chapter 5 personal risk

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

Coverage A – Dwelling
-Applies to the dwelling on the residence premises listed on the Declarations page
-Also applies to structures (like a garage or deck) attached to the dwelling, along
with materials located on/next to the dwelling used to construct/repair dwelling.
-Does not apply to the land at the residence premises.
Coverage B – Other Structures
-Applies to structures that are not attached to the dwelling; that is, they are
separated from the dwelling by “clear space” (e.g., a shed or detached garage)
-Limits for this coverage are 10% of limits for Coverage A.
-Exclusions include structures rented to a non-resident of the dwelling, structures
where business is conducted, or structures used to store business property.
Coverage C – Personal Property
-Applies to items the insured owns or uses, regardless of the items’ location.
-Also applies to personal property owned by others while that property is on the
residence premises.
-Limits for this coverage are 50% (for 1st point above) and 10% (for 2nd point
above) of limits for Coverage A, but can be increased with an additional premium.
-Exclusions include animals, motor vehicles, aircraft, business data, water from a
swimming pool, and many other specific situations.

Coverage D – Loss of Use
-Applies to the insured’s exposure to financial loss if the residence premises are
damaged badly enough to be unfit for living (which means a dwelling that is not
safe, sanitary, and secure).
-Limits for this coverage are 30% of limits for Coverage A, but can be increased
with an additional premium.
-Coverage categories here include:
 Additional living expenses required to maintain household’s normal
standard of living (if having to seek shelter elsewhere)
 Fair rental value (if part of the residence was rented to others)
 Loss of use due to civil authority (perhaps because adjacent properties are
damaged so that local government prohibits living in your neighborhood)
Additional Categories
-Might include any special coverages not mentioned with Coverages A-D above
-Might also include coverages that were excluded from Coverages A-D above
HO-3 Perils Insured Against and Exclusions
-Coverages A and B are lumped together, provide ‘special form coverage’ for
property items with similar exposures to loss, and insure against ‘direct physical
loss to property.’ This is on an ‘open perils’ basis, as any peril not listed among the
exclusions is covered. Exclusions include collapse, freezing of plumbing / heating /
AC, vandalism, mold, natural deterioration, pollutants, and animals.
-Coverage C provides coverage on a ‘named perils’ basis, and is thus not as broad
as what is covered in Coverages A and B. Named perils include fire or lighting,
windstorm or hail (only if wind/hail first damages the building), explosion, riot,
personal property in back seat of motor vehicles, smoke, theft, falling objects,…

-Other exclusions pertaining to HO-3 in general include:
 Earth movement (from earthquakes or landslides/mudslides)
 Water damage from flooding (including sewage backups from sewers)
 Power failure
 Neglect
 War
 Nuclear hazard
 Intentional loss
 Destruction or confiscation from governmental action
Note: Within Chapter 5, you can ignore the following sections in the readings (as
the level of detail is beyond what we will cover):
 Key Changes in the ISO 2011 Program Revision (page 5.9 bottom and 5.10)
 Special Sublimits (page 5.13 bottom and 5.14)
 Table of Additional Coverages (page 5.17)
 Table of Limitations Applicable to Theft Peril (page 5.21 top)
 Additional 3 Exclusions for Coverages A-B only (page 5.23 bottom–5.24 top