risk and insurance chapter 22

Basics of Homeowners Insurance

• Homeowners insurance forms (created by ISO) are the standard versions used across the U.S.

• These forms are made specifically for people who own and live in their homes (owner-occupants).

• A homeowners policy can cover:

  • The dwelling (your actual house)

    • Example: If a fire damages your kitchen, this part pays to repair it.

  • Other structures

    • Example: Detached garage, shed, fence, or gazebo.

  • Personal property

    • Example: Furniture, electronics, clothes damaged by a covered peril.

  • Additional living expenses

    • Example: If your home is unlivable after a fire, this pays for a hotel and meals.

  • Personal liability

    • Example: Someone slips on your icy walkway and sues you.

  • Medical payments to others

    • Example: A guest is injured at your home; this pays their medical bills (no lawsuit needed).

• There are six different ISO homeowners forms, each offering different levels of coverage.

Owner-Occupants of Family Dwellings

People who own a home and live in it themselves, rather than renting it out

Types of Homeowners Policies (HO-2 vs. HO-3)

• HO-2 (Broad Form)

  • Covers dwelling, other structures, and personal property.

  • Uses named perils → the policy only covers the specific dangers listed.

    • Example: If “fire” and “theft” are listed, those are covered; if “falling objects” isn’t listed, then no coverage.

• HO-3 (Special Form)

  • Covers dwelling and other structures on an open perils / risk-of-direct-physical-loss basis.

    • This means everything is covered unless the policy specifically excludes it.

    • Example: If a tree randomly collapses on the roof, it’s covered unless “tree collapse” is excluded.

  • Personal property is still named perils (same as HO-2).

    • Example: Your clothes are covered only for listed perils like fire or theft.

Key Difference:

• HO-2 = named perils for house + belongings.

• HO-3 = open perils for house, named perils for belongings.

Named Perils Basis

Coverage applied only to the specific dangers (perils) that are listed in the policy

Risk-of-Direct Physical Loss Basis

Everything is covered unless the policy clearly says it isn’t

Specifically Excluded

These are the losses the policy says it will not cover, no matter what

HO-4 and HO-5 Homeowners Policies

• HO-4 (Contents Broad Form)

  • Designed for renters/tenants (not homeowners).

  • Covers personal property only (since renters don’t own the building).

  • Uses named perils → only the listed dangers are covered.

    • Example: If “theft” is listed and your laptop gets stolen, it’s covered.

    • But if “water damage” isn’t listed, a burst pipe ruining your clothes wouldn’t be covered.

• HO-5 (Comprehensive Form)

  • Most complete and generous homeowners policy.

  • Provides open perils (all-risks) coverage for:

    • Dwelling

    • Other structures

    • Personal property

  • Covers all losses unless specifically excluded.

    • Example: Your TV randomly fries from an unknown cause — covered, unless that type of loss appears on the exclusions list.

Key Difference:

• HO-4 = renters → named perils on belongings only.

• HO-5 = homeowners → open perils on both house AND belongings.

Tenant’s (Renter’s) Personal Property

The renter’s own belongings — like clothes, electronics, and furniture — that they keep inside the place they’re renting

HO-6 and HO-8 Homeowners Policies

• HO-6 (Unit Owners Form)

  • Made for condo owners.

  • Covers personal property on a named perils basis.

    • Example: If “fire” is listed, your furniture damaged by fire is covered.

  • Automatically includes at least $5,000 of coverage for parts of the condo unit the owner is responsible for:

    • Improvements & additions (like upgraded floors, cabinets, or built-in shelves).

• HO-8 (Modified Coverage Form)

  • Designed for older homes, especially those where replacement cost would be extremely high or unrealistic.

  • Covers the dwelling and other structures based on using common, cheaper construction materials rather than original historic materials.

    • Example: If your 1920s home originally used rare wood, HO-8 pays for modern materials instead.

Key Difference:

• HO-6 = condo owners → named perils, plus limited coverage for improvements.

• HO-8 = older homes → repairs using standard, modern materials.

Condominium Unit

The individual living space you own inside a larger building, like your private apartment within a condo complex

The HO-3 Policy Coverage Overview

• HO-3 Policy is divided into two main sections:

Section I: Property Coverages

• Coverage A: Dwelling → covers your house itself.

  • Example: Roof repair after storm damage.

• Coverage B: Other Structures → covers detached structures on your property.

  • Example: Garage, shed, or fence.

• Coverage C: Personal Property → covers your belongings inside the home.

  • Example: Furniture, electronics, clothes.

• Coverage D: Loss of Use → pays for living expenses if your home becomes uninhabitable.

  • Example: Hotel and meals after fire damage.

• Additional Coverages → extra protections included in the policy, like debris removal or fire department service charges.

Section II: Liability Coverages

• Coverage E: Personal Liability → protects you if someone sues for injury or property damage.

  • Example: Guest slips on your icy walkway.

• Coverage F: Medical Payments to Others → pays medical bills for guests injured on your property, regardless of fault.

  • Example: Neighbor falls on your porch and needs treatment.

Who is “Insured” Under HO-3 Policy

• Persons considered “insureds” under an HO-3 policy:

  • Named insured and spouse → the main policyholder and their spouse.

  • Resident relatives → family members living in the home.

  • Other persons under age 21 → can include children or relatives living with you.

  • Full-time students away from home → under 21 and living elsewhere for school.

    • Example: Your college-aged child living in a dorm is still covered.

• Section II (Liability) also covers:

  • Anyone legally responsible for covered animals or watercraft.

    • Example: Your dog injures someone; the person responsible is covered.

  • With motor vehicles covered by the policy (like a riding mower), employees of the named insured are also covered.

    • Example: Your gardener gets injured while using your riding lawnmower.

Section I Coverages — HO-3 Policy

• Coverage A: Dwelling

  • Covers the house itself and any attached structures (like an attached garage).

  • Materials for construction are included.

    • Example: Lumber stored on the property for home repairs.

  • Excludes land → the land your home sits on is not covered.

• Coverage B: Other Structures

  • Covers detached structures on your property.

    • Example: Detached garage, shed, gazebo, or fence.

  • Excludes structures rented out or used for business.

    • Example: A small office you rent to a business is not covered.

  • Coverage amount is usually a percentage of Coverage A.

    • Example: If Coverage A is $200,000 and Coverage B is 10%, Coverage B = $20,000.

Section I — Coverage C (Personal Property)

Coverage C: Personal Property

• Covers personal belongings owned or used by an insured.

• Worldwide coverage → applies both at home and anywhere else.

  • Example: Your laptop stolen while traveling is covered.

• Coverage amount is typically 50–75% of Coverage A, but can be increased if you want more protection.

  • Example: If Coverage A = $200,000, Coverage C = $100,000–$150,000.

• Coverage at another residence (like a vacation home) is limited to 10% of Coverage C or $1,000, whichever is higher.

  • Example: If Coverage C = $100,000, the maximum at a second home = $10,000.

• Certain property types (like jewelry, furs, electronics) have specific maximum payout limits.

  • Example: Policy might limit jewelry claims to $2,000 per item.

Section I — Coverage C: Exclusions and Scheduled Property

• Scheduled Personal Property:

  • You can create a schedule to insure certain items for a specific amount.

    • Example: Schedule a $5,000 diamond ring for full coverage, separate from the general limit.

• Coverage C Exclusions (not covered under standard policy):

  • Articles separately described and specifically insured → already covered elsewhere.

  • Animals, birds, and fish → pets or livestock are not covered.

  • Motor vehicles, aircraft, hovercraft, and parts → except certain exceptions (like lawn mowers).

  • Property of roomers and other tenants → not your personal property.

  • Property in a regularly rented apartment → belongings of renters in another unit.

  • Property away from premises that is rented → like a rented storage unit.

  • Business data → info stored on computers, files, etc.

  • Credit cards or electronic fund transfer cards → there are separate coverages for fraud.

  • Water (e.g., in swimming pools) → water itself is not covered.

Schedule

A list of specific items you want insured for a set amount of money, separate from your general coverage

Section I — Coverage D: Loss of Use

Coverage D: Loss of Use

• Protects you when your home can’t be used due to a covered loss.

• Typically 30% of Coverage A (dwelling coverage).

• Additional Living Expenses (ALE) → pays the extra costs to maintain your family’s standard of living.

  • Example: Hotel, meals, or temporary housing costs after a fire.

• Fair rental value → if part of your home is rented out but can’t be used, the policy pays the lost rent.

  • Example: Tenant cannot live in their apartment because of storm damage.

• Civil authority coverage → applies even if your home isn’t damaged, but a government order prohibits use.

  • Example: Mandatory evacuation due to nearby wildfire or flooding.

Additional Living Expense (ALE)

Extra money you spend to live normally when your home is uninhabitable

Fair Rental Value

The rental income you lose if part of your home that is normally rented cannot be used

Section I: Additional Coverages

• Pays to remove debris after a covered loss.

• Pays for temporary repairs to prevent more damage.

• Limited coverage for trees, shrubs, and plants (only certain perils).

• Covers fire department service charges.

• Covers moving property out of danger from a covered peril.

• Covers unauthorized credit card use, EFT card misuse, forgery, and counterfeit money.

• Loss Assessment: Pays your share if your homeowners’ association charges members for damage to shared property.

• Collapse: Covers building collapse caused by specific covered perils.

• Glass Breakage: Covers broken windows or glass materials.

• Landlord’s Furnishings: Covers limited damage to furniture in a rental unit you own.

• Ordinance or Law (A1): Pays extra costs to meet new building codes after a covered loss.

• Grave Markers: Covers damage to grave markers and monuments.

Section I — Perils Insured Against for Dwelling and Other Structures

• Coverage A (dwelling) and Coverage B (other structures) are insured for all direct physical losses unless the policy lists them as exclusions.

• Key exclusions include:
  • Collapse
  • Freezing damage
  • Damage to fences/pavement/patios
  • Damage that occurs while the dwelling is under construction
  • Vandalism if the home is vacant
  • Mold, fungus, or dry rot
  • Wear and tear or mechanical breakdown

Section I — Perils Insured Against for Personal Property

• Personal property coverage = named perils → only covers losses caused by perils specifically listed in the policy.

  • Example: Fire, windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, smoke, vandalism, falling objects, etc.

• Proximate cause rule: The peril must be the main cause of the loss.

  • Example: A tree falls during a windstorm → windstorm is the proximate cause.

• Theft coverage is broad but excludes:

  • Theft by an insured

  • Theft in a dwelling under construction

  • Theft from rented portions of the premises that are not occupied by the insured

Proximate Cause

The main event or peril that directly leads to a loss or damage

Section I — Exclusions

• Concurrent causation losses: If a loss is caused by two perils at the same time, like wind and flood, it may not be covered.

• Ordinance or law: Losses caused by changes in building codes are generally excluded, except under Additional Coverages (A1).

• Earth movement: Damage from earthquakes, landslides, or other earth movement is excluded.

• Certain water losses: Floods or damage from poor plumbing are excluded.

• Neglect, power failure, or faulty design: Losses caused by lack of maintenance, electrical outages, or construction defects are excluded.

• Intentional losses: Any damage caused on purpose by the insured is excluded.

• War, government action, failure to act, nuclear hazard: These events are not covered.

• Certain weather conditions: Some weather-related damages may be excluded depending on the cause.

Section I — Conditions

• Insurable interest: The insurer will only pay up to the value the insured actually owns at the time of the loss.

  • Example: You can’t collect for a neighbor’s house.

• Deductible: Typically $1,000 or more applies to any loss under Section I.

  • Example: If a covered loss costs $5,000 and your deductible is $1,000, you pay $1,000 and the insurer pays $4,000.

• Premium adjustment: Raising your deductible can lower your insurance premium.

• Percentage deductibles: In catastrophe-prone states, deductibles may be a percentage of Coverage A instead of a flat dollar amount.

  • Example: 2% of a $200,000 dwelling = $4,000 deductible for a hurricane loss.

Percentage Deductibles

A deductible amount based on a percentage of your home’s insured value instead of a fixed dollar amount

Section I — Duties of the Insured After a Loss

After a loss, the insured must:

• Give prompt notice to the insurer.

  • Example: Call your insurance company immediately after a fire.

• Protect the property from further damage.

  • Example: Board up broken windows to prevent rain damage.

• Prepare an inventory of damaged personal property.

  • Example: List each damaged item, its age, cost, and value.

• Exhibit damaged property to the insurer.

  • Example: Allow the adjuster to inspect the broken items.

• File a proof of loss within 60 days of the insurer’s request.

  • Example: Submit a completed form documenting the loss and claim amount.

Section I — Personal Property Loss Payments

• Standard coverage: Losses to personal property are paid at actual cash value (ACV) → current value after depreciation.

  • Example: A 5-year-old laptop worth $1,000 new may be valued at $600 ACV after depreciation.

• Replacement cost endorsement: If purchased, no depreciation is deducted.

  • Example: Same laptop would be reimbursed for $1,000, the cost to replace it new.

• Limited Replacement Cost policy: Offers some replacement coverage with restrictions.

• Insurer’s right to repair/replace: The insurer can repair or replace damaged property with similar items after notifying the insured.

  • Example: A broken dishwasher may be replaced with a comparable model.

Section I — Dwelling and Other Structures Loss Payments

• Dwelling and other structures are paid on replacement cost basis → no depreciation deducted.

• 80% rule: If the home is insured for at least 80% of its replacement cost, partial losses are fully covered.

  • Example: Home replacement cost = $250,000; insured for $200,000 (80%) → partial fire damage is paid in full.

• Replacement cost definition: The amount needed to repair or replace the home with materials of like kind and quality at current prices.

  • Example: Replacing your siding with similar siding at today’s price, even if it’s more expensive than when you bought it.

Replacement Cost

The amount needed to repair or replace property with similar material’s at today’s prices

Section I — Dwelling Losses Under 80% Rule

• If the dwelling is insured for less than 80% of its replacement cost, the insured does not automatically get full replacement cost.

• The payment is the larger of two amounts:

  1. Actual cash value (ACV) of the damaged part

     • Example: A partial fire loss to a wall valued at $5,000 ACV.

2. Proportional formula:

• Payment = [Amount of Insurance Carried / (0.8 * Replacement Cost)] * Loss

• Example: Replacement cost = $200,000, insured = $120,000 (less than 80% = $160,000), partial loss = $20,000

  • Payment = (120,000 / 160,000) * 20,000 = 15,000

• This encourages homeowners to insure their home for at least 80% of replacement cost.

Section I — Extended and Guaranteed Replacement Cost

• Extended Replacement Cost Endorsement:

  • Pays 20% or more above the policy limit if rebuilding costs exceed the coverage limit.

  • Example: Policy limit = $200,000; home rebuild costs = $230,000 → insurer may pay up to $240,000 if 20% extension applies.

• Guaranteed Replacement Cost Policy:

  • Insurer pays to rebuild the home exactly as it was, even if the cost exceeds the stated policy limit.

  • Example: Policy limit = $200,000; actual rebuild cost = $250,000 → insurer pays the full $250,000.

• These endorsements help protect against unexpected increases in construction costs.

Extended Replacement Cost Endorsement

Coverage that pays a set percentage (like 20%) above your policy limit if rebuilding costs exceed your limit

Guaranteed Replacement Cost Policy

Coverage that pays to fully rebuild your home exactly as it was, even if it costs more than your policy limit

Section I — Special Loss Conditions

• Loss to a pair or set:

  • Insurer can repair/replace any part of the pair/set, or

  • Pay the difference in actual cash value before and after the loss.

  • Example: A set of silverware loses one piece → insurer may replace just the missing piece or pay the value difference.

• Appraisal clause:

  • Used when coverage is agreed, but the amount of loss is disputed.

  • Example: You and the insurer disagree on the value of damaged flooring; an appraiser helps decide.

• Other insurance:

  • If another policy also covers the loss, the insurer pays a proportional share based on its limit relative to total insurance.

  • Example: Auto hits your home; you have HO-3, but the driver’s liability insurance also applies → each pays its share.

Loss to a Pair or Set

When part of a matching set is damaged or lost, the insurer can repair/replace part or pay the value difference

Appraisal Clause

A process used when the insurer and insured agree a loss is covered, but disagree on the amount, allowing an appraiser to determine the value

Section I — Legal and Loss Payment Conditions

• Legal action restriction: The insured cannot sue the insurer unless all policy conditions are met first.

  • Example: You must submit proof of loss before taking legal action.

• Right to repair or replace: The insurer can repair or replace damaged property with like kind/quality after notifying the insured.

• Loss payment: The insurer generally pays the named insured directly.

• Abandoned property: The insurer is not required to accept property the insured abandons.

Section I — Mortgage Clause and Policy Limitations

• Mortgage clause: Protects the mortgagee’s (lender’s) insurable interest in the property.

  • Example: If the home is damaged, the lender’s financial interest is covered even if the homeowner fails to comply with some policy conditions.

• Policy period: Only losses that happen during the active policy period are covered.

• Fraud & misrepresentation: Concealment, misrepresentation, fraud, or false statements related to the insurance void the coverage.

Mortgage Clause

A policy provision that protects the lender’s (mortgagee’s) financial interest in the property if it is damaged or destroyed

Conditions That Apply to Both Section I and II

• Liberalization clause: If the insurer broadens coverage without extra cost, the policy automatically includes the improvement.

• Waiver/change of policy provisions: The insurer can modify or waive certain rules if agreed in writing.

• Cancellation terms: Specifies how the policy can be canceled by the insurer or insured.

• Nonrenewal terms: Outlines rules if the insurer chooses not to renew the policy.

• Assignment of policy: Policy can be transferred to another party (usually requires insurer’s consent).

• Subrogation clause: Allows the insurer to recover payments from third parties responsible for the loss.

  • Example: If a neighbor causes a fire, the insurer can seek reimbursement from them.

• Extension to legal representatives: Policy rights can extend to a legal representative if the named insured or spouse dies.