Chapter 5a Notes – Homeowners Property Coverage
INS 51 - Chapter 5a Notes – Homeowners Property Coverage
ISO Homeowners Coverage
-The Insurance Services Office (ISO) created policy forms designed to meet the risk management needs of individuals and families.
-Parties eligible for coverage under this Homeowners (HO) insurance program are:
· Individuals and families who own a private home in which they reside (includes single-family / multi-family dwellings, but excludes mobile homes)
· People who rent the premises in which they reside (includes apartments, houses, mobile homes, trailer homes, or condominiums)
· Individuals and families who own private condominiums that are used for residential purposes
-Individuals will select from among the following policy forms, depending on their specific risk management needs and whether they meet eligibility requirements:
· HO-2 – Broad Form – provides owner-occupants ‘named perils’ coverage for dwellings, other structures, and personal property; here, ‘named perils’ means that only perils (causes of loss) specifically named will be covered.
· HO-3 – Special Form – provides owner-occupants ‘open perils’ coverage for dwellings, other structures, and personal property; here, ‘open perils’ means that all perils (causes of loss) covered unless specifically excluded. Thus, coverage is broader than what is offered in the HO-2 form.
· HO-4 – Contents Broad Form – provides tenants coverage for their personal property on a ‘named perils’ basis. This does not also provide tenants coverage for dwellings or other structures.
· HO-5 – Comprehensive Form – provides owner-occupants ‘open perils’ coverage for dwellings, other structures, and personal property that is the most comprehensive (i.e., even broader than what HO-3 provides); of course, the policyholder will have to pay an extra premium for this.
· HO-6 – Unit-Owners Form – provides coverage for owners of either condominiums or co-operative apartments on a ‘named perils’ basis. The insured need not be an occupant of the unit to receive coverage.
· HO-8 – Modified Coverage Form – provides owner-occupants coverage (if not meeting insurer standards for other forms above) on a limited, ‘named perils’ basis, subject to a special valuation clause which specifies that damage is only covered on a functional replacement cost basis (i.e., the cost of replacing damaged property with similar property that performs the same function but might not be identical to the damaged property).
Homeowners Program Structure
-Perhaps the most widely used of the six forms described above is the HO-3, which will be the example employed for the remainder of Chapter 5 (and also the majority of Chapters 6-7).
-It provides coverage for a house, its contents, and the occupants’ liability.
-The structure of the HO-3 includes the following sections:
· Declarations
· Agreement and Definitions
· Section I – Property Coverages
· Section II – Liability Coverages
· Endorsements
Declarations
-Provides essential information about the insured, property covered, and the limits of coverage provided
Agreement and Definitions
-The agreement (or ‘insuring agreement’) states that the insurer will make available the insurance provided in the policy in return for the premium and the insured’s compliance with all applicable policy provisions.
-Definitions follow the agreement and can continue for several pages. A defined word or phrase might have a meaning that is different than a dictionary definition.
Section I – Property Coverages
-Specifies the property covered, the perils that are covered, and any exclusions or conditions that affect coverage. There are five property coverages, which will be explained more in the notes for the 2nd half of Chapter 5:
· Coverage A – Dwelling
· Coverage B – Other Structures
· Coverage C – Personal Property
· Coverage D – Loss of Use
· Additional Coverages
Section II – Liability Coverages
-There are two liability coverages, which will be explained more in Chapter 6:
· Coverage E – Personal Liability
· Coverage F – Medical Payments to Others
Endorsements
-Common examples include the increase or decrease of policy limits, the additional or removal of coverages, or changes in policy definitions. Typically, the premium will be adjusted due to the extent of endorsements utilized.
Factors Important to Rating Homeowners Insurance
-The ISO has designed a framework that develops a base premium, which is then adjusted in several ways before arriving at the final premium.
-The base premium is influenced by several factors, including the dwelling location, construction factors, coverage amount, the policy form selected, and the public protection class (which has to do with the quality of fire protection).
-The base premium is initially adjusted (‘base premium adjustments’) due to endorsements, deductible changes, and unusual construction types.
-It is then subsequently adjusted (‘final adjustments’) due to claim history, insurance score, and package policy credits.