/or a tool shed) Personal property Loss of use Miscellaneous coverages There are also some other main areas of exposure that are covered by homeowners policies: Liability for which the insured may be found responsible in most situations in all parts of the world Living expenses if the home is rendered uninhabitable due to fire or other covered peril. We will discuss each of these areas and their coverages later in the course. In most states a homeowner policy will be made up of the following coverages. Each of the coverages is distinguished by what it protects: Coverage A covers the house Coverage B covers other structures (detached garages, sheds, etc.) Coverage C covers personal property, including the possessions Coverage D covers loss of use (in case the insured cannot temporarily live in his/her home because of covered damaged) Coverage E covers personal liability or damages that result from injury or damage to others Coverage F covers medical payments to others injured on the insured s property

15 6 Policy types, limits and requirements vary by state and by company. That is why the following information should be considered general and not specific to any particular state or insurance company. The information given below is brief, as later we will go into all the detail on types of coverage. Coverage A is the key property coverage as it covers the single most valuable piece of property the house itself. The coverage A amount should equal what it would cost to rebuild the house if it were completely destroyed. Coverage A provides protection to the home if it is damaged by fire, wind, hail, falling objects, etc. Coverage B covers other structures. For some homeowners it is an important part of coverage, though some might not need it. Coverage B provides protection to structures on the property, which are not attached to the home, as for example a detached garage, a tool shed, fences and in-ground pools. Coverage C covers personal property. In addition to the home, this homeowners policy also covers personal property, meaning articles the insured owns other than land and buildings. Personal property consists of the contents of the insured s house. It provides protection for the insured s personal possessions, such as clothing, furniture or children s toys in the event they are damaged by a covered peril, such as fire. Even the smallest residence contains property worth thousands of dollars, as for example, home computer, entertainment or sound system, or jewelry. There are standard limitations and exclusions, and there may be need to arrange for extra coverage. Homeowners policies cover personal property to some extent, as there are set specific dollar limits for particular categories of personal property in a section entitled Special Limits of Liability. For some categories the policy specifies a limit only for theft, not for destruction. Generally, the limit of personal property coverage is 50 percent of the dwelling coverage amount. Later in this course we ll discuss all exclusions and limitations for personal property coverage. Coverage D covers loss of use. It provides protection in the event that the insured cannot live in his/her house due to certain damages. These damages are listed in the policy. This coverage provides additional living expenses to compensate the insured for the extra costs associated with temporarily not being able to live in the house. Coverage E covers personal liability and provides protection for accidental bodily injury or property damage to others for which the insured is legally liable. A visitor can slip and break bones on the front steps, or the insured s dog might bite someone, a child may break a neighbor s window. These are just a few

16 7 examples of the situations that may happen and the homeowner will be legally liable. In the event the insured sustains a covered loss and is sued, this coverage will also provide for the cost of his/her legal defense. Coverage F covers medical payments to others and provides coverage for medical costs incurred by others injured while on the insured s property or through his/her personal activities. Endorsements Besides all the above-mentioned coverages, an endorsement may be added to the standard policy for additional premium payment. An endorsement is an additional coverage for specified circumstances. It is a form attached to the policy that changes the terms of the policy to fit special circumstances the insured obtains coverage for. One of the most common examples of endorsement is the second home endorsement. If the insured owns a second home, he/she can cover it by adding it on the existing homeowners policy, as it is not necessary to purchase a new policy. Another example of endorsement is the increased cost of construction endorsement. If a person owns an older home, and the town requires all new construction to be built with fireproof materials, this type of endorsement would pay for the replacement of the present house, if it is totally destroyed, and provides enough finance to build a new fireproof house. There is also a personal computer endorsement, which may be cheaper than insuring the computer under a separate policy. This book will discuss endorsements in more detail later. If a homeowner needs additional coverage for some special possessions like jewelry, furs, watches, currency, etc. he/she can purchase a Scheduled Personal Property endorsement or a personal articles floater. Personal articles floater is an agreement between the insured and the insurance company on a value and the premium related to that value. The name floater explains what that type of insurance does. It actually floats with the property wherever this property goes, and the coverage follows the item insured. The value of the item covered should be appraised by a recognized expert in the field or by forwarding a copy of the sales slip from the purchase of the item. If the item is inherited or there is no sales slip, the insurance company may demand an appraisal. One may have to purchase a separate floater for each item that is to be insured. Discounts are usually available for floaters.

17 8 Homeowners Insurance Discounts Discounts are usually provided in the following cases: If the house is 1-10 years old If it is a multi-line insurance (the insured has more than one insurance policy with same company) If the house has smoke alarms on all floors Dead bolt locks on all doors Burglar alarm that reports to central service Fire alarm that reports to central service If a homeowner is a senior citizen or retired If the building under the homeowners insurance policy is made of fire resistive construction, such as block or masonry If residents do not smoke If residents do not drink Deductibles A deductible is the amount of money the insured must pay up front for a loss before the insurance company will pay for anything. The typical deductible for a homeowners policy starts at $250. One may save on homeowners policy if a deductible is increased. Insurance.com gives the following chart to show how money can be saved by increasing a deductible: Deductible $500 $1,000 $2,500 $5,000 Savings on homeowners policy Up to 12% Up to 24% Up to 30% Up to 37%

18 9 Exclusions Homeowners insurance policies not only state what perils are covered; they also list which perils are excluded from coverage. Most typical exclusions are the following: Enforcement of building codes and similar laws Earthquakes Flooding Power failures Neglect (failure to take reasonable steps to protect the property) War Nuclear hazard Intentional acts As it has been stated earlier flood insurance and earthquake insurance are available as separate policies. Additional exclusions open perils In addition to the above mentioned exclusions, the following perils may be also excluded from coverage: Freezing pipes and systems in vacant dwellings Damage to foundations or pavements from ice and water weight Theft from a dwelling under construction Vandalism to vacant dwellings Latent defects, corrosion, industrial smoke, pollution Settling, wear, and tear Pets, other animals, and pests Weather conditions that aggravate other excluded causes of loss Government and association actions Defective construction, design, and maintenance In further chapters we will deal with exclusions in more detail and explain what is understood under these terms.

19 10 SUMMARY Homeowners and Dwelling Property insurance is a part of Property/Casualty insurance. Homeowners insurance is really a package of coverages. Property can be insured with a dwelling policy and homeowner insurance policy. The main problem with any type of dwelling policy is that none of them provide liability coverage or any theft coverage, as homeowners insurance does. To be protected against accidents a dwelling policy owner has to purchase supplemental liability coverage. To be protected against losses related to theft, a special endorsement must be added to a dwelling policy, for which additional premium will be charged. Homeowners insurance provides three major benefits, namely it protects the home; it protects personal property, and it provides liability coverage. Homeowners insurance is substantially standardized throughout the United States. There are several basic types of policies, which are labeled HO for homeowners with a number. The number designates different policy packages. HO 1 provides basic coverage, and is also known as Homeowners 1. It is one of the cheapest homeowners policies. HO 2 is also called the broad form policy. It adds several additional coverages not available under HO 1. The premiums for this policy are also higher. HO 3 is considered the most popular form of homeowners insurance. It is known as the Special Form policy or Homeowners 3 Special Form. This policy covers for all risks of physical loss except those specifically excluded in the policy. HO 4 is a special policy for people who rent or for owners of cooperative apartments. It is also known as Contents Broad Form. HO 5 is considered the most expensive homeowners policy. It is also known as the Comprehensive Form policy and is also called All Risks policy. It covers both the dwelling and the personal possessions from anything and everything except for the risks specifically excluded. Those exclusions are typically flood, earthquake, war and nuclear accident. HO 6 is a policy for owners of condominium apartments, and is also known as Unit-Owners Form. HO 8 is a special policy and is designated for owners of older structures that cannot be replaced today. It is also known as Modified Coverage Form. There are several basic areas that are protected in the property section of a homeowners policy: the house itself and other structures on the property; personal property, loss of use, miscellaneous coverages. There are also some other main areas of exposure that are covered by homeowners policies: liability for which the insured may be found responsible and living expenses if the home is rendered

20 11 uninhabitable due to fire or other covered peril. Each of the coverages is distinguished by what it protects and has a letter. Coverage A covers the house; coverage B covers other detached structures on the property; coverage C covers personal property; coverage D covers loss of use; coverage E covers personal liability; coverage F covers medical payments to others. Policy types, limits and requirements vary by state and by company. Besides the coverages, an endorsement, which is an additional coverage for specified events, may be added to the standard policy for additional premium payment. One of the most typical endorsements is the second home endorsement. There are also other endorsements, like the increased cost of construction endorsement or a personal computer endorsement. If a homeowner needs additional coverage for some special possessions like jewelry, furs, etc. he/she can purchase a Scheduled Personal Property endorsement or a personal articles floater. To save money on insurance an individual may increase a deductible, which is the amount of money the insured must pay up front for a loss before the insurance company will pay for anything. Besides, discounts are usually provided in some cases. For example if the house is secured by burglar alarm and a fire alarm; if the house has smoke alarms on all floors, or if the residents are non-smokers, or senior citizens. Insurance companies also provide some discounts if it is a multiline insurance, which means the insured has more than one insurance policy with the same company. Homeowners insurance policies not only state what perils are covered; they also list which perils are excluded from coverage. No homeowners insurance policy provides coverage for flood or earthquake. Federal government provides special policies for individuals to protect their homes in the event of those calamities.

21 12 QUIZ Questions 1. What is the main difference between a dwelling policy and homeowners insurance policy? 2. Does any dwelling policy provide theft coverage? 3. Is homeowners insurance coverage limited to the property damaged on the premises? 4. Name the three major benefits of homeowners insurance. 5. Which is the cheapest homeowners insurance policy? 6. Who needs dwelling insurance policy? 7. Which of homeowners insurance policies is for people who rent or for owners of cooperative apartments? 8. HO 6, which is also known as Unit-Owners Form is a policy for owners of cooperative apartments (True/False) 9. HO 8, which is also known as Modified Coverage Form is a special policy and is designated for 10. Is there a homeowners insurance policy that provides coverage for flood or earthquake? How this type of insurance can be purchased? 11. What is an endorsement? 12. Is there any way to save money on homeowners insurance? Name at least three factors that can help to save money on homeowners insurance.

22 13 Answers 1. The main difference between a dwelling policy and a homeowners insurance policy is that a dwelling policy does not provide liability coverage. 2. No, none of dwelling policies provide theft coverage. 3. No, it isn t. It also applies to personal property anywhere in the world. 4. The three major benefits of homeowners insurance are: Protects the home Protects personal property Provides liability coverage 5. The cheapest homeowners insurance policy is HO 1, which provides basic coverage. 6. One of the major reasons for purchasing a dwelling policy is for the house, which a person owns but does not occupy. Another reason is that a person may not qualify for homeowners insurance. 7. HO 4 is for people who rent or for owners of cooperative apartments. It is also known as Contents Broad Form. 8. False, HO 6, which is also known as Unit-Owners Form, is a policy for owners of condominium apartments. 9. HO 8, which is also known as Modified Coverage Form is a special policy and is designated for owners of older structures that cannot be replaced today. 10. These two perils are not covered under any homeowners policy. Federal government provides special policies for individuals to protect their homes in the event of those calamities. 11. An endorsement is an additional coverage for specified circumstances. It is a form attached to the policy that changes the terms of the policy to fit special circumstances the insured obtains coverage for. 12. Yes, some money can be saved by getting a big deductible. Insurance companies typically favor individuals who have more than one insurance with them. Dead bolt locks on all doors; burglar alarm and fire alarm that report to central service can also save money. Senior citizens or retired people also get some favors. It also helps when residents do not smoke and do not drink.

23 14 CHAPTER 2 BASICS OF POLICY PROVISIONS In this chapter we will review only the main provisions of the standard homeowners insurance policy, as in further chapters we ll discuss in more detail all the important provisions and show how to apply it in practice. What is homeowners insurance? Homeowners insurance is a policy that covers the home (the structure) and its contents (personal belongings). It not only covers family possessions, but it also can provide with compensation for liability claims, medical expenses, and other expenses that result from property damage and personal injury suffered by others. An insurance policy is a legal contract between the person who buys insurance and the insurance company. The person who buys the insurance is the insured and is one party to the contract. The insurance company is the other party to the contract and is the insurer. The person purchasing homeowners or dwelling insurance is also known as the named insured. The insured must have an insurable interest in the property being insured. An individual has an insurable interest if he/she will suffer a financial loss if the property insured will be damaged. The property that is insured is referred to as the risk in insurance policy, as that property is in danger of risk of loss. By signing the insurance policy, the insurer agrees to protect the insured from a possible loss and the insured agrees to pay a certain amount of money for the protection against financial loss, the premium. The insurance premium is determined by a process that is called rating. Homeowners insurance protects more than just the owner of the house. Generally, it protects anyone named in the policy, the spouse, residents of the home (other than tenants), household employees, guests and visitors. The insurance policy provides a certain amount of protection specified in the contract, which is called coverage. For dwelling and homeowners insurance coverage will be a combination of the type of property insured and the causes of loss insured against. The property insurance section of the homeowners policy generally provides coverage for the following:

24 15 The dwelling, any structures attached to the dwelling, building materials and supplies that are stored near the dwelling and are used to construct, alter, or repair the dwelling or other structures on the property Structures on the premises that are not attached to the dwelling, such as a garage, a tool shed or a pool house Personal property, such as the contents of the house like furniture, clothing, electronic equipment, as well as outdoor items like sporting equipment and gardening tools Coverage may be general, as shown above or specific. Whether an individual owns or rents a home, homeowners insurance company will reimburse the homeowner insurance holder in most cases for costs, expenses, and other amounts that are related to specific coverage. Here are some examples of specific coverage: Loss of use Liability Medical payments to others We will return to structures, personal property and specific coverage later. The above was given as an example of coverage under a dwelling or homeowners insurance policy. The cause of a loss insured against in a policy is called peril. Perils specified in a policy as those the policy insures against are called named perils. The most common perils that are covered are the following: Fire and smoke Lightning Tornadoes and windstorms Hail Explosions Vandalism Theft Damage from vehicles Falling objects Every type of HO policy will specify the perils that are covered under the policy. Homeowners insurance policies not only state what perils are covered; they also specify the perils, which are not covered, which is called excluded coverage. For example, neither the named perils policy types (HO-1, HO-2, HO-4, HO-6, HO8), nor the open perils form (HO-3) cover the following events: Enforcement of building codes and similar laws

25 16 Earthquakes Flooding Power failures Neglect (here it means the policyholder failure to take reasonable steps to protect his/her property) War Nuclear hazard Intentional acts Flood insurance and earthquake insurance are available as separate policies. Here are examples of some additional exclusions for open peril policies: Freezing pipes and systems in vacant dwellings Damage to foundations or pavements from ice and water weight Theft from a dwelling under construction Vandalism to vacant dwellings Latent defects, corrosion, industrial smoke, pollution Settling, wear and tear These are just examples, we will return to exclusions later on in the course. Just note here that both dwelling and homeowners policies use the same term Perils Insured Against to refer to the covered peril. Perils that are not covered by a particular insurance policy will be listed in exclusions. An insurance policy may be issued in its basic policy form or with an endorsement/endorsements. As you have already learned in Chapter 1, an endorsement is an additional coverage for specified circumstances. It is a form attached to the policy that changes the terms of the policy to fit special circumstances the insured obtains coverage for and also involves a premium change for additional coverage. Endorsements are also used for dwelling policies. Since none of the dwelling policies provide any theft coverage, a special endorsement, for which an additional premium will be required, can be added to a dwelling insurance policy. The same goes for a personal liability endorsement and premises liability endorsement. Insurance companies use deductibles to avoid nuisance claims. A deductible is the amount of money the insured must pay up front for a loss before the insurance company will pay for anything. Generally, both for dwelling insurance policies and for homeowners insurance policies a minimum deductible is $250 per occurrence. However, in most states insurance companies allow the insureds to get a lower deductible per occurrence, such as $100. A general rule is the higher a deductible the lower is the premium, as with a low deductible the insurer has a

26 17 greater exposure. Typically, deductibles help the insurer to keep premiums within reasonable limits, as expenses of handling and paying small losses are reduced. Declaration page Every policy whether it is a dwelling insurance policy or a homeowners insurance policy has a declaration page. The declaration page has a policy number and a space where it is stated whether it s a new policy or the previous policy number is provided. It also carries the name of the insurance company, which issued the insurance. Next a policy period is written where time and place are recorded when and where the policy was issued, the date when the policy comes into effect and the date when the policy expires. Typically, there is also space for successive policy periods. In the space Named Insured and mailing address names of policyholder/s are given for example William and Helen Smith Husband and Wife as joint tenants with the exact mailing address. Below the location of the insured property is written, it is usually the same as the mailing address, unless otherwise stated. Next section specifies coverage provided where a premium or limit of liability is shown for the coverage. Typically it will be shown as follows: Section 1 Coverages A. Dwelling Limit of Liability Premium Basic Policy Premium Additional Premiums B. Other Structures C. Personal Property D. Loss of Use Total Prepaid Premium Section 2 Coverages E. Personal Liability F. Medical Payments to Others Form and Form Premium if paid in installments Payable: At Inception At each anniversary Endorsement(s)

27 18 Endorsements made part of this policy at time of issue Deductible Other insured locations This declaration page may vary, which depends on the insurance company and the state where the insurance policy is issued. In dwelling insurance policy a declaration page also lists perils insured against, state extended coverage, if any, for example vandalism or malicious mischief, and also state the form of the dwelling insurance policy. Next follows the Agreement section. This section is identical for both Dwelling policy and Homeowners policy. It says that the insurance described in the policy will be provided in return for the premium and compliance with all applicable provisions of this policy. Definitions are next on the policy form. This section contains definitions and explains terms used throughout the policy. The Definitions section explains concisely and in detail what every term in the policy implies. For example Bodily injury means bodily harm, sickness or disease, including required care, loss of services and death that results. Business includes trade, profession or occupation. (Source: Homeowners 3 Special Form taken at iso.com) Most of the material in this chapter is taken from a standard Homeowners 3 Special Form, since it is the most popular homeowners insurance policy in the United States. ISO forms are taken for examples due to a great number of variations of forms used by different insurance companies in different states. Much of the material is common for numerous Homeowners forms and Dwelling policy forms. After the Declaration page, Agreement and Definitions, major parts of the policy follow. The major parts of the HO-3 policy are further subdivided into the following sections: Section I Property Coverages Coverage A Dwelling Coverage B Other Structures Coverage C Personal Property. In this section Special Limits of Liability and Property Not Covered are specified

28 19 Coverage D Loss of Use Additional Coverages Section I Perils Insured Against Coverage A Dwelling Coverage B Other Structures Coverage C Personal Property Section I Exclusions Section I Conditions Section II Liability Coverages Coverage E Personal Liability Coverage F Medical Payments to Others Section II Exclusions Section II Additional Coverages Section II Conditions Section I and II Conditions Any insurance policy becomes valid only when it is signed by all the parties to the contract. The policy is not valid unless countersigned by the insurers authorized agent. Now that you know what major parts of Homeowners insurance policy are let us go into more detail about every part. Section 1 Property Coverages This section is almost identical for Dwelling and Homeowners policies. Coverage A Dwelling This part of the form reads as follows: We cover: 1. The dwelling on the residence premises shown in the Declarations, including structures attached to the dwelling; and 2. Materials and supplies located on or next to the residence premises used to construct, alter or repair the dwelling or other structures on the residence premises. This coverage does not apply to land, including land on which the dwelling is located.

29 20 Let us start with the definition residence premises. First of all it is in quotation marks, which means it is a special term and is explained in Definitions of the policy. The Definitions section of HO-3 Special form policy gives the following definition of Residence premises : Residence Premises means: a. The one family dwelling, other structures, and grounds; or b. That part of any other building; c. Where you reside and which is shown as the residence premises in the Declarations. Residence premises also means a two family dwelling where you reside in at least one of the family units and which is shown as the residence premises in the Declarations. (Source: Homeowners 3 Special Form; HO All further quotations and definitions are from the same policy). Residence premises is more restrictive than Insured location definition, as it is only a part of the definition for Insured location. Insured location means: a. The residence premises ; b. The part of other premises, other structures and grounds used by you as a residence and: (1) Which is shown in the Declarations; or (2) Which is acquired by you during the policy period for your use as a residence; c. Any premises used by you in connection with a premises in 4.a. and 4.b. above; d. Any part of a premises: (1) Not owned by an insured ; and (2) Where an insured is temporarily residing: e. Vacant land, other than farmland, owned by or rented to an insured. f. Land owned by or rented to an insured on which a one or two family dwelling is being built as a residence for an insured; g. Individual or family cemetery plots or burial vaults of an insured ; h. Any part of a premises occasionally rented to an insured for other than business use.

30 21 Example: The Smiths own a home at Main Street, Hesperia, Ca. They live there most of the time, but they also spend some time at their other home at 234 Mariposa Road, Victorville, Ca. Since only one location is permitted to be insured under the terms of any Homeowners policy for Section 1 Property Coverages, only the house at Main Street, Hesperia, Ca. will be considered residence premises. Coverage B Other structures Coverage B other Structures in Section I Property Coverages of HO-3 Special Form policy defines the coverage of other structures as follows: We cover other structures on the residence premises set apart from the dwelling by clear space. This includes structures connected to the dwelling by only a fence, utility line, or similar connection. This coverage does not apply to land, including land on which the other structures are located: We do not cover other structures: 1. Used in whole or in part for business, or 2. Rented or held for rental to any person not a tenant of the dwelling, unless used solely as a private garage. The limit of liability for this coverage will not be more than 10% of the limit of liability that applies to Coverage A. Use of this coverage does not reduce the Coverage A limit of liability. What you have to pay particular attention to is that other structures are covered only on the residence premises, and not on Insured locations. And that the policy does not provide any coverage for loss to other structures, if these structures are used for business or as rental property. The Definitions section gives the following explanation of the term business : Business includes trade, profession or occupation. So what it actually means is that if the insured uses any part of the other structure doing anything that gives him/her a profit, this part of other structure is not covered by the insurance. Operating a business out of the home can trigger coverage problems. For example an insured repairs some items and charges

31 22 money for it, or is engaged in any craft work and sells it, or doing any office job he/she gets money for. Since these kinds of activities present a greater risk than using the residential premises as just a regular home, the individual should purchase a special insurance with the premium in accordance with the risk involved in being engaged in that particular business. A Homeowners policy or a Dwelling policy can have an endorsement, Permitted Incidental Occupancies, or buy an additional business insurance, if eligible. Note that business operated out of home can be primary or incidental. Various insurance companies define incidental in a different way, which depends on the policy language. Some companies define incidental business that grosses less than $5,000 a year. Homeowners insurance does not cover business liabilities, but we ll discuss this issue later in the book. Most homeowners policies provide coverage for business equipment and furniture up to a certain limit, which amounts to a maximum of $2,500. Other policies may provide coverage up to $10,000 for business supplies and furnishings, including data stored in a personal computer, but only if business is incidental rather than primary. Also note that it is very important whether a building or a structure is insured under coverage A or B, since this also determines limits of liability for each coverage. Coverage C Personal Property Coverage C typically covers the personal property owned or used by the insured anywhere in the world. This section of the policy is also known as the contents coverage. If Coverages A and B protect the house itself and other structures on the owned land, Coverage C provides insurance protection for the contents of the house, garage, tool shed, and whatever other structures are on the insured s property. Personal Property coverage is under Section I Property Coverages. The text of the form (HO-3) reads as follows: We cover personal property owned or used by an insured while it is anywhere in the world. At your request, we will cover personal property owned by: 1. Others while the property is on the part of the residence premises occupied by an insured ; 2. A guest or a residence employee, while the property is in any residence occupied by an insured. Our limit of liability for personal property usually located at an insured s residence other than the residence premises, is 10% of the limit of liability for

32 23 Coverage C, or $1,000, whichever is greater. Personal property in a newly acquired principal residence is not subject to this limitation for 30 days from the time you begin to move the property there. You must have noticed a new term here Residence employee. If we look at Definitions we will read the following: Residence employee means: a. An employee of an insured whose duties are related to the maintenance or use of the residence premises, including household or domestic services; or b. One who performs similar duties elsewhere not related to the business of an insured. It is important to note here between the difference in defining residence employee, an employee related to business, or some people who come over to the residence premises of the insured to perform some maintenance or some other kind of job. For example a nurse, employed full time, a gardener who comes on a part-time basis, a cleaning woman that comes twice a week will all be within the definition of a residence employee. But a GTE person who comes to check phone lines, a carpenter who is helping with a one-time job are not considered residence employees. The last paragraph of personal property section is for the insureds who own more than one residence and have personal property at both locations, and for those who are moving from one location to another. Special Limits of Liability This section covers special limits for 11 categories of personal property. You can read this part of the policy in Appendix with Homeowners 3 Special Form. I d like to note here that every limit is given per occurrence. Pay attention to Special Limits 8 and 9. If Special Limit 8 provides coverage in the amount of $2,500 for property on the residence premises, used at any time or in any manner for any business purpose, Special limit 9 limits the coverage to $250 for property away from the residence premises used at any time or in any manner for any business purpose. Special Limit 10 provides $1,000 coverage for loss to electronic apparatus, while in or upon the vehicle only in the case if these electronic apparatus can also be used out of the vehicle, which means they should be equipped to be operated by some other sources of power, not only by the vehicle s electrical system. Any electronic apparatus that can be operated only by the vehicle s electric system is