Chapter 9 Homeowners Insurance: Section II Coverages Overview This chapter examines Section II of the ISO Homeowners insurance contracts. Section I of the Homeowners 3 policy was examined in the previous chapter. While there are variations in the Section I coverages for the various forms, Section II is identical in each form. Section II provides personal liability insurance that will respond to liability claims. Section II also includes medical payments to others coverage. As both of these coverages are provided on an all-risk basis, the exclusions applicable to these coverages are examined. Some additional coverages provided under Section II are discussed, as well as some endorsements that can be added to your homeowners policy to broaden the coverage. The chapter closes with some important suggestions to follow when shopping for homeowners insurance. The appendix to Chapter 9 provides tips on how to save money when buying homeowners insurance. Learning Objectives After studying this chapter, you should be able to: Explain the personal liability coverage found in Section II of the homeowners policy. Explain the medical payments to others coverage found in Section II of the homeowners policy. Identify the major exclusions that apply to the Section II coverages in the homeowners policy. Explain the following endorsements that can be added to a homeowners policy: inflation guard endorsement and personal property replacement cost endorsement. Explain the suggestions that consumers should follow when shopping for a homeowners policy. Define the following: Claim expenses Contractual liability Damage to the property of others Earthquake endorsement First-aid expenses Home business insurance coverage endorsement Identity theft endorsement Inflation guard endorsement Insurance score Medical payments to others Occurrence Personal injury Personal liability Personal property replacement cost loss settlement endorsement Personal umbrella policy Scheduled personal property endorsement (with agreed value loss settlement) Watercraft endorsement
294 Rejda Principles of Risk Management and Insurance, Eleventh Edition Outline I. Personal Liability Insurance A. Insuring Agreements 1. Coverage E: Personal Liability 2. Coverage F: Medical Payments to Others II. Section II Exclusions A. Exclusions That Apply to Both Coverage E and Coverage F B. Exclusions That Apply Only to Coverage E C. Exclusions That Apply Only to Coverage F III. Section II Additional Coverages A. Claim Expenses B. First-Aid Expenses C. Damage to Property of Others D. Loss Assessment IV. Endorsements to a Homeowners Policy A. Inflation Guard Endorsement B. Earthquake Endorsement C. Personal Property Replacement Cost Loss Settlement Endorsement D. Scheduled Personal Property Endorsement (with Agreed Value Loss Settlement) E. Personal Injury Endorsement F. Home Business Insurance Coverage Endorsement G. Identity Theft Endorsement V. Shopping for Homeowners Insurance A. Cost of Homeowners Insurance B. How to Save Money on a Homeowners Policy (Appendix)
Chapter 9 Homeowners Insurance: Section II Coverages 295 Short Answer Questions 1. What two coverages are provided under Section II of the homeowners policy? 2. Is the limit of liability under Coverage E an aggregate limit or a per-occurrence limit? What is an occurrence? 3. How do the two coverages provided under Section II of the homeowners policy differ with regard to who is covered and whether liability must be established for the coverage to respond?
296 Rejda Principles of Risk Management and Insurance, Eleventh Edition 4. What exclusions are common to both Coverage E and Coverage F? 5. What additional exclusions apply to Coverage E only? 6. What additional exclusions apply to Coverage F only?
Chapter 9 Homeowners Insurance: Section II Coverages 297 7. What additional coverages are provided under Section II of the homeowners policy? 8. What endorsements can be added to the homeowners contract to make the coverage more complete? 9. What factors determine the cost of homeowners insurance?
298 Rejda Principles of Risk Management and Insurance, Eleventh Edition 10. What factors should you consider when shopping for homeowners insurance coverage? Multiple Choice Questions Circle the letter that corresponds to the BEST answer. 1. All of the following are excluded under Section II of the homeowners policy EXCEPT: (a) bodily injury to others (b) business activities (c) motor vehicles (d) personal injury 2. All of the following are additional coverages automatically provided under Section II of the homeowners policy EXCEPT: (a) first aid expenses (b) inflation protection (c) damage to property of others (d) claim expenses 3. Which statement(s) is(are) true with regard to Section II of the homeowners policy? I. It provides coverage for damage to the dwelling, other structures, and personal property. II. It provides personal liability insurance and medical payments to others coverage. (a) I only (b) II only (c) both I and II (d) neither I nor II 4. Dr. Mary Chang is a dentist. She misread a patient s X-ray and extracted the wrong tooth. The patient has filed a lawsuit against Dr. Chang, alleging malpractice. This claim will not be covered under the homeowners policy because: (a) It involves personal injury, not bodily injury. (b) Intentional injury is excluded. (c) Liability resulting from professional services is excluded. (d) The act was an occurrence, not an accident.
Chapter 9 Homeowners Insurance: Section II Coverages 299 5. Gilda does not want depreciation taken into consideration if her personal property sustains a loss. Which of the following endorsements should Gilda consider adding to her Homeowners 3 policy? (a) personal property replacement cost endorsement (b) scheduled personal property coverage (c) personal injury endorsement (d) inflation guard endorsement 6. Which statement is true with regard to Section II of the homeowners policy? I. Before the insurer will pay a personal liability insurance claim, an insured must be legally liable. II. Before the insurer will cover medical payments to others, an insured must be legally liable for the injury. (a) I only (b) II only (c) both I and II (d) neither I nor II 7. All of the following are endorsements that can be added to the homeowners policy EXCEPT: (a) home business insurance coverage endorsement (b) bodily injury liability endorsement (c) earthquake endorsement (d) watercraft endorsement 8. Which statement(s) is(are) true with regard to Coverage E Personal Liability? I. In addition to liability coverage, the insurer will cover legal defense costs. II. The coverage will only respond to accidents, not occurrences. (a) I only (b) II only (c) both I and II (d) neither I nor II 9. Which statement is true with regard to shopping for homeowners insurance? (a) Selecting a lower deductible will lower your premium. (b) There is no cost variation among homeowners policies. (c) It may be necessary to use a scheduled personal property endorsement to provide coverage for some personal property. (d) Although the actual cash value coverage on personal property is limited, replacement cost coverage is not available. 10. All of the following statements regarding the cost of homeowners insurance are true EXCEPT: (a) Insurers charge less to insure newer homes than to insure older homes. (b) Wooden homes cost more to insure than do brick homes. (c) The HO-3 policy is less expensive than the HO-2 policy. (d) If a higher deductible is selected, the premium will be lower.
300 Rejda Principles of Risk Management and Insurance, Eleventh Edition True/False Circle the T if the statement is true, the F if the statement is false. Explain to yourself why a statement is false. T F 1. Personal injury is covered under Section II of an unendorsed homeowners policy. T F 2. Intentional injury is excluded from coverage under Section II of the homeowners policy. T F 3. Medical expense coverage applies to resident employees injured on the premises. T F 4. All watercraft are explicitly excluded from coverage under Section II of the homeowners policy. T F 5. Section II of the homeowners policy applies to accidents only. Gradual damage that occurs over time is not covered. T F 6. In addition to providing personal liability protection under Coverage E, the insurer also provides for the cost of a legal defense even if the claim is groundless. T F 7. The age, construction, fire protection class, and location of your home will affect the premium you pay for homeowners insurance. T F 8. Damage to personal property owned by the insured is covered under Section II of the homeowners policy. T F 9. Legal liability of an insured must be established before the medical payments to others coverage will apply. T F 10. Your credit history may have an influence upon an insurer s willingness to sell you a homeowners insurance policy. Case Applications Case 1 Last Friday was a horrible day for Dr. Brian and Lynn Green. A patient filed a medical malpractice claim against Dr. Green. While playing golf, Lynn sliced a shot and hit another golfer. The normally docile family dog bit their next-door neighbor. Dr. Green was charged with defamation of character by another physician. The other doctor claims Dr. Green slandered her at an American Medical Association meeting. The maid, who lives with the Greens, received a severe laceration when a glass she was washing shattered. Will Section II of the HO-3 policy cover these claims?
Chapter 9 Homeowners Insurance: Section II Coverages 301 Case 2 Penny Franklin insured her home with an unendorsed Homeowners 3 policy. Penny taught kindergarten and first grade up until her son was born last year. Penny misses the classroom and needs to earn some money. However, she would like to spend time with her baby. She is considering opening a pre-pre-school in her home. Parents will leave their children in the morning before they go to work, and in addition to normal day-care services, Penny will prepare the children for kindergarten. What advice would you offer Penny with regard to her homeowners insurance and this proposed child care operation? Solutions to Chapter 9 Short Answer Questions 1. Section II of the Homeowners 3 policy provides two coverages. Coverage E is personal liability insurance. This coverage is provided with a $100,000 per occurrence limit. The insurer also provides coverage for legal defense costs, with the cost of the legal defense not counted against the limit of liability. Coverage F is medical payments to others coverage. Up to $1000 per person is provided. 2. The limit of liability under Coverage E is a per-occurrence limit. Several occurrences could happen during the year, and the full limit of liability is available to respond to each separate occurrence. While accidents are sudden events, an occurrence may take place over time. The homeowners policy defines occurrence to include accidental losses as well as losses that happen over a period of time. 3. Personal liability coverage protects the named insured, spouse, family members residing at home, and some other miscellaneous persons. The medical payments coverage, in contrast, does not apply to the homeowner or regular residents of the home, except resident employees. The words to others are added to the medical payments coverage medical payments to others. The liability coverage is based upon establishing legal liability. The medical payments coverage is not based on legal liability. 4. Several exclusions apply both to personal liability (Coverage E) and medical payments to others (Coverage F). These common exclusions are: motor vehicle liability, liability arising from use of certain watercraft, aircraft and hovercraft liability, expected or intentional injury, business activities, professional services, uninsured locations, war, communicable disease, sexual molestation/abuse and corporal punishment, and controlled substances.
302 Rejda Principles of Risk Management and Insurance, Eleventh Edition 5. Additional exclusions that apply to personal liability (Coverage E) include: contractual liability, property owned by the insured, property in the care of the insured, workers compensation, nuclear energy, and bodily injury to an insured. 6. The final set of exclusions applies to medical payments to others (Coverage F). These exclusions are: injury to a resident employee off an insured location, workers compensation, nuclear energy, and persons regularly residing at the insured location. 7. Several additional coverages are provided under Section II of the homeowners policy. The additional coverages are claim expenses, first-aid expenses, coverage for damage to the property of others, and certain loss assessment charges. 8. A number of endorsements can be added to the homeowners contract to broaden the coverage. These endorsements include: an inflation guard endorsement, an earthquake endorsement, a personal property replacement cost endorsement, a scheduled personal property endorsement, a personal injury endorsement, an endorsement covering certain watercraft and recreational vehicles, and a home business insurance coverage endorsement. 9. A number of factors determine the cost of homeowners insurance. Major rating and underwriting factors include: construction, location, fire-protection class, construction costs, age of the home, type of policy purchased, deductible level, insurance score, and CLUE report. 10. Some guidelines when shopping for homeowners insurance include: purchase an adequate amount of insurance, add necessary endorsements, shop around for a policy, consider a higher deductible, take advantage of discounts, don t ignore disaster perils, consider purchasing a personal umbrella policy, and improve your credit rating. Multiple Choice Questions 1. (a) Bodily injury to others is not excluded it is covered. Personal injury and the other listed choices are excluded under Section II of the homeowners policy. 2. (b) Inflation protection is not provided automatically. The insured must periodically adjust the amount of coverage in force or purchase an inflation-guard endorsement to have this protection. 3. (b) Damage to the dwelling, other structures, and personal property of the insured are provided under Section I of the homeowners policy. Section II provides personal liability and medical payments to others coverage. 4. (c) Liability arising out of professional services is excluded under Section II of the homeowners policy. 5. (a) The personal property coverage in a Homeowners 3 policy is written on an actual cash value basis. Should a loss occur, depreciation will be considered when determining the loss settlement. A personal property replacement cost endorsement changes the basis of recovery to replacement cost.
Chapter 9 Homeowners Insurance: Section II Coverages 303 6. (a) Coverage E, Personal Liability, is based on establishing legal liability. Medical Payments to Others (Coverage F) is paid regardless of legal liability. 7. (b) There is no need to add a bodily injury liability endorsement as this coverage is already provided under the policy. The other endorsements listed may be added by the insured. 8. (a) Only the first statement is true. As the insurer will pay the claim if you are legally liable, the insurer has an incentive to make sure that you have competent legal representation. The coverage is written to insure occurrences, not accidents. Occurrence coverage is broader, insuring accidents as well as damage that happens gradually over time. 9. (c) Certain property, such as furs, silverware, and collectibles, is subject to limits under the homeowners policy. To overcome these internal policy limits, a scheduled personal property endorsement can be added to the homeowners policy. 10. (c) The HO-3 policy is more expensive than the HO-2 policy. The HO-3 provides broader coverage, and insurers charge accordingly. True/False 1. F While bodily injury and property damage liability are covered under Section II, personal injury is excluded. This coverage can be added through an endorsement. Personal injury is also covered by some personal umbrella liability policies. 2. T 3. T 4. F Although there is a watercraft exclusion, only certain watercraft are excluded. Excluded watercraft are mainly those above certain length and horsepower limits. 5. F Section II of the homeowners policy is written on an occurrence basis. Occurrence coverage protects against accidents and also damage that occurs gradually over time. 6. T 7. T 8. F Coverage for damage to personal property owned by the insured is covered under Coverage C of Section I of the homeowners policy. It is excluded under Section II. 9. F The medical payments to others coverage under Section II does not require establishing legal liability. 10. T
304 Rejda Principles of Risk Management and Insurance, Eleventh Edition Case Applications Case 1 The first claim is a medical malpractice claim against Dr. Green. Professional liability is excluded under Section II, so this claim is not covered. The coverage would respond to the golfer injured by the misguided golf shot Lynn Green hit. A claim brought by the next-door neighbor as a result of the dog bite would be covered. As defamation and slander are considered personal injuries, Section II would not respond unless the coverage was added by endorsement. The maid s medical expenses would be eligible for coverage. While the medical expense coverage applies to others, an exception is made for a resident employee who was injured at the insured s home. Case 2 Before Penny starts this business in her home, her homeowners coverage must be modified. There is a general business activity exclusion in Section II that makes it clear that liability resulting from businesses activities is not covered. She must endorse her policy to have coverage for day-care related liability claims or purchase a separate policy to have the necessary coverage.