Unit 4: Personal Lines Insurance Review
Introduction: The History of Fire Insurance and the ‘Standard Fire Insurance Policy’
Development of the Standard Fire Policy (SFP):
New York developed the first Standard Fire Insurance policy during the early 1900s.
Because it was well-designed, it was used throughout most of the United States and became known as the "165-line policy."
The SFP is unique as the only insurance policy with its wording standardized by law.
Historically, the SFP was included in all fire insurance policies even though it was not a complete contract on its own.
Evolution of the SFP:
While the original SFP is no longer in use, many of its perils, exclusions, and provisions remain in current insurance forms.
The California Standard Form Fire Insurance Policy:
California created its own version of the SFP.
It contains provisions similar to the industry standard but can provide coverage that is ‘equivalent to or more favorable’ than the standard.
California Insurance Code Regulations:
The code states: ‘All fire policies on subject matter in California shall be on the standard form, and except as otherwise provided shall not contain additions thereto.’
Essential Insurance Terms and Definitions
Open Policy: A policy where the value of the coverage is not agreed upon at the start; it is left open.
Valued Policy: A policy where the item being insured is valued at a specified sum.
Warranty: A statement in a policy importing an intention to do or not to do a thing which materially affects the risk. Characteristics include:
It can relate to the past, present, or future.
It can be expressed or implied.
If the warranty relates to a person or thing insured, it is considered ‘expressed.’
Return of Premium: An insured is entitled to a return of premium if the policy is canceled, rejected, surrendered, rescinded, or voidable due to known or unknown fraud or misrepresentation.
The return can be ‘whole’ if the insurer has not been exposed to any risk.
The return is ‘proportionate’ with the unexpired time if risk exposure occurred.
The law prohibits homeowner policies from containing provisions that mandate premiums are fully earned upon the happening of any contingency.
Part A: Dwelling Insurance (DP Forms)
Purpose and Usage:
Dwelling insurance is primarily used for landlord (tenant) properties and homes that do not qualify for ‘standard’ or ‘preferred’ Homeowners insurance policies.
Similar to Homeowners policies, it provides property insurance for residential dwellings/contents, appurtenant structures, and loss or damage to the dwelling.
Eligible and Ideal Properties:
Rental properties (--$4 units or apartments).
Older and/or lower-valued homes.
Homes with minor cosmetic problems.
Homes with a market value below replacement cost.
Customers with credit and/or loss problems.
Dwellings under construction, vacation homes, or rentals.
Permanent mobile homes (those not on wheels).
Offices, studios, or storage facilities.
Reasons to Select a Dwelling Policy (DP) over a Homeowners Policy (HOP):
The property is vacant.
The insured does not live in the dwelling (e.g., it is rented out).
Occupancy includes up to five roomers or boarders.
The dwelling's condition, value, and age are rated poor to good.
The insured is only required to carry coverage for the dwelling itself.
Financial Details:
The standard deductible for a DP is .
The Three Dwelling Forms
1. Basic Form (DP 01)
Description: The simplest and most affordable form. Used for residential homes, rentals (--$4 families), seasonal homes, vacation homes, and homes under renovation.
Settlement Basis: Losses are settled on an Actual Cash Value (ACV) basis.
Named Perils (Mnemonic: F.L.I.):
Fire
Lightning
Internal Explosion: Examples include a furnace or water heater exploding.
2. Broad Form (DP 02)
Description: Covers dwellings on a broad named perils basis.
Settlement Basis: Settled on an ACV basis for both the dwelling and separate structures.
Included Perils: Includes DP 01 perils, Extended Coverage Perils (W.H.A.R.V.E.S), and Vandalism and Malicious Mischief (V&MM).
3. Special Form/Open Peril (DP 03)
Description: Provides "all risk" or "open peril" coverage for the dwelling and appurtenant structures. This means any direct physical loss is covered unless specifically excluded.
Personal Property Coverage: Personal property is covered only on a Broad Form Named Peril basis (similar to DP 02).
Target Audience: Owner-occupied homes, rental properties (--$4 units), and seasonal homes.
Settlement Basis: Losses are settled on a Replacement Cost basis (depreciation is not deducted).
Extended Coverage Perils (W.H.A.R.V.E.S)
These can be added to the DP 01 for an extra premium and are included automatically in DP 02 and DP 03.
Windstorm: Includes tornadoes and hurricanes.
Hail: External coverage only; internal damage is covered only if the weather creates a hole in the roof or walls first.
Aircraft: Protects against plane crashes or objects falling from planes. Requires actual physical contact with the property.
Riot or Civil Commotion: Covers property stolen or damaged during a riot.
Vehicle: Applies if a car crashes into the property or kicks up objects that damage it.
Note: Under DP 01, this does not apply if the vehicle belongs to the insured.
Volcanic Eruption: Covers buildings and contents against ash, smoke, lava flow, or airborne shockwaves.
Exclusions: Damage from earthquakes, landborne shockwaves, floods, or mudslides resulting from the eruption are excluded.
Explosion: Covers sudden and accidental internal or external explosions.
Exclusion: Does not apply to the insured's steam boiler in DP 01.
Smoke: Covers sudden and accidental smoke damage.
Exclusion: Damage from fireplaces or nearby industrial factories is not covered.
Vandalism and Malicious Mischief (V&MM): Covers intentional or random damage.
Restriction: No coverage if the dwelling was vacant for more than consecutive days prior to the loss.
Additional Named Perils for Broad Form (DP 02)
Damage by Burglars: Covers damage caused by burglars (e.g., a broken door) but does not replace stolen property. Not covered if vacant for more than days.
Weight of Ice, Snow, or Sleet: Covers the building and contents. Excludes external items like patios or porches.
Falling Objects: Covers damage from objects like trees or meteorites. Contents are covered only if the object first damages the exterior to create an opening.
Accidental Discharge or Overflow of Water or Steam: Covers sudden damage from plumbing or appliances. Excludes damage from freezing if the building is poorly maintained or vacant for more than days.
Freezing: Covers freezing of plumbing or appliances. Excludes losses due to poor maintenance or vacancy over days.
Sudden and Accidental Damage from Artificially Generated Electrical Current: Damage from non-lightning man-made electrical sources.
Sudden and Accidental Tearing Apart, Cracking, Burning, or Bulging: Covers water heaters, HVAC, and fire sprinkler systems.
Expanded Coverage Extensions in DP 02 vs. DP 01
Explosion: DP 02 covers steam boiler explosions (on or off-premises) if they damage covered property.
Vehicles: DP 02 provides coverage for vehicles owned by the insured if they hit the house (excludes fences, driveways, or walkways).
Smoke: DP 02 covers smoke damage from a fireplace (e.g., forgetting to open the damper).
Special Form (DP 03) Specific Exclusions
Weather damage to satellite dishes (wind, hail, ice, snow, sleet).
Collapse (unless specifically added as separate coverage).
Freezing in poorly maintained, unoccupied, or under-construction dwellings.
Theft to uninsured property or property under construction.
V&MM if unoccupied for more than consecutive days.
Constant or repeated leakage from plumbing/appliances over time.
Gradual deterioration: Wear and tear, air pollution, rust, mold, settling, cracking, or shrinking.
Non-human damage: Birds, insects, rodents, domesticated animals, or aliens.
Microbial Matter Exclusion: Excludes mold, mildew, viruses, fungi, and bacterial matter (living or not) reproducing via spores.
Dwelling Form Coverages A–E
Coverage A — Dwelling:
Covers the main house and attached structures (e.g., attached garage).
Includes materials/supplies on-premises for repair or construction.
Includes outdoor equipment used to maintain the premises (e.g., lawnmowers).
Note: Items cannot be covered under both Coverage A and Coverage C.
Coverage B — Separate (Other) Structures:
Covers detached structures like storage sheds, pools, or detached garages.
Must be separated by clear space; only impermanent connections like fences or utility lines are allowed.
Maximum limit: of Coverage A. This is