3-A1/2 HOMEOWNERS Flashcards
Property Insurance Categories:
Personal Lines
Commercial Lines
Homeowners Insurance
Dwelling Insurance
Personal Lines:
for possessions intended for personal use (e.g. a home, family
mini-van, or land).
Commercial Lines:
for possessions intended for business or corporate use (e.g. a restaurant or church).
Residential dwellings fall under Personal Lines and are insured by either Homeowners or _______.
Dwelling policies
Homeowners Insurance:
for property inhabited by the insured (e.g. primary residence).
Dwelling Insurance:
for property not inhabited by the insured (e.g. rental property, vacation home, etc).
Homeowners (HO) Insurance bundles property and liability coverages into one _____ policy.
“package”
Property coverage:
Liability coverage:
Property coverage:
covers physical losses to the home and associated structures
Liability coverage:
covers losses experienced by a third party, for which the policyholder is liable
Homeowner Eligibility
- It’s Personal
- Own & Occupy
It’s Personal:
HO policies are for individuals, not corporations, businesses,government entities, etc.
Own & Occupy:
HO policies are for individuals who both own and occupy their
residences
If you run a business out of your home, you may not be eligible for a _____ policy.
homeowners
A business is any full time, part time, or occasional ____ or occupation.
trade
Buildings that qualify for HO Insurance:
● Residential dwellings with up to 4 families (if at least one of the units is
occupied by the owner)
● Dwellings used exclusively for residential purposes Exception: using a room for
a home office or having a private daycare or school may be allowed.
● Mobile homes, with the proper endorsement
● Buildings under construction
“Insurance Services Offices” (ISO) forms:
● Forms for homeowners policies
● Each provides a different type of coverage
ISO forms currently used:
● HO-2: Broad form ● HO-3: Special form ● HO-4: Contents Broad form ● HO-5: Comprehensive form ● HO-6: Condominium form ● HO-8: Modified Coverage form
The Named-Peril Approach
● Covers losses caused only by perils named in policy.
● If loss is caused by unlisted peril, it is not covered.
The Named-Peril Approach
Example
The Standard Fire Policy was a named-peril policy covering fire and lightning. Losses caused by any other peril would be excluded.
In addition to the perils of fire and lightning, the Extended Coverage Endorsement covered:
● Windstorm ● Hail ● Explosion ● Riot or civil commotion ● Vehicles ● Aircraft ● Volcanic Eruption ● Smoke
The Broad Form Endorsement added coverage for:
● Vandalism or malicious mischief
● Theft
● Falling objects
● Weight of ice, snow, or sleet
● Damage from a steam or hot water system
● Accidental discharge or overflow of water or steam
● Freezing of plumbing, heating, air conditioning systems, or domestic
appliances
● Sudden and accidental damage from artificially generated electrical current
● Volcano
Broad Form Endorsement Example
Two Broad Form perils, vehicles and smoke, are fairly specific: property damage caused by a vehicle is covered, but damage to a fence, driveway, or walkway is not covered if it was caused by a vehicle driven by a resident of the “residence premises.” And smoke damage from a fire is covered, but not smoke damage from an industry nearby.
Herman leaves a window open while he is away at work, allowing rain from a sudden thunderstorm to enter the living room and damage a sofa. Is this loss covered?
No. Rain damage to personal property inside a building is only covered if the storm first makes an opening.
During a sudden thunderstorm, a small tree in Herman’s yard is blown down. One of the branches breaks a window, allowing rain to enter the living room and damage a sofa. Is this loss covered?
Yes. Since the windstorm caused the opening that resulted in rain damage, this loss would not be excluded.
Herman leaves a window open while he is away at work, allowing rain from a sudden thunderstorm to enter the living room and damage the hardwood flooring. Is this loss covered?
Yes. Since the floors are not personal property, but are part of the building itself, the damage would be covered in most policies.
Herman leaves a window open while he is away at work, allowing wind from a sudden thunderstorm to enter the living room and shatter a lamp by blowing it off a table. Is this loss covered?
Yes. The lamp is personal property directly damaged by a covered, named peril. The exclusion for personal property inside a building applies to damage caused by rain, sand, sleet, snow, or dust—not wind.
So, if a picture falls off a wall and damages the table below it, there is __ ___. But if a suitcase falls out of an airplane flying overhead, punctures the roof, and crushes a dining room table, then the table would be covered.
no coverage
“Unoccupied” does not mean _____
“vacant”
Unoccupied:
no one is living at the insured property, but the insured’s belongings are
there
Vacant:
the insured property is empty; neither the insured nor his belongings are there
HO-2 “Broad Form”
● Named peril policy
● Insures against all 17 Broad Form perils
● Covers the insured’s house and personal property
HO-4 “Contents Broad Form”
● Known as “renters insurance” (think “4-Rent”)
● Insures against all 17 Broad Form perils
● Only covers personal property
● Does not insure house and other structures
HO-6 “Unit Owner’s Form”
● Known as the Condo Form
● Covers the owner’s belongings
● Covers all finished surfaces of the individual condominium unit
HO-8 “Modified Coverage Form”
● Named-peril coverage ○ fire ○ lightning ○ windstorm ○ hail ○ explosion ○ riot or civil commotion ○ aircraft ○ vehicles ○ smoke ○ vandalism or malicious mischief ○ theft ○ volcanic eruption ● Covers fewer perils ● Covers property at ACV (deducts depreciation for age, condition, and wear) ● Considers the fair market value of the home ● Advantage: it’s cheaper
HO-8 Example
If you bought a fixer-upper in a run-down neighborhood, its value might be only $25,000, but material and labor costs would make its replacement cost well over $100,000.
The Open-Peril Approach
● Covers damages caused by all perils, except those specifically excluded
● If loss is caused by unlisted peril, it is covered
● Increases the need for exclusions
● HO-3 & HO-5 use the Special Form Endorsement
HO-3 “Special Form”
● Open-peril coverage for dwelling and other structures
● Named-peril coverage for personal property (covered against all Broad Form
perils)
HO-5 “Comprehensive Form”
● Open-peril coverage for structures and personal property
● Most comprehensive coverage available
6 sections of an HO Policy:
I. Declarations II. Insuring Agreement III. Definitions IV. Section I – Property Coverage A. Coverage A – Dwelling B. Coverage B – Other Structures C. Coverage C – Personal Property D. Coverage D – Loss of Use E. Additional Property Coverages F. Exclusions G. Conditions V. Section II – Liability Coverage A. Coverage E – Personal Liability B. Coverage F – Medical Payments C. Additional Liability Coverages VI. General Conditions and Endorsements
The Declarations page lists what’s unique to an individual’s HO Policy:
● Policyholder Name ● Policyholder Address ● Premium ● Deductible ● Policy Term (i.e. policy dates) ● Limits of Coverage ● Any Endorsements
contract of adhesion:
the insurer authors the agreement entirely and the insured may only take it or leave it.
The insurer’s advantage in this position, however, is mitigated by the fact that any ambiguity in the language will favor the insured.
You, Your
The named insured of the policy
We, Us
The insurer providing the policy
Insured
- The person(s) named on the declarations page
- Residents of your household
a. relatives
b. persons under age 21 in your care
c. full-time students, under the age of 24, who are away at school
Example
A 19 year-old exchange student would qualify as an insured if under the care of the named insured or the named insured’s relatives.
Residence Premises
- The dwelling listed on declarations page
- Other buildings, grounds where insured lives
- Building bought for use as a dwelling
- Any premises used in connection with the above
- Any premises the insured rents regularly but does not own
- Vacant land, except farm land
- Land the insured owns or rents in order to build a one- to four-unit residence
- Cemetery plots
- Premises the insured occasionally rents, unless for business purposes
Coverage A – Dwelling
Property covered:
● Dwelling
● Structures attached to dwelling
● Materials located in or near the “residence premises” used to construct, alter,
or repair dwelling and other structures on property
● Items that service the dwelling (AC compressor, fuel tanks)
● Under HO-6 (Condo Form): alterations, appliances, fixtures, and improvements
that are part of building contained within residence
Coverage B –
Other Structures
Designed for detached structures, including:
● Garages ● Gazebos ● Fences ● Mailboxes ● Lampposts ● Sheds
Coverage B –
Other Structures Example
If the Coverage A limit for your home is $100,000, you will have a $10,000 Coverage B limit per claim for damage to your detached garage, gazebo, fence, sheds, or any other structures.
Coverage B Limit
Coverage B is usually additional insurance:
● Pays in addition to the limit for Coverage A
● Typically set at a percentage of Coverage A limit
Coverage B Limit Example
● Coverage A: $100,000
● Coverage B: 10% of Coverage A ($10,000)
● Insured could receive up to $110,000
Coverage B Exclusions
Coverage B does not cover:
- Detached structures wholly rented out
- Structures held for rental
- Detached structures used for business
Coverage B does cover:
structures rented to an insured or tenant of the primary dwelling Garages rented as private garages
Coverage B Example
Jeff operates a small engine repair shop out of a building on his residence premises that was originally intended to be a detached garage. Even when damaged by a covered peril, this structure would not be covered under Jeff’s Homeowners form, since he uses it for business purposes.
Coverage C Personal Property
Coverage C of the Homeowners policy is for personal property
Real Property
Personal Property
Real Property:
● Buildings
● Elements attached to buildings
● Building materials/supplies that are located on or next to the residence
premises and intended for use on those premises
Personal Property:
● All property that does not qualify as real property
● Covered anywhere in the world
Coverage C Example
Tools, or a lawnmower kept in a storage shed, are personal property. Wallets, jewelry, money, and other items that insureds carry with them are also personal property.
Coverage C Limits
Two categories of personal property:
- Property usually situated at the residence premises: full coverage
- Property usually situated somewhere other than the residence premises: 10%
of Coverage C limit or $1,000, whichever is greater
Coverage C Special Limits
● $200: coins and money
● $250: antennas, tapes, wires, records, disks and other media while in a vehicle ● $1,500:
○ securities, accounts, deeds, letters of credit, manuscripts, personal records, passports, tickets, and stamps
○ theft of jewelry, watches, furs, and precious stones
○ boats and their trailers, furnishings, equipment, and engines
○ other types of trailers
○ personal property used for a business when away from the residence
○ portable electronics and accessories that are in a vehicle
● $2,500:
○ theft of firearms
○ theft of silver, gold, and platinum
○ personal property used for a business
Coverage C Exclusions
Personal Property not covered:
● Pets
● Motor vehicles
● Aircraft and hovercraft (but hobby aircraft are covered)
● Property of a renter or boarder
● Personal property the insured is renting out
● Credit cards
● Value of water or steam, such as from a heating system (but water in a residential pool is covered under Coverage C)
● Mysterious disappearance (excluded in some policies)
Coverage D – Loss of Use
For indirect losses that result from direct losses
Three coverages for Loss of Use:
● Additional Living Expenses (ALE)
● Fair Rental Value (FRV)
● Prohibited Use (a.k.a. Civil Authority)
Coverage D – Loss of Use Example
Sam has to stay in a hotel because his roof was torn off in a storm. Coverage D pays for his stay during home repairs because the direct loss of the roof is the cause of the hotel expenses.
Additional Living Expenses (ALE)
● Most common type of Coverage D – Loss of Use
● Pays increase in expenses needed for the insured to maintain normal standard
of living after a covered loss
Requirements:
● Dwelling must be uninhabitable
● Damage must have been caused by a covered peril
Only covers costs that exceed the insured’s normal living expenses
Additional Living Expenses (ALE) Example
Amanda’s regular expenses:
● Mortgage payment
● $20/week for laundry and dry cleaning
Amanda’s expenses after the loss:
● Mortgage payment
● Hotel bill
● $60/week for laundry and dry cleaning
Increase in Amanda’s expenses due to the loss:
● Hotel bill
● $40/week for laundry
Fair Rental Value
● Type of Coverage D – Loss of Use
● Indemnifies insured for lost rent if a tenant has to move out due to covered damages
● Pays lost rental income until unit is habitable again
● Only pays net loss: subtracts any expenses that do not continue while the
tenant is gone
Fair Rental Value Example
Before the loss:
● Dana’s rental income: $1,200/month
● Dana’s water bill for rented unit: $40/month
After the loss:
● Dana’s lost rent: 3 weeks (3/4 month = $900)
● Water turned off: 3 weeks (3/4 month = $30)
● Dana’s net loss: $900 - $30 = $870
Important Note About Fair Rental Value
● Coverage does not include losses due to cancelled lease or agreement
● Only pays up until the unit is repaired, not until the insured finds a new tenant,
if applicable
Civil Authority coverage:
● Pays for ALE and FRV when a civil authority prevents the insured from using the home
● Civil authority: any government entity acting on behalf of, or to protect, people or property
● Only applies if the damage was caused by a peril covered in the insured’s policy
Civil Authority coverage Example
Cliff has a homeowners policy that insures against fire, among other things. He comes home from work one night to find the fire department busily fighting a fire at his neighbor’s house. The local police and fire departments have blocked off the entire street, leaving Cliff stranded without access to his home.
Since a civil authority has prevented Cliff from using his residence premises because of damage from a covered peril, Cliff’s Civil Authority coverage may pay the increase in his living expenses until he is allowed to return home.
Coverage D Limits
Measured in time rather than dollars.
Additional Living Expenses are paid:
● Until the premises is repaired or replaced, or
● Until the insured’s household can settle elsewhere
Fair Rental Value
is paid for the shortest amount of time needed to restore the rented area to rentable condition.
Civil Authority
coverage pays ALE and FRV:
● Until access to the home is restored
● Up to a maximum of two-weeks
Limits of Coverage D:
● Designed to cover the insured until the dwelling is habitable
● Allow Additional Living Expenses and Fair Rental Value to extend beyond the
policy expiration date if needed
Remember: Fair Rental Value does not include time spent finding a new tenant if a previous tenant cancels the lease.
Limits of Coverage D Example
Say Marguerite’s house is damaged in a kitchen fire, and Lucy, who rents her extra bedroom, has to move out. It takes three months to repair the damage, but by that time, Lucy has found a new place to live. It takes Marguerite another two months tofind a new boarder.
Even though Marguerite lost 5 months of rental income, she is only eligible for three months of Fair Rental Value coverage, since it only took three months to restore the unit to rentable condition. Lucy’s default on the lease does not affect Marguerite’s FRV coverage in any way.
Loss of Use Deductibles
● Additional Living Expenses and Fair Rental Value: subject to the policy deductible
● Civil Authority coverage: not subject to any deductible
Note: since HO deductibles apply only once for each occurrence (rather than separately for each coverage), Coverage A losses will usually end up covering deductible.
Debris Removal Coverage
● Pays to: remove and dispose of the debris of covered property if damaged by a covered peril
● Limit: the limit for the type of property involved
○ Debris from Dwelling: subject to Coverage A limit
○ Debris from Other Structures: subject to Coverage B limit
○ Debris from Personal Property: subject to Coverage C limit
Debris Removal Coverage Example
Debris Removal might pay to clean up shattered glass from your windows, but not the shards of your neighbor’s fine china that got blown all over your yard.
Additional Debris Removal Coverage
When needed Debris Removal can pay an additional 5% of the applicable limit:
● Coverage A property: 5% of Coverage A limit
● Coverage B property: 5% of Coverage B limit
● Coverage C property: 5% of Coverage C limit
Debris Removal Coverage Example
Bill has an HO-3 policy with a Coverage A limit of $150,000, which makes the Coverage B limit $15,000. During a windstorm, Bill sustains $12,000 in damage to his detached garage, $3,000 in damage to fencing, $700 in damage to a shed on a permanent foundation, and $1,200 in debris removal.
All of these items are insured under Coverage B, but the total damage is $16,900, which exceeds the Coverage B limit.
In this situation, Bill’s Debris Removal coverage would provide an additional 5% of the Coverage B limit for the removal of debris from the garage, fencing
Reasonable Repairs
Coverage reimburses a homeowner for expenses to protect property from further damage.
Reasonable Repairs Example
If wind blows shingles and felt off of Mark’s roof, and rain pours into his house, he may have to pay a roofer to put up a tarp until permanent repairs are made or the roof is replaced.
The Reasonable Repairs clause would reimburse Mark for the expense of these temporary repairs.
Loss Assessment
● For condo owners under HO-6
● Pays when condo association charges an assessment after a loss
● Limit: typically $1,000 or $2,500 per claim
Property Removal
● Provides coverage for items that the insured removes from danger if a covered peril is imminent
● Property remains covered under the original peril for up to 30 days
● No matter what damages the property during this time, it will still be covered under the peril that the insured was trying to protect it from
Ordinance or Law
● Pays difference between old construction and new code-required constructionduring repair or damage due to a covered peril
● Pays up to 10% of the Coverage A limit as additional insurance
● Does not cover Ordinances or Laws as perils; this is specifically excluded
Landlord’s Furnishings
● Designed to protect a landlord who rents out a furnished room
● Pays in addition to the Coverage A limit
● Limit: $2,500
Grave Marker
● Protects against damage to grave plots due to covered perils
● Limit: $5,000
Exclusions
Risks or causes of loss that the insurer decides not to cover
Named peril vs. Open peril
● Named peril: narrow coverage = few exclusions
● Open peril: wide coverage = many exclusions
Insurance to Value Requirement:
If home is insured at 80% of value or more: replacement cost
If home is insured at less than 80%: policy pays the higher of: ● ACV
● Replacement cost minus the insurance to value requirement
○ this has a similar calculation to a coinsurance penalty
○ formula: (insurance limit / 80% of property value) x (covered damage)
Liability coverage:
pays damages to someone who suffers loss caused by the insured.
Homeowners Liability Coverage can pay for:
● Medical bills ● Lost wages ● Pain & suffering ● Inconvenience ● Property damage
Personal Liability Terms
Bodily Injury:
Physical harm, disease, sickness, or death
Property Damage:
Physical damage or loss to tangible property
Occurrence:
Accident or incident resulting in harm, damage, or loss
