Kap Real Estate Chapter 13: Property Insurance Basics

Question 1

An insurance policy is an agreement between two parties:

What does insurance represent?

Answer 1

the insurer and the insured

Insurance represents the transfer of risk from the individual homeowner to the group of policyholders affiliated with the insurance company.

Question 2

property insurance/casualty insurance

Answer 2

policy protects the insured from losses caused by damage to the insured property and the permitted improvements on that property

Question 3

liability insurance

Answer 3

policy protects the insured from losses or damage caused to third persons or their property

Question 4

package insurance

Answer 4

policy protects the insured from both types of losses (property and Liability)

Question 5

The basis for most homeowners’ policies is called a basic form (HO-1): (name a few things you’re covered from)

Answer 5

fire and lightning

glass breakage,

windstorm and hail,

explosion,

riot and civil commotion,

damage by aircraft,

damage from vehicles,

damage from smoke,

vandalism and malicious mischief,

theft, and

loss of property removed from the premises when it is endangered by fire or other perils.

Question 6

The packaged homeowners’ policy also includes liability coverage for:

Answer 6

(1) personal injuries to others resulting from the insured’s acts of negligence
(2) voluntary medical payments and funeral expenses for accidents sustained by guests or resident employees on the insured’s property
(3) physical damage to the property of others caused by the insured.

Question 7

HO-2 (broad form)

Answer 7

insurance policy is a named peril policy, which means that if a specific peril or hazard is not named in the policy, it is not covered

falling objects

weight of ice, snow, or sleet

collapse of buildings

malfunctioning heating systems

accidental discharge of water or steam

and electrical currents

Question 8

HO-3 (special form)

Answer 8

is an all-risk form insurance policy that provides even greater coverage than HO-2 because loss and damage to real property caused by all perils is covered unless excluded from coverage.

HO-3 remains a named peril policy regarding damage or loss to personal property

Because it provides the insured with a greater amount of protection, it is the most commonly used residential policy today. It also meets the minimum coverage required by most mortgage lenders.

Question 9

HO-4 (contents broad form)

Answer 9

is a tenant’s policy (renter’s policy) that covers the same perils as HO-2 regarding the insured’s personal property. It cannot insure the building in which the tenant lives because the tenant does not hold the required financial interest in the property

HO-4 will frequently include liability insurance for any damage that the tenant might cause to the rented property

Question 10

HO-5 Comprehensive Form

Answer 10

This homeowners’ policy insures an owner-occupied dwelling, other structures in connection with the dwelling, unscheduled personal property on and away from the premises, and loss of use.

This policy also provides personal liability coverage and medical payments coverage. This is the broadest homeowners’ form, as coverage is on an all-risks basis for the dwelling and other structures, as well as personal property.

Question 11

HO-6 (unit owners form)

Answer 11

policy is designed for the special needs of condominium owners.

Because condo ownership is limited to air space, (ownership extends inward from interior walls, floors and ceilings), the main areas of real property concern are coverage of personal property and fixtures as well as liability from injuries.

Question 12

HO-7

Answer 12

An extended all-risk form providing broad coverage of both real and personal property. The HO-7 is designed for and primarily sold to owners of very expensive property

Question 13

HO-8 (modified coverage form)

Answer 13

This Homeowners’ Modified Coverage Form is generally used when properties have less market value than the cost to replace them. It may be used to insure older homes.

Question 14

Contents of Standard HO-3 Policy

Answer 14

Agreement to insure

Declaration page

Standardized policy provisions

Question 15

Insurance Definitions (CEE)

Answer 15

Condition -is a limitation on the coverage of a specific insured property. For example, damage to a vehicle will only be covered if the vehicle was inside the garage at the time of the damage

Endorsement - is coverage for specific property or perils that are not covered in the original policy and is sometimes called a rider. For example, if the homeowner owns a collection of rare books, an endorsement would probably be needed to fully insure the collection against loss

Exclusion - is some item, or loss due to a specific event, that is not covered by the policy. For example, most policies exclude the coverage of loss due to acts of war or terrorism

Question 16

What does CLUE stand for?

Answer 16

Comprehensive Loss Underwriting Exchange

***Insurance underwriters routinely request a CLUE report when property buyers apply for coverage or request a quote

Question 17

The report contains the following claim information provided by your insurance company:

Answer 17

your name, date of birth, policy number, date of loss, type of loss, amount the company paid, description of the covered property, and property address for homeowner claims, or specific vehicle information for auto claims

Question 18

What is an unoccupied property?

Answer 18

means that the property has been left in a state where the property still contains all items and possessions as if the owners were to return at any time.

For a home to be determined as unoccupied, there must be sufficient items left in the house such as cooking utensils, functioning appliances like a microwave oven, toaster, refrigerator, and basic furniture.

If a property is indeed unoccupied, such as the case in a vacation home or a main residence where the owner is away for an extended period of time, normal coverage usually remains in place.

Question 19

What is a vacant property?

Answer 19

A vacant property is one that is completely empty, that is, the property lacks inhabitants and personal property. Vacancy can also be defined as “substantially empty of personal property necessary to sustain normal occupancy.”

Insurance policies usually contain exclusions for vacant property. Vacant properties have a greater chance of vandalism, undiscovered damage, and theft, and can adversely affect property insurance claims.

In a homeowners policy, vacancy exclusions will remove coverage for vandalism, building glass breakage, water damage, theft or attempted theft if the damage occurs within 30 or 60 days (depending on the policy and state laws) of the home becoming vacant. Coverage for standard perils such as fire and wind usually remain intact.

Question 20

What is vacant for commercial properties?

Answer 20

For commercial properties, a building is considered vacant unless at least 31 percent of its total square footage is occupied, and the operations conducted must be in accordance with building use. Standard commercial property policies generally remove coverage for vandalism, sprinkler leakage, water damage, theft, or attempted theft when a building is vacant for more than 60 days.

Another aspect of commercial property insurance policies is that for a peril that causes a covered loss to a vacant property, payment is reduced by 15 percent. That means, if $20,000 of damage occurs, the policy would pay only $17,000 (less the insurance policy’s deductible).

Question 21

Unoccupied building exclusion

Answer 21

Most policies contain provisions that state that “if the insured building is vacant or unoccupied for more than a certain length of time, the owner may not be able to recover any losses that may occur.”

According to North Carolina statute, insurance companies may use 60 consecutive days as the unoccupied/vacancy time period. A property owner should also make sure the building is not vacant for a longer period than that stated in the insurance policy (e.g., 60 days).

Question 22

What does FEMA stand for?

Answer 22

Federal Emergency Management Agency

Question 23

What does NFIP stand for?

Answer 23

National Flood Insurance Program

Question 24

FEMA has designated many areas bordering on rivers and streams as

Answer 24

Flood Hazardous Areas

which are subject to federal regulations concerning improvements and construction in those areas.

Question 25

FEMA produces maps that designate these flood hazard areas, and flood insurance is required under the _______________ if a federally-related mortgage loan is to be used for properties within those areas. The lender will insist on appropriate flood insurance, which the buyer can purchase through most insurance companies that sell homeowners policies.

Answer 25

NFIP (National Flood Insurance Program)

Question 26

What. is the intent of the NFIP?

Answer 26

The NFIP (www.floodsmart.gov) aims to reduce the impact of flooding on private and public structures. It does so by providing affordable insurance to property owners, renters, and businesses, and by encouraging communities to adopt and enforce floodplain management regulations. These efforts help mitigate the effects of flooding on new and improved structures.

Question 27

The amount paid for a flood insurance policy is calculated based on factors such as:

Answer 27

Year of building construction

Building occupancy

Number of floors

Location of its contents

Flood risk (e.g., flood zone classification)

Location of the lowest floor of the building in relation to the base flood elevation (computed elevation to which flood water is anticipated to rise during a flood) on the flood map

Deductible and amount of building and contents coverage

Question 28

The amount of flood insurance coverage required by the Flood Disaster Protection Act of 1973, as amended by the National Flood Insurance Reform Act of 1994, is the lesser of the following:

Answer 28

The maximum amount of NFIP coverage available for the particular property type

the outstanding principal balance of the loan

the insurable value of the structure

Question 29

A homeowners policy that provides both casualty and liability coverage is best referred to as a blanket policy.

Answer 29

False

Package insurance is the name

Question 30

The most popular type of homeowners insurance policy and the one usually required by lenders is a HO-3 policy. (t/f)

Answer 30

True

Question 31

An HO-4 policy typically provides a renter’s personal property. (t/f)

Answer 31

True

Question 32

The insured is the insurance company that agrees to reimburse the insurer for losses caused by a covered event. (t/f)

Answer 32

False