Lesson 5: Additional Coverages

Transcription

1 Lesson 5: Additional Coverages Property and Liability Exposures---Homeowners Insurance Types of Property and Liability Exposures: Property loss exposures--the possibility of loss to either real property (land, its permanent improvements, and resources [what you d leave behind if you moved] or personal property [any property other than real property or what you d take with you if you moved]) Liability loss exposures--the possibility of loss resulting from financial responsibility or legal damages for harm to another; legal wrongs include both criminal wrongs (crimes) and civil wrongs (torts and breaches of contract) o Four categories of liability losses: a. Bodily injury--bodily harm, sickness, or disease that creates liability for medical costs, loss of services, pain and suffering, lost income, death, and, perhaps, punitive damages if the defendant s conduct was egregious b. Property damage--actual damage to real or personal property, as well as lost income or extra expenses resulting from the inability to use the damaged property c. Personal injury--invasion of privacy, defamation (libel, slander), or malicious prosecution d. Contractual liability--invasion of another s contractual rights e. Wrongful acts--acts or omissions committed by a corporate director or officer Property Insurance Provisions: Mortgage clause--the mortgagee is entitled to payment to the extent of its insurable interest, regardless of any policy violation by the insured. Insurers must give the mortgagee separate notification before cancellation or non-renewal. Loss payable clause--this endorsement covers automobiles and other financed personal property. The lender is entitled to payment if the policy owner is denied coverage due to fraud or omissions. The insurer must notify the lender prior to cancellation. Loss valuation--the policy states the method of loss valuation. a. Actual cash value (ACV)--Policies written on an actual cash value basis pay the lesser of actual cash value (replacement cost minus depreciation) or the cost to repair or replace, up to the policy limit. Example: Assume a fire destroys a 5-year-old oven that has an expected life of 15 years and a replacement cost of $600. Homeowners and Dwelling Insurance 36

2 Because the oven is one-third depreciated, the actual cash value is $400 (2/3 or 10/15 of $600). b. Replacement cost (RC)--Policies written on a replacement cost basis pay the cost to repair or replace with like kind and quality without deduction for depreciation, up to the policy limit. If the damage is more than $2,500, the insured must actually make the repairs to receive the replacement cost. c. Agreed value--for items that are difficult to value (art, antiques, etc), the insurer and insured can agree on a value when the policy is written. In the event of total loss, the insurer pays the agreed value. d. Stated amount--antique autos and other unique vehicles are often insured under a stated amount approach, under which the maximum loss settlement equals the lowest of the stated amount, the ACV, and the cost to repair or replace. e. Valued policy laws--some states have valued policy laws, which require insurers to pay the policy limit upon total loss to real property, even if the property is over-insured. Covered perils--a named perils policy insures only losses caused by listed, named perils. An open-perils policy (aka all-risks policy) insures against risk of direct loss to property and covers all losses not specifically excluded or limited. Duties of the insured--iso forms require that the insured must notify the insurer promptly; notify the police of theft; notify credit card issuers of card loss; protect the property; inventory damaged personal property; cooperate with the insurer; and file a sworn proof of loss within 60 days of the insurer s request Obligations of the insurer--the ISO forms also require that the insurer must pay the loss within 60 days after it receives a proof of loss, and either reaches an agreement with the policy owner or receives an appraisal award, or receives a final legal judgment. However, since insurance is regulated at the state level, some states may have stricter requirements for when companies must pay losses. The insurer may choose to repair or replace damaged property instead of paying money. Other insurance provisions--most property and liability policies specify how the existence of duplicate coverage affects the insurer s obligations. Policies use one of two approaches: a. Pro rata coverage requires each policy to pay its proportionate share by limits of insurance. Example: If Policy A provides $50,000 of coverage on a building and Policy B provides $100,000 of coverage on the building, Policy A pays one-third of any loss and Policy B pays two-thirds of any loss. Homeowners and Dwelling Insurance 37

3 b. Primary and excess coverage--establishes priorities for payment. The primary policy pays first. The other policy pays only if the primary policy has inadequate limits or inadequate coverage. This method is used for auto collision losses. Coinsurance (insurance-to-value) provision--the policy owner must carry insurance equal to at least a specified percentage (usually 80%, 90%, or 100%) of the property s insurable value to recover full payment for any loss. If the property is insured for at least the specified percentage of its insurable value, the insurer will pay the replacement cost without deducting for depreciation, up to the coverage limit. If the property is insured for less than that specified percentage, the insurer pays the greater of the ACV or the amount of loss times the amount of insurance divided by the required percentage. Example: Assume a home has a replacement cost of $150,000, but the homeowner only carries $100,000 of coverage with an 80% insurance-to-value requirement. A storm causes $12,000 in damage to the roof. Because the home does not meet the insurance-to-value requirement of $120,000 (80% of $150,000), the loss payment is reduced. The insured recovers the greater of the roof s actual cash value (not stated in this example) or $12,000 X ($100,000 / $120,000), which equals $10,000. Legal Liability arises from three types of legal wrongs: Crime--an act that injures the public or the state and is punished by the government; Contractual liability including: a. breach of contract--failure to perform one s voluntary contractual obligations; b. implied warranties--sellers obligations to provide goods that are reasonably fit for the purpose for which they are sold; and Tort--breach of a common law obligation There are three classes of torts: a. Intentional torts involve intentional acts or omissions that harm a person or his property. b. Absolute liability (strict liability) imposes liability regardless of fault for inherently dangerous activities. Example: Storing explosives and owning wild animals impose absolute liability for any resulting injuries. Homeowners and Dwelling Insurance 38

4 c. Negligence is the failure to use reasonable care. The Four Elements of Negligence: (A breached duty caused damage.) Legal duty requires each person to exercise a required standard of care to avoid harm to others. Breach of that duty involves failure to exercise the standard of care of a reasonably prudent person (how a reasonably prudent person would have acted in similar circumstances). Injury to the claimant or damage to his property Proximate cause requires a direct, unbroken, reasonably foreseeable chain of causality from the breach to the injury. Legal Principles Related to Negligence: Contributory negligence--under this strict common law doctrine, the injured person s negligence, to any degree, in caring for his own self-interest, bars any recovery in a negligence action. This doctrine has been replaced by comparative negligence in almost every state. Comparative negligence--the harshness of the contributory negligence doctrine led most states to adopt comparative negligence laws. The plaintiff can recover damages in spite of his negligence, but his recovery is reduced by his own percentage of negligence. Example: A plaintiff who is 40% at fault can recover 60% of his damages. Doctrine of last clear chance--if both parties negligence contributed to the accident, liability is imposed only on the party who had the last clear chance or opportunity to avoid the accident. Res ipsa loquitur--creates a rebuttable presumption of negligence if: a. whatever caused the injury was under the defendant s exclusive control; and b. there was no contributory negligence by the plaintiff; and c. such injuries don t normally occur except in cases of negligence. Examples of res ipsa loquitur ( the thing speaks for itself ): a surgeon who leaves a sponge in a patient or operates on the wrong body part and a dentist who extracts the wrong tooth Imputed negligence imposes responsibility on one person (a parent, principal, employer, or business partner) for the torts of another (his child, agent, employee, or partner). Vicarious liability laws impute the negligence of a car driver to the car s owner. Under the family purpose doctrine, the owner of a car can be held liable for the negligent acts of family members driving the car. Dram shop or liquor liability laws make those selling liquor liable for injuries caused by intoxicated patrons. The attractive nuisance doctrine imposes liability on landowners for children injured by any non-natural or artificial condition or item that can Homeowners and Dwelling Insurance 39

5 attract and injure children. Settlement of Liability Losses: Duties of the insured--the insured must notify the insurer promptly, forward any legal papers, cooperate with the insurer, and help the insurer obtain evidence and witnesses. Obligations of the insurer--the insurer will pay damages, defense costs, and prejudgment interest for any legally liable insured. The insurer has a duty to defend, but may choose to settle. Tax Implications Related to Property and Liability Policies: Deductibility of premium--payments by individual taxpayers for personal property and liability insurance are not deductible. Premiums for business coverage are deductible. Taxation of premiums for employees--if the employer pays any part of the employee s property-casualty premium, the employer can deduct its payments as a business expense, but the employer must report the payment as taxable income. If the employee pays the full cost of the premiums, the payments are not deductible. Taxation of benefits--benefits paid for direct loss under property insurance might result in a capital gain, but the gain can be postponed if the taxpayer buys replacement property. Tax treatment of payment for consequential losses varies. Benefits paid under liability policies do not result in taxable income to the policy owner. Deductibility of uninsured losses--taxpayers can deduct certain losses to the extent they are not reimbursed by insurance. The losses must result from sudden, unexpected damage or from theft. The taxpayer can deduct the lesser of the decrease in the property s fair market value or the taxpayer s adjusted basis in the property. The taxpayer can deduct the full amount of losses incurred in a trade, business, or activity entered for profit.other losses of individual taxpayers are deductible only if the taxpayer itemizes deductions and only to the extent that each separate loss exceeds $100 and the loss total exceeds 10% of the taxpayer s adjusted gross income. Property and Liability Insurance Planning--Although standard property and liability insurance policies provide a broad range of coverage, they may not meet all of an individual insured s unique needs. Policy endorsements or additional policies can fill in gaps or cover special needs. Homeowners (HO) Insurance is a package policy with a series of forms that differ regarding which property perils are insured and which the insured is eligible for. Most insurers use forms created by the Insurance Services Office (ISO) (an insurance advisory organization) or the American Association of Insurance Homeowners and Dwelling Insurance 40

6 Services (AAIS) (a smaller advisory organization). Some insurers develop their own forms. The following text focuses on the current versions of the ISO forms. Other forms offer similar coverage. Every HO policy has two sections: Section I (property coverages) and Section II (liability coverages). Section I of The HO-3 Policy insures the named insured and spouse, resident relatives, resident minors in the care of any other insured, and full-time students who were residents before leaving for school and who are either the insured s relative s under the age of 24 or under 21 and in the care of another insured Section II of The HO-3 Policy includes the Section I insured plus any entity responsible for animals or watercraft owned by a Section I insured, the employee of an insured using a covered vehicle, and anyone using a covered vehicle on an insured location with the consent of the named insured An Insured Location includes: the residence premises; the part of any other premises used by a named insured or spouse as a residence if listed in the declarations or acquired during the policy year as a residence; other non-owned premises used by an insured as a temporary residence vacant land (other than farm land) owned by or rented to an insured; cemetery plots or burial vaults of an insured; and the part of a premise occasionally rented to an insured for nonbusiness use Section I of The HO-3 contains four basic coverages and several additional coverages. The limit of insurance for Coverage A is based on the value of the home. The amounts of insurance for the other three coverages are set as a percentage of the Coverage A limit and are paid as additional amounts of insurance, not as part of the Coverage A limit. Coverage A--Dwelling insures the described dwelling, its attached structures, and on-premises building materials used for their construction or repair. Losses under Coverage A are settled on a replacement cost basis. Coverage B--Other Structures insures separate, detached, permanent structures that are not used for business and are not rented to anyone except a tenant of the dwelling. Coverage B equals 10% of Coverage A, but may be increased for an additional premium. Homeowners and Dwelling Insurance 41

7 Losses are settled on a replacement cost basis. Coverage C--Personal Property insures personal property owned by or used by an insured anywhere. For personal property usually located at another residence of the insured, the off-premises coverage is limited to the greater of $1,000 or 10% of the Coverage C limit. Property of others not used by an insured is covered at the named insured s request only while on the insured s premises. Coverage C equals 50% of Coverage A, but may be increased or decreased. Coverage C excludes articles separately insured; animals, fish, and birds; motor vehicles; aircraft; tenants property; property rented to others; business data; credit cards, ATM cards; and damage from water or steam. The standard policy settles losses on an actual cash value basis, but replacement cost coverage is available by endorsement. Coverage D--Loss of Use provides coverage when a covered loss makes the residence uninhabitable. This covers additional living expenses (increased living expenses to maintain the family s standard of living) and fair rental value (lost income from parts of the residence rented to others). Coverage D equals 30% of Coverage A, but may be increased. Open-perils policies insure against risk of direct loss to property and cover all losses not specifically excluded or limited. The all risks HO-3 excludes under Coverages A, B, and D loss caused by: Freezing of a building system containing water--in a vacant or unoccupied building unless the insured used reasonable care to maintain heat or drain the system Freezing or other pressure to outdoor property--such as fences, paths, foundations, and pools Theft of building materials--before the dwelling is completed Vandalism--to property vacant over 60 consecutive days preceding the loss Other exclusions--wear and tear, marring, inherent vice, mechanical breakdown, vermin, birds, smog, mold and rot, agricultural or industrial smoke, pollutants, settling, shrinking, expansion, and animals owned or kept by the insured Losses excluded under Section I; Governmental action--destruction or confiscation of real or personal property unless action was taken to prevent the spread of fire Additional general exclusions: Weather conditions--but ensuing loss by insured perils is covered Acts or decisions (or failure to act or decide) by a government unit--but ensuing loss is covered if due to a covered peril Faulty or defective plans, zoning, workmanship, or materials--but ensuing loss is covered if due to a covered peril Named perils policies insure only losses caused by listed, named perils. Homeowners and Dwelling Insurance 42

8 The HO-3 insures Coverage C (personal property) against the perils of: Fire and lightning--including water damage from firefighters; Windstorm and hail--excluding any inside loss caused by rain or snow unless the building s interior is first damaged by wind or hail; Explosion; Riot and civil commotion; Aircraft; Vehicles; Smoke--but only sudden and accidental non-industrial, non-agricultural smoke; Vandalism; Theft--but not theft a) committed by any insured, b) of building materials from a dwelling being built, c) of contents from a rented part of the premises, d) from a secondary home except while the insured is living there, e) from a student s residence that is unoccupied over 60 days, or f) of watercraft, trailers, or campers off the residence premises Falling objects--if the object damages the building s exterior first; Weight of ice, snow, or sleet--but only for property inside the building; Accidental discharge of water from appliances and building systems--but not damage to the appliance itself or freezing Sudden and accidental tearing apart--of a steam, hot water, air conditioning, or sprinkler system--not freezing Freezing--except in an unoccupied or vacant dwelling unless the insured tried to maintain heat or drain the system Damage from man-made electricity--but not damage to electronic parts Volcanic eruption--but not earthquake, land shock waves, or tremors HO-3 Section I Excludes, under all coverages--a, B, C, and D--loss caused by: ordinance or law--enforcement of any law-regulating buildings; earth movement--except ensuing loss by fire, explosion, or glass breakage; water damage--from any water at or below ground level; neglect--the insured must try to save and protect property after a loss; war; nuclear hazard--all nuclear losses, including nuclear reaction, radiation, and contamination; intentional loss--by or at the direction of any insured Section II of All Homeowners Policies contain Coverage E and Coverage F. Coverage E--Personal Liability--protects the insured, on an occurrence basis, for his legal liability arising from bodily injury (BI) and/or property damage (PD) liability. The minimum limit is $100,000 plus unlimited defense costs. The insurer s duty to defend ends when it has paid the policy limit. Homeowners and Dwelling Insurance 43

9 Coverage F Medical Payments To Others pays up to $1,000 per person for the reasonable medical expenses of the non- insured injured at the insured premises or elsewhere if caused by a condition of the insured premises or activities of an insured, his resident employees, or his animals. Section II Exclusions That Apply to Both Coverage E AND Coverage F: Expected or intended injury or damage--caused by an insured Business pursuits--including home day care for pay Professional services Non-insured locations--an unlisted, but owned at policy inception, location is not covered Motor vehicles--ownership and use of motor vehicles and motorized land conveyances except golf carts, off-road vehicles not subject to motor vehicle registration, and vehicles used to service the property, to assist the handicapped, or placed in dead storage at the insured location Watercraft--ownership and use of watercraft powered by inboard motors (over 50 HP for non-owned boats), powered by outboard motor(s) over 25 HP if owned at policy inception, and powered by sail if more than 26 feet long Aircraft Communicable disease--transmitted by an insured Sexual molestation, corporal punishment, and physical and mental abuse Controlled substances--including their sale, use, manufacture, delivery, or possession Exclusions That Apply Only to Coverage E: Contractual liability--except liability under contracts related to the ownership or use of an insured location or liability the insured assumed prior to the occurrence Property owned by the insured Property in the insured s care, custody, or control--except for damage caused by fire, smoke, or explosion Bodily injury to an insured Bodily injury covered by workers compensation Bodily injury caused by nuclear energy Section II Additional Coverages: First aid expenses--reimbursement for expenses incurred to provide first aid to others who incur bodily injury covered by the policy Claim expenses--in addition to defense costs Damage to property of others--up to $1,000 coverage for damage to property of others in the insured s care. It excludes losses also covered under Section I, intentional damage by an insured age 13 or Homeowners and Dwelling Insurance 44

10 older, owned property, tenant s property, business liability, noninsured locations, aircraft, watercraft, and vehicles. Loss assessment--up to $1,000 toward assessments made by a property owners association for liability from covered acts of the association The Insurance Services Office uses the following forms in its homeowners program. Section I differs among the forms. Section II is identical in all five forms. HO-2--Broad Form provides named perils coverage on dwellings, other structures, and personal property (Coverages A, B, and C). Coverage D equals 30% of Coverage A. HO-3--Special Form provides open-perils coverage on buildings and structures (Coverages A and B) and named perils coverage for the insured s personal property (Coverage C). Coverage D equals 30% of Coverage A. HO-4--Contents Broad Form provides named perils coverage for tenants personal property. There is no Coverage A or B. The policy owner selects a limit for Coverage C. Coverage C can be changed to an open-perils basis by endorsement. Coverage D is set at 30% of the Coverage C limit. HO-5--Comprehensive Form provides open-perils coverage on homes, structures, and personal property (Coverages A, B, and C). Coverage D equals 30% of Coverage A. HO-6--Unit-Owners Form provides named perils coverage for personal property of owner-occupants of condominiums and cooperatives. Coverage A has a $5,000 limit for real property (bookshelves, carpeting, etc.) within the unit. The policy owner selects the Coverage C limit. Coverage D equals 50% of Coverage C. There is no Coverage B in the HO-6. Coverages A and C can be changed to an open-perils basis by endorsement. HO-8--Modified Coverage Form covers homes that have replacement costs substantially higher than their market values. Covered perils are limited to fire, lightning, windstorm, hail, explosion, riot, aircraft, vehicles, smoke, vandalism, and volcanic eruption. Only 10% of Coverage C is provided off the insured premises. Theft is covered only from the residence premises and only up to $1,000. Coverage D equals 10% of Coverage A. Endorsements That Modify Section I And Section II: Additional insured--residence premises endorsement--insures another person who has an interest in the real property, for both Sections I and II at that premises. Home business insurance coverage endorsement--adds coverage for Homeowners and Dwelling Insurance 45

11 home business property, including other structures, and liability exposures. Home day care coverage endorsement--covers personal property used in the day care business and extends Section II coverage to home day care services. Loss assessment coverage endorsement--increases the $1,000 limit for loss assessments by a homeowners association. Permitted incidental occupancies (residence premises) endorsement-- permits certain businesses to use a Coverage A or B building. Business personal property, for that business, is covered up to the Coverage C limit. Structures rented to others--residence premises endorsement--adds property and liability coverage for scheduled structures on the residence premises that are rented to others. Assisted living care coverage--provides limited coverage for personal property, additional living expenses, and liability for the insured s named relatives living in assisted-living facilities. There are liability limits for hearing aids, eyeglasses, false teeth, wheelchairs, and walking aids. Residence held in trust endorsement--provides coverage when a trust holds the title to the insured dwelling. Section I Endorsements: Additional limits of liability--coverages A, B, C, and D--amends the HO-2 or HO-3 to provide replacement cost coverage for the dwelling and increases the property coverages proportionally Coverage C--increased special limits endorsement--increases coverage for certain items with limited protection under Coverage C. Credit card, fund transfer card, forgery, and counterfeit money coverage--increased limits endorsement--increases the $500 limit for these types of losses. Earthquake endorsement--covers earthquakes, volcanic eruption, and earth movement. Functional replacement cost endorsement--modifies the HO-2 or HO-3 replacement cost provision with a provision that pays for repairs with less expensive materials or methods that are functionally equivalent to the dwelling s obsolete, antique, or custom materials or methods. Increased limits on business property endorsement--increases the $2,500 limit for on-premises business property. Increased limits on personal property in other residence endorsement-- provides increased coverage for the insured s property at a secondary residence, beyond the basic 10%. Inflation-guard endorsement--increases property coverages uniformly throughout the policy period by a specified annual percentage, chosen at policy inception. Homeowners and Dwelling Insurance 46

12 Multiple company insurance endorsement--allocates coverage among two or more insurers. Ordinance or law coverage endorsement--increases the Additional Coverage limit for increased costs of construction resulting from ordinance or law. Other structures--increased limits endorsement--increases Coverage B on other structures. Personal property replacement cost endorsement--changes the basis of loss settlement under Coverage C from ACV to replacement cost except for antiques, fine arts, and collectibles. Premises alarm or fire protection system endorsement--provides a premium credit in exchange for the insured s promise to maintain the alarm system. Refrigerated property coverage endorsement--adds up to $500 coverage ($100 deductible) for loss of property in refrigerators and freezers caused by power failure or mechanical failure. Scheduled personal property endorsement--covers scheduled personal property against risks of direct loss. Sinkhole collapse endorsement--covers property damage resulting from sinkholes. Special computer coverage endorsement--covers computer equipment for open-perils. Special loss settlement endorsement--reduces the coinsurance percentage when the replacement cost exceeds the dwelling s market value. Special personal property coverage endorsement--changes the HO-4 personal property coverage from named perils coverage to openperils coverage. Unit-owners Coverage A and unit-owners Coverage C endorsements-- change the HO-6 from named-perils coverage to open-perils coverage. Identity fraud expense endorsement--covers specified expenses resulting from the unauthorized use of an insured s identity to commit an unlawful activity. The ISO Dwelling Program is used for property that is ineligible for the homeowners policy and for property owners who do not want all the HO coverages. Endorsements can provide theft coverage, personal liability insurance, and medical payments coverages, which are coverages not otherwise included. Mobile home Insurance may be written as a separate policy or by endorsement to the HO-2 or HO-3. An eligible mobile home must be at least 10 feet wide and 40 feet long and be owner-occupied. Homeowners and Dwelling Insurance 47

13 The policy insures the home and its original equipment (Coverage A), other structures (Coverage B), unscheduled personal property (Coverage C), and loss of use (Coverage D). Coverages E and F are similar to HO Section II. Farm and Ranch Insurance covers the personal and commercial property and liability exposures of farmers and ranchers. The typical policy covers the dwelling, other structures, household and business personal property, farm structures, loss to farm animals, and injury to the public at pick-your-own operations. The National Flood Insurance Program (NFIP) provides subsidized insurance to the insured in designated flood zones. Originally, the insured bought coverage directly from the NFIP. Now most policies are written through private insurance companies through a write-your-own-program, under which participating insurers sell and service flood insurance policies under their own names, but the government reinsures 100% of the loss exposures. The program covers flood (temporary inundation of usually dry areas), surface water, and mudslide. The policy owner can buy coverage on the dwelling, the contents, or both. There is up to $30,000 of coverage for the increased repair cost to comply with ordinances or laws. Fair Plans (Fair Access to Insurance Requirements) make property insurance available to property owners who can t get voluntary coverage, but who do meet FAIR plan standards. FAIR plans will not cover property that is vacant, poorly maintained, subject to unacceptable hazards, or in violation of building or safety codes. Coverage extends to limited perils, and is subject to maximum limits and mandatory deductibles. Beach and windstorm plans provide wind and hail coverage to coastal property subject to hurricane loss. Title Insurance protects property owners and mortgage lenders against unknown title defects that existed before the policy s effective date but are discovered after the effective date. The premium is paid once, but the coverage lasts for as long as the title holder owns the home. If a loss occurs, the policy only pays the purchase price of the house (up to the policy limits) even if the house has appreciated since purchase. Floaters cover property that floats (moves from place to place). Personal articles floater--provides open-perils coverage for scheduled personal property. Personal property floater--provides an open-perils world-wide coverage for unscheduled property. Personal effects floater--provides an open-perils world-wide coverage for property typically worn or carried by tourists except money, passports, and Homeowners and Dwelling Insurance 48

14 tickets. Homeowners and Dwelling Insurance 49