Chapter 7a Notes – Other Residential Insurance

INS 51 - Chapter 7a Notes – Other Residential Insurance

Dwelling Policies

-Typically used to insure rental dwellings via ISO Special Form DP-3

(where DP = Dwelling Property)

-Some residences are not eligible for traditional homeowners coverage, like when:

·        The residence is not owner-occupied

·        The value of the dwelling is below the minimum limit for a HO policy

·        The residence does not meet an insurer’s underwriting standards

-Also, an insured may choose not to purchase a HO policy if:

·        They don’t need the full range of HO coverages

·        The HO policy costs more than they are willing to pay

-In the above circumstances, a dwelling policy can be used instead.

-The most important differences between a DP-3 and a HO-3 are:

·        DP-3 does not provide theft coverage for personal property

·        DP-3 does not provide liability coverage at all

-However, both limitations above can be addressed by endorsements.

-Dwelling policies are primarily used for insuring owner-occupied or tenant-occupied buildings, but can also be used for:

·        A home still in the course of construction

·        Mobile homes if at a permanent location

·        Houseboats (in some states)

·        Business occupancies (if business is operated by owner or tenant)

The DP-3 offers the following 5 Coverages:

Coverage A – Dwelling

Coverage B – Other Structures

Coverage C – Personal Property (except no theft coverage)

Coverage D – Fair Rental Value (Loss of Use)

Coverage E – Additional Living Expenses (Loss of Use)

FAIR and Beachfront/Windstorm Plans

-Both riots (in urban areas) and windstorms (in coastal areas) have resulted in excessive property damage that have henceforth restricted insurance availability.

-State governments have since developed programs that allow homeowners to purchase insurance if they cannot obtain such policies in the private/voluntary market (due to reasons of uninsurability or unreasonably high premiums).

-FAIR Plans

-FAIR stands for ‘Fair Access to Insurance,’ which applies specifically to the availability of insurance in markets underserved by voluntary insurance.

-FAIR Plans needed since lenders will not extend credit for the purchase of property unless the owner can obtain adequate property insurance coverage.

-FAIR plans cover:

·        Urban areas that may be susceptible to civil commotion

·        Coastal properties with unusually high exposure to windstorms

·        Wooded, suburban areas with high exposure to brush fires

-FAIR plans operate through a ‘syndicate,’ which is a group of insurers involved in joint underwriting and premium collection (instead of just a single insurer), and the sharing of claims, expenses, and profits.

-To be eligible for FAIR plans, a property much be ineligible for traditional coverage in the voluntary market, and the policyholder must have the property inspected by the FAIR plan administrator.

-There are five types of exposures that are uninsurable by FAIR Plans:

·        Property is vacant or open to trespass

·        Property is poorly maintained or has unrepaired fire damage

·        Property is subject to unacceptable physical hazards

·        Property is a condemned building that is unfit for living

·        Property was not built in accordance with building and safety codes

-FAIR Plans provide coverage only for fire and a limited number of other perils like vandalism and windstorm.  If a policyholder wants additional coverage, they can also employ a specialty insurer.   This insurer can then write a DIC (Difference in Conditions) policy to fill in coverage gaps (e.g. – floods and earthquakes).

Beachfront and Windstorm Plans

-Properties along the Atlantic Coast or Gulf Coast are especially vulnerable to windstorm losses (which may be either winter storms in the north or hurricanes).

-Beginning in the late 1960s, insurers in the voluntary market began withdrawing from writing property coverage in these areas.  States responded by developing their own beachfront and windstorm plans.  In recent years, these plans have increased in popularity as both the quantity & price of such homes has increased.

-These plans are similar to FAIR plans, but any flood-related risk (e.g. - tidal water)  should be covered separately under a flood insurance policy.  Insurers writing property coverage in a state are required to share in plan losses in proportion to their share of state property insurance premiums.

-Eligible properties (just like with FAIR plans) include only properties that were ineligible for traditional coverage, and must be located within a state-specified distance of the shoreline.  No application for coverage will be accepted when a hurricane has already formed in the immediate area and a threat is imminent.  Some states have merged their FAIR and beachfront/windstorm plans (FL/LA).