FIN3040 - Risk and Insurance > Chapter 22 > Flashcards
Chapter 22 Flashcards
What is HO-3?
HO-3: (Special Form), covers the dwelling and other structures on a risk-of-direct-physical loss basis.
-All direct physical losses are covered except those losses specifically excluded
-Personal property is covered on a named perils basis
What is HO-4?
HO-4: (Contents Broad Form), covers a tenant’s personal property on a named-perils basis
What is HO-5?
HO-5: (Comprehensive Form), provides open perils coverage (“all-risks coverage”) on the dwelling, other structures and personal property
- All direct physical losses are covered except those losses specifically excluded
What is HO-6?
HO-6: (Unit Owners Form), covers personal property on a named perils basis
- Minimum of $5,000 of insurance is also provided on the condominium unit that covers improvements and additions
What is HO-8?
HO-8: (Modified Coverage Form), designed for older homes
- Dwelling and other structures are based on the amount required to repair or replace common construction materials and methods
What are the types of coverage in homeowners insurance?
Coverage A
Coverage B
Coverage C
Coverage D
Coverage E
Coverage F
What is Coverage A in homeowners insurance?
Coverage A covers the dwelling on the resident premises and any structure attached to the dwelling
- Materials intended for construction are included
- The coverage specifically excludes land
What is Coverage B in homeowners insurance?
Coverage B insures other structures on the resident premises
- Includes a detached garage, tool shed
- Structures that are rented out or used for a business are excluded
- The amount of coverage is based on the amount of insurance in coverage A
What is Coverage C in homeowners insurance?
Coverage C insures personal property owned or used by the insured
- Personal property is covered anywhere in the world, both on and off the premises
- The amount of coverage is 50% of Coverage A, but can be increased if desired
- Coverage for personal property is at another residence such as vacation home, which is limited to 10% of coverage C or $1000, whichever is greater
- Certain types of personal property have maximum dollar limits on the amount paid for any loss
What is Coverage D in homeowners insurance?
Coverage D provides protection when the residence premises cannot be used because of a covered loss
- Coverage is 30% of coverage A
- Additional living expense is the increase in living expenses actually incurred by the insured to maintain the family’s standard of living
- The policy pays the fair rental value for that part of the residence that is rented to others, but is not fit to live in
- Coverage applies if the home is not damaged, but a civil authority prohibits the insured from using the premise
T/F: You can’t buy flood insurance if you are located in a high-risk flood area.
False
T/F: You can’t buy flood insurance immediately before or during a flood.
True
T/F: Flood insurance is only available for homeowners.
False (Renters HO-4)
T/F: You can’t buy flood insurance if your property has been flooded.
False
T/F: Only residents of high-risk flood zones need to insure their property.
False
T/F: The NFIP offers basement coverage.
True
T/F: Federal disaster assistance will pay for flood damage.
False
T/F: The NFIP encourages costal development.
False
T/F: The NFIP does not cover flooding resulting from hurricanes or the overflow of rivers or tidal waters.
False - Its Covered
T/F: Wind-driven rain is considered flooding.
False - Not Considered
About one in ______ homeowners has an insurance policy that would cover ________ of the value of rebuilding the home
four, less than 80%
What should be zeroed in on when getting homeowners insurance?
Whats the current cost to rebuild?
- Do you have extended replacement cost coverage?
- Do you have building code upgrade coverage?
- What will my policy cover if my home is flooded?
- What will my policy cover for wind/hurricane damage?
What percent of people have homeowners insurance vs how many have renters?
95% have homeowners vs only 40% have renters
How much does a normal renters insurance plan cost?
$15 per month
What are the considerations you should take into account when deciding to get renters insurance?
- Your belongings are covered
- Your policy covers your stuff even when you’re not in your home
- It covers other peoples stuff too
- You could stay in a hotel in case of emergency
- You’re covered if someone gets hurt on your watch
- Third-party property damage
- Further consideration
What do most homeowner policies not cover?
Flooding
What damage is covered under homeowner’s insurance?
- Fire
- Winds
- Hail
- Explosions
- Riots
- Aircraft
- Vehicles
- Smoke
- Vandalism
- Theft
- Falling objects
- The weight of ice, snow or sleet
- Volcanic eruption
What damage is not covered under homeowner’s insurance?
- Earthquake
- Floods
- Mudslides
- Landslides
- Power failure
- Neglect
- War
- Nuclear hazard
- Government confiscation or seizure
- Wind damage (if flooding and wind damage happen simultaneously
U.S. law requires people to purchase basic flood insurance if they buy a home in a _____________ with a federally backed mortgage.
high-risk flood area
The major flood insurer is now _________________.
The U.S. government
What program created the U.S. government’s program to supply flood insurance for citizens?
The National Flood Insurance Program in 1968
What is the hurricane deductible?
When a hurricane does occur, the insurance company may charge a 1-10% deductible
Jack and Jane are married and own a home insured for $150,000 under an unendorsed HO-3 policy. The replacement cost of the home is $250,000. Personal property is insured for $75,000. Jane has jewelry valued at $10,000. Jack has a coin collection valued at $15,000 and a motorboat valued at $20,000.
A) Assume you are a financial planner who is asked to evaluate the couple’s HO-3 policy. Based on the facts given, do you believe that Jack and Jane’s coverages are adequate? If not, make several recommendations for improving the coverage.
- Insurance on the home should be increased to at least $200,000 to comply with the coinsurance requirement so that partial losses will be settled on a replacement cost basis. An extended replacement cost or guaranteed cost endorsement could be added, which requires the home to be insured to $250,000.
- Jewelry is covered only for a maximum of $1,500 if the jewelry is stolen. The jewelry should be scheduled and specifically insured to its full value. There is only $200 of coverage provided for the coin collection. The coin collection should also be scheduled and insured for its value.
- The homeowners policy provides only limited coverage on boats. The boat should be specifically insured under a separate “all-risks” boat insurance policy.
- A personal property replacement cost endorsement could be added that
provides replacement cost coverage on personal property.
Jack and Jane are married and own a home insured for $150,000 under an unendorsed HO-3 policy. The replacement cost of the home is $250,000. Personal property is insured for $75,000. Jane has jewelry valued at $10,000. Jack has a coin collection valued at $15,000 and a motorboat valued at $20,000.
B) A fire damaged one bedroom of the home. The actual cash value of the loss is $10,000. The cost of repairs is $16,000. How much will the insurer pay for the loss?
Jack and Jane will receive the higher of (1) The actual cash value of $10,000 (2)an amount based on the following formula: Amount of insurance carried / (80% of replacement cost( x loss , $150,000 / (80% x $250,000) x $16,000 = $12,000. The insurer will pay $12,000
Jack and Jane are married and own a home insured for $150,000 under an unendorsed HO-3 policy. The replacement cost of the home is $250,000. Personal property is insured for $75,000. Jane has jewelry valued at $10,000. Jack has a coin collection valued at $15,000 and a motorboat valued at $20,000.
C) A burglar broke into the home and stole a new television, jewelry, and several paintings. The actual cash value of the stolen property is $4,000. The cost of replacing the property is $9,000. In addition, the coin collection was taken. Indicate the extent, if any, to which an unendorsed HO-3 policy will cover these losses.
Unless a replacement cost provision is added to the policy, personal property is indemnified on the basis of actual cash value. Ignoring any deductible, the actual cash value of the stolen property ($4,000) would be paid.
Jack and Jane are married and own a home insured for $150,000 under an unendorsed HO-3 policy. The replacement cost of the home is $250,000. Personal property is insured for $75,000. Jane has jewelry valued at $10,000. Jack has a coin collection valued at $15,000 and a motorboat valued at $20,000.
D) Assume that Jack and Jane have a disagreement with their insurer concerning the value of the aforementioned losses. How would the dispute be resolved under their HO-3 policy?
The dispute is settled under the appraisal provision that appears in the Section I conditions. Jack and Jane would select their own appraiser. The insurer would select its appraiser. The two appraisers would then select an umpire. If the appraisers cannot agree on an umpire, a judge in a court of record will appoint one. If the appraisers disagree on the amount of the loss, their differences are submitted to the umpire. An agreement by any two of the three is then binding on all parties.
Jack and Jane are married and own a home insured for $150,000 under an unendorsed HO-3 policy. The replacement cost of the home is $250,000. Personal property is insured for $75,000. Jane has jewelry valued at $10,000. Jack has a coin collection valued at $15,000 and a motorboat valued at $20,000.
E) Assume that Jane operates an accounting business from the home. Her home business office contains a computer used solely for business, office furniture, file cabinets, and other business personal property. Explain whether her HO-3 policy would cover business personal property used in a home business.
Business personal property used in a home business on the premises is covered
up to $2,500.
Identify the basic types of homeowners policies that are used today.
- HO-3 is a special form that covers the dwelling and other structures against all direct physical losses except certain losses specifically excluded. Personal property is covered only for certain named perils. HO-3 is designed for
homeowners who desire broader coverage than that provided by HO-2. - HO-4 covers the personal property of renters and also provides personal liability insurance; it is designed for renters. HO-5 covers the dwelling, other
structures, and personal property on an open-perils (“all-risks”) basis. - HO-5 is designed for insureds who want broader coverage on both the dwelling and personal property.
- HO-6 is designed for condominium owners.
- HO-8 is designed for insureds who have older homes with a replacement cost exceeding market value.
Identify the persons who are insured under a homeowners policy.
Persons insured include
(1) the named insured and household residents who are
relatives,
2) other persons under age 21 in the care of the named insured or in the care of a household resident who is a relative, and
(3) full-time resident
students under age 24 who are relatives and attending school away from home, or under age 21 and in the care of the named insured, or the care of a household resident who is your relative.
The Section I property coverages provide different types of coverages to an insured. For each of the following coverages, briefly describe the type of coverage provided, and give an example of a loss that would be covered.
A. Coverage A: Dwelling
B. Coverage B: Other Structures
C. Coverage C: Personal Property
D. Coverage D: Loss of Use
E. Additional coverages
- (A) Coverage A covers the dwelling, attached structures, and materials and supplies used to construct, repair, or alter the dwelling or other structure. An example of a covered loss is damage to the roof because of a windstorm or tornado.
- (B) Coverage B covers other structures, such as a detached garage, tool shed, or horse stable. The amount of insurance is 10 percent of Coverage A. An example of a covered loss is damage to the detached garage because of a fire.
-(C) Coverage C covers personal property anywhere in the world. The amount of insurance under Coverage C is 50 percent of Coverage A, which can be increased if desired. If personal property is usually located at another residence, such as a cabin or vacation home, the off-premises coverage is limited to 10 percent of Coverage C, or $1,000, whichever is greater. Special limits apply to items that are often subject to theft. An example of a covered loss is the theft of a camera from a motel room while the insured is
on vacation. - (D) Coverage D covers the loss of use. The Coverage D amount is 30 percent of Coverage A. Three benefits are provided—additional living expenses, fair rental value, and prohibited use. For example, if the insured must rent a
temporary apartment for three months while his or her home is being repaired because of a fire, the additional living expenses would be covered under this provision.
(E) Additional coverages include the cost of debris removal; repairs to prevent further damage; limited coverage of trees, shrubs, plants, and lawns; unauthorized use of credit cards and fund transfer cards; broad coverage of
property removed from the premises threatened by a covered peril for up to 30 days; loss assessment charge up to $1,000; certain collapse losses; coverage for glass or safety glazing material; coverage for landlord’s
furnishings up to $2,500; limited coverage for increased construction costs because of some ordinance or law; and coverage of grave markers up to $5,000. An example of a covered loss is the cost of removing debris after a
tornado occurs.
A. Briefly describe the special limits of liability that apply to certain types of personal property.
B. Why are these special limits used?
A) The special limits of liability on certain types of property are as follows:
(1) $200 on money, bank notes, bullion, gold, silver, platinum, coins, medals, stored value cards, and smart cards
(2) $1,500 on securities, valuable papers, manuscripts, passports, tickets, and stamp collections
(3) $1,500 on watercraft of all types
(4) $1,500 on trailers not used with watercraft
(5) $1,500 for theft of jewelry, watches, furs, and precious and semiprecious stones
(6) $2,500 for theft of firearms and related equipment
(7) $2,500 for theft of silverware, goldware, platinumware, and pewterware
(8) $2,500 on property on the residence premises used primarily for business
(9) $1,500 on property away from the premises used primarily for business
(10) $1,500 on portable electronic equipment in or upon a motor vehicle
(11) $250 on antennas, tapes, wires, records, disks, and other media used with electronic equipment in or upon a motor vehicle
B) Because of moral hazard and loss-adjustment problems and a desire by the insurer to limit its liability, certain types of property have maximum dollar limits on the amount paid for any loss.
A. Coverage A and Coverage B under a Homeowners 3 policy insure the dwelling and other structures against “direct physical loss.” Explain the meaning of this phrase.
B. Coverage C under a Homeowners 3 policy covers personal property on a named-perils basis. List the various perils that are covered.
A) This means that all direct physical losses are covered except certain losses specifically excluded.
B) Under Coverage C, personal property is covered for 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,
sudden and accidental tearing apart, cracking, burning, or bulging of a steam, hot water, air conditioning, or automatic fire protective sprinkler system, or household appliance, sudden and accidental damage from an artificially generated electrical current, and volcanic eruption.
List the major exclusions that are found in Section I of the Homeowners 3 policy.
The major exclusions that apply to the dwelling and other structures are collapse, except certain collapse losses; freezing of plumbing, heating, air conditioning, or automatic fire protection sprinkler system unless heat is
maintained; damage to pavements, patios, swimming pools, and similar structures from ice, water pressure, freezing, and thawing; theft of materials and supplies from a dwelling under construction; vandalism, malicious
mischief, and glass breakage if the dwelling is vacant for more than 60 consecutive days immediately before the loss; wear and tear; inherent vice; smog; smoke from agricultural smudging; release or escape of pollutants
unless caused by a Coverage C peril; settling, cracking, shrinking or bulging of pavements, foundations, walls, floors and roofs; animals owned or kept by an
insured; and certain additional exclusions. Certain types of personal property are also excluded, including articles
separately described and specifically insured; animals, birds, and fish; motor vehicles and motorized land conveyances, aircraft and parts; hovercraft and parts; property of roomers, boarders, and other tenants; property rented or held for rental to others off the residence premises; and business records. Certain other exclusions apply to the dwelling, other structures, and personal
property. They include losses from an ordinance or law; earth movement; certain types of water damage; power failure away from the premises; neglect
of the insured to protect the property; war; nuclear hazard; intentional loss; governmental action; weather conditions that are otherwise excluded; failure to act by any person, group, or government body; and faulty, inadequate, or
defective planning and design.
Briefly describe the duties imposed on the insured under a homeowners policy after a property loss occurs.
The conditions section imposes certain duties on the insured after a loss occurs. The insured must give immediate notice of the loss; the property must be protected from further damage; the insured must prepare an inventory of the damaged personal property, and may be required to show the damaged property to the insurer as often as is reasonably required, and the insured may be
required to file a proof of loss at the insurer’s request within 60 days.
The Section I Conditions of the Homeowners 3 policy deal with the payment of losses to an insured.
A. How is the amount paid for a covered loss to personal property determined?
B. How is the amount paid for a covered loss to the dwelling and other structures determined?
(A) Covered losses to personal property are settled on the basis of actual cash value at the time of loss but not to exceed the amount necessary to repair or replace the property. Actual cash value is replacement cost less
depreciation. However, personal property can be insured for replacement cost by adding a replacement cost endorsement to the policy. Under this endorsement, there is no deduction for depreciation in determining the
amount paid for a loss to personal property.
(B) Covered losses to the dwelling and other structures are paid on the basis of replacement cost with no deduction for deprecation if certain conditions are fulfilled. If the insured carries insurance at least equal to 80 percent of the
replacement cost at the time of loss, full replacement cost is paid with no deduction for depreciation for partial losses.
If the insurance carried is less than 80 percent of the replacement cost, the insured receives the larger of the following amounts:
A. Describe the extended replacement cost endorsement that can be added to a Homeowners 3 policy.
B. What is a guaranteed replacement cost policy?
A) Pays up to an extra 20% or more above the policy limits. The insured agrees to insure the dwelling for full replacement cost and must also notify the insurer if alterations or remodeling increase the value of the dwelling.
B) Under a guaranteed replacement cost policy, the insured agrees to insure the home to 100 percent of its estimated replacement cost rather than 80 percent. If a total loss occurs, the insurer agrees to replace the home exactly
as it was before the loss even if the replacement cost exceeds the amount of insurance stated in the policy
A home buyer may obtain a mortgage loan to purchase a house. Explain briefly how the mortgage clause protects the insurable interest of the lending institution (mortgagee).
Under the mortgage clause, the mortgagee (lending institution) is entitled to receive a loss payment from the insurer to the extent of its interest regardless of any policy violation by the insured. Even if the insured violates a policy
provision, the insurer must make a loss payment to the mortgagee. Thus, the mortgagee’s insurable interest is protected.
Carolyn owns a home with a replacement cost of $400,000 that is insured under a Homeowners 3 policy for $280,000. The roof was badly damaged in a severe windstorm, and it will cost $20,000 to repair the roof. The actual cash value of the loss is $10,000. Ignoring any deductible, how much will Carolyn collect from the insurer?
Carolyn does not carry insurance at least equal to 80 percent of the replacement cost of the dwelling. As a result, she will receive the greater of either the actual cash value of the loss or an amount based on the replacement cost formula when the amount of insurance carried is less than 80 percent of
the replacement cost. The actual cash value of the loss is $10,000.
$280,000 / (80% of $400,000) x $20,000 = $17,500
Thus, Carolyn will receive $17,500 for the loss.
Michelle purchased a Homeowners 3 policy with no special endorsements to cover her home and personal property. A fire occurred and destroyed a big-screen television. Michelle paid $4,000 for the new TV, and it was 25 percent depreciated when the fire occurred. The replacement cost of a similar television is $3,800. Ignoring any deductible, how much will Michelle collect for the loss?
Michelle will be paid the actual cash value. Replacement cost is $3,800. Depreciation is $950 because the destroyed television is 25 percent
depreciated. Michelle will receive $2850.
𝐴𝐶𝑉= Replacement cost less depreciation = $3,800 ―$950 = $2,850
Martin and Carrie Jones insured their home and personal property under an unendorsed Homeowners 3 policy. The home has a current replacement cost of $300,000. The policy contains the following limits:
Coverage A:
$240,000
Coverage B:
$24,000
Coverage C:
$120,000
Coverage D:
$72,000
The home was badly damaged in a fire, and the Jones family was forced to live in a motel for 60 days while their home was being repaired. Undamaged personal property was stored in a rental unit during the period of reconstruction. What dollar amount, if any, is payable under their Homeowners 3 policy for the following (ignore any deductible)?
A) Three bedrooms were totally destroyed in the fire. The replacement cost of restoring the bedrooms is $80,000. The actual cash value of the loss is $50,000.
B) Monthly mortgage payment of $1,500 on their home.
C) Rental of motel room at $100 daily for 60 days.
D) Meals eaten in the motel restaurant for 60 days at an average cost of $60 daily (food costs at home average $20 daily).
E) Rent for storing undamaged furniture in a rental unit while the home is being rebuilt, $200 monthly.
(A) The amount paid will be $80,000. The amount of insurance carried ($240,000) is 80 percent of replacement cost ($300,000). Because the 80
percent rule is met, the full amount of the partial loss is paid.
(B) Nothing is paid. The mortgage payment is a normal living expense that would have to be paid even if the fire had not occurred.
(C) The amount paid will be $6,000. This is an additional living expense above normal living expenses. The cost of the motel room is covered for 60 days.
(D) The amount paid will be $2,400. The additional cost of meals is covered. The average cost of meals in the motel restaurant is $60, while normal food costs at home average $20 daily. Thus, the additional living expense of $40
is covered for 60 days.
(E) The amount paid will be $400. The storage fee is an additional living
expense, which is paid for two months while the home is being rebuilt
Megan has her home and personal property insured under an unendorsed Homeowners 3 (special form) policy. Indicate whether each of the following losses is covered. If the loss is not covered, explain why it is not covered.
A) Megan carelessly spills a can of paint while painting a bedroom. A wall-to-wall carpet that is part of the bedroom is badly damaged and must be replaced.
B) Water backs up from a clogged drainpipe, floods the basement, and damages some books stored in a box.
C) Megan’s house is totally destroyed by a tornado. Her valuable Doberman pinscher dog is killed by the tornado.
D) During a frost warning, smudge pots from a nearby orange grove emit dense smoke that settles on Megan’s freshly painted house.
E) Megan is on vacation, and a thief breaks into her hotel room and steals a suitcase containing jewelry, money, clothes, and an airline ticket.
F) Megan’s son is playing baseball in the yard. A line drive shatters the living room window.
G) A garbage truck accidentally backs into the garage door and damages it.
H) Defective wiring causes a fire in the attic. Damage to the house is extensive. Megan is forced to move into a furnished apartment for three months while the house is being repaired.
I) Megan’s son, age 20, is attending college but is home for Christmas. A stereo set is stolen from his dormitory room during his absence.
J) The home is badly damaged in a severe earthquake. As a result of the earthquake, the front lawn has a 3-foot crack and is now uneven.
K) An icemaker in the refrigerator breaks and water seeps into the flooring and carpets, causing considerable damage to the dwelling.
A) Covered. Wall-to-wall carpeting is part of the dwelling. Since the loss is not excluded, it is covered.
(B) Not covered. Damage from water that backs up through sewers or drains is excluded.
(C) The dwelling is covered for the damage from the tornado. Animals are excluded under personal property, so the loss of the dog is not covered.
(D) Not covered. Smoke damage from agricultural smudging or industrial operations is excluded.
(E) Covered. However, there is a $1,500 limit on the theft of jewelry, a $200 limit on cash, and a $1,500 limit on tickets.
(F) Covered. Since the loss is not excluded, it is covered. Glass breakage is covered.
(G) Covered. Vehicle damage to the dwelling is covered.
(H) Covered. The additional living expense is covered under Coverage D. The fire loss to the dwelling is covered under Coverage A.
(I) Covered. As long as the son had been in the room any time during the 90-day period before the loss, the theft is covered.
(J) Not covered. Earthquake damage is specifically excluded.
(K) Covered. Water seepage from an appliance is covered.
Susan owns a valuable diamond ring that has been in her family for generations. She is told by an appraiser that the ring has a current market value of $50,000. She feels that the ring is adequately insured because she purchased a Homeowners 3 (special form) policy. Is Susan correct in her thinking? If not, what would you advise her concerning proper protection of the ring?
No. The homeowners policy does not provide complete coverage for valuable jewelry since there is a $1,500 limit on the theft peril. She should have the ring insured for a specific amount of insurance. A personal articles floater can be purchased, or this
coverage can be added as an endorsement to the homeowners policy.
Owen has his home and its contents insured under a Homeowners 3 (special form) policy. He carries $160,000 of insurance on the home, which has a replacement cost of $200,000. Explain the extent to which each of the following losses is covered. (Ignore the deductible.) If Owen’s policy does not cover the loss or inadequately covers any of these losses, show how full coverage can be obtained.
A) Owen’s stamp collection, which is valued at $5,000, is stolen from his home.
B) Teenage vandals break into Owen’s home and destroy a painting that has a market value of $1,000.
C) A motorboat stored in the driveway of Owen’s home is badly damaged during a hailstorm. The actual cash value of the damaged portion is $8,000, and its replacement cost is $20,000.
(A) Covered. However, the loss is covered only for $1,500 because of the $1,500 limit on stamps.
The stamp collection should be scheduled and specifically insured.
(B) Covered. Personal property is covered against loss by vandalism. The $1,000 loss is covered.
(C) Not covered. Damage to boats from windstorm or hail is covered only while inside a fully enclosed building. The boat should be insured under an
“all-risks” boat insurance policy that provides broader coverage.
Craig owns a home with a replacement cost of $200,000 that is subject to a $100,000 mortgage held by First Federal as the mortgagee. Craig has the home insured for $160,000 under the HO-3 policy, and First Federal is named as mortgagee under the mortgage clause. Assume there is a covered fire loss to the dwelling in the amount of $50,000. To whom would the loss be paid? Explain your answer.
Technically, under the standard mortgage clause, payment would be made to the mortgagee (First Federal). As a practical matter, the check for the loss payment would be made payable to both parties. Both the insured and First Federal would endorse the check, which would then be used to restore the property.
