Lesson 2: The Homeowners Policy

Transcription

1 Lesson 2: The Homeowners Policy Homeowners Insurance: ISO Policy Forms Covered Property to Identify and Address Residential Property and Liability Loss Exposures Four Methods for Managing Personal Residential Property Loss Exposures: Avoidance--Don t own or use property. [This is obviously not a reasonable option in most cases.] Loss control--install security systems and smoke detectors. Don t build in a flood zone. Remove dead and damaged trees. Risk financing--buy insurance. Set aside at least three months of pay as an emergency fund. Retention--Use deductibles on insurance policies. Retain losses on property with limited or no coverage under policies. ISO Homeowners 2000 Program Policy Forms: HO-2 is designed for owner-occupants of one-family to four-family dwellings. The HO-2 provides coverage on buildings and personal property for specifically named perils. HO-3 is designed for owner-occupants of one-family to four-family dwellings. The HO-3 provides coverage on: a. buildings for all causes of loss not otherwise excluded and b. personal property for the perils named in the HO-2. HO-5 is designed for owner-occupants of one-family to four-family dwellings. The HO-5 provides coverage on buildings and personal property for all causes of loss not otherwise excluded. HO-4 is designed for tenantsthe HO-4 provides coverage on personal property only for the perils named in the HO-2. HO-6 is designed for condominium and cooperative apartment owners. The HO-6 provides coverage on personal property and some building items for the perils named in the HO-2. HO-8 is designed for owner-occupants of homes that do not meet the eligibility requirements of other homeowners policies (particularly homes with replacement costs that exceed their market values). The HO-8 provides limited named perils coverage on buildings and personal property. Homeowners and Dwelling Insurance 14

2 Note: Homeowners policies also provide limited property coverage for incidental occupancy (use of a residence premises for a non- residential purpose--i.e., for home office or studio use) if the premises are occupied principally as a dwelling and not used for any business purpose other than the incidental occupancy. The Homeowners policy format: Each homeowners policy contains three preliminary sections and two coverage sections. Three Preliminary Sections: Declarations page--identifies the policy number, the coverage period, the policyholder, the residence location, the mortgage holder, the coverage limits, the deductible, the premium, and any applicable forms and endorsements General agreement--makes the insurer s obligations contingent on the insured s payment of the premium and compliance with the policy provisions Definitions section--gives the special meanings of any words that appear in the policy within quotation marks Two Coverage Sections: Section I is divided into the following four property coverages: Coverage A--Dwelling Coverage B--Other Structures Coverage C--Personal Property Coverage D--Loss of Use Section II is divided into the following two liability coverages: Coverage E--Personal Liability Coverage F--Medical Payments to Others Additional Coverages Homeowners Section 1--Property Coverages For the purposes of Section I: Property Coverages, the definition of insured includes: the named insured; the resident spouse of the named insured; relatives of either the named insured or spouse if residents of the household; and full-time students away from home (considered former residents) who are either: a. relatives under the age of 24 or b. in the care of a named insured or resident relative and under the Homeowners and Dwelling Insurance 15

3 age of 21 Exposures and Hazards: The named insured is evaluated on factors that indicate a greater-thannormal chance of loss. a. Joint ownership by two unmarried adults raises questions about the actual ownership of the real property (land and permanently attached structures) and personal property (property other than real property). Questioning must be skillful since a rejected applicant could later allege discrimination based on gender, marital status, or lifestyle. b. Occupation and salary are compared with the value of the property to identify imbalances suggesting the need for additional sources of revenue. c. Prior home ownership indicates a homeowners knowledge of home care and maintenance requirements. d. Financial strength determines the homeowners ability to make mortgage payments and to maintain his property. Property location indicates the level of police and fire protection, isolation, and susceptibility to certain perils. If the dwelling description and value are atypical for that area, the replacement value could be inflated. More applications from a certain area could indicate that other insurers are decreasing their exposure in that area or that the producer is increasing his marketing efforts in that area. Property protection class refers to the rating (1--best to 10--worst) given to the public protection facilities in a community. The property protection class rating reflects the quality of fire protection, road conditions, water pressure, and water availability. Type of construction affects the building s resistance to damage from perils. a. Frame construction may consist of exterior and interior walls, partitions, floors, and roofs made of wood or other combustible materials. b. Masonry construction may consist of exterior walls made of noncombustible materials. Interior walls, partitions, floors, and roofs are made of wood or combustible materials. c. Fire-resistive construction has masonry (or steel and masonry fire-resistive) partitions, a concrete floor, and a noncombustible roof. d. Non-combustible construction has exterior walls and roofs made of metal or other non-combustible materials. e. Townhouse and Rowhouse construction is rated accorded to ISO (Insurance Services Office) standard homeowners rules based on the number of units between firewalls. Firewalls must have at least six inches of reinforced concrete, eight inches of masonry, Homeowners and Dwelling Insurance 16

4 or other material tested to withstand a minimum two-hour fire at [A two-hour firewall protects property against a 1700 fire on the other side.] Firewalls must extend to the exterior walls and above the roof. Older homes may have outdated or hazardous heating, electrical, or plumbing systems. Lead paint and asbestos are expensive to remove. Old homes may be difficult and expensive to replace. Instead of drywall, an old homes walls may be covered with plaster on lath (plaster over narrow strips of wood nailed to the wall supports). Two valuation options address the high replacement cost of older homes: a. Functional replacement cost covers the cost of repairing or replacing structural elements with currently-used materials and techniques. b. Reproduction cost (used for historic homes) covers the cost to replace damaged or destroyed property with the nearest obtainable kind and quality. Dwelling values are monitored to ensure that adequate coverage limits are maintained. Three tools keep insurance limits in line with the replacement cost of the dwelling: a. Value increase at renewal--automatically increases dwelling coverage limits by a set percentage at renewal, but may not accurately reflect the replacement cost of individual residences. b. Inflation guard endorsement--requires the insured to choose an annual percentage by which policy coverages are increased daily, pro rata during the policy year. c. Replacement or repair cost guarantee--increases the dwelling coverage limit to include replacement or repair cost even if doing so exceeds the coverage limit in the declarations. Home businesses present both positive and negative underwriting factors. Underwriting factors include: the type of business, whether employees work in the house, customer characteristics, access between the business and living sections, and the existence of any increased hazards. A home business reduces the daily unoccupancy hazard. Heating systems require periodic maintenance. Chimney fires result from improper installation and from creosote accumulation. A wood stove should be professionally installed with a. either a minimum of 36 inches between the stove and combustible walls or a radiation shield (to protect combustible surfaces from the stove s heat); b. shields to protect the floor and ceiling; c. a vent pipe of at least 26-gauge steel connecting the stove and chimney; and d. a thimble (double-walled, insulated pipe that lets the Homeowners and Dwelling Insurance 17

5 vent pipe pass safely through non-masonry walls) Vacancy increases the risk of vandalism and malicious mischief. Under the ISO homeowners forms revised in 2000, the permitted vacancy time period after which coverage for vandalism or malicious mischief will not apply was increased from 30 to 60 days. Roofs are underwritten based on their location, proximity to a forest fire hazard, windstorm exposure, maintenance, age, type of roof covering, and general condition. a. Architectural shingles are made of expensive composition material and warranted for up to 30 years. They were first installed in the 1980s, so their long-term results are unknown. b. Asphalt or composition shingles have a life of 20 years and an increased susceptibility to wind, water, and hail damage. c. Built-up roofs are flat with built-up layers of hot tar and gravel. They provide good fire protection, but are subject to water leaks if not properly maintained. d. Fiberglass shingles have an appearance and performance similar to asphalt shingles but have a life of 25 to 30 years. e. Metal roofs have long lives and provide good protection from weather and fire. Maintenance includes painting and sealing joints with roofing cement. f. Rolled roofing is asphalt spread on the roof in overlapping layers and nailed in place. It provides moderate protection from windstorms and has a life of 5 to 10 years. g. Selvage edge is rolled roofing that is tarred down on the seams. It has a life of 10 years and gives moderate weather protection. h. Slate roofs are expensive to replace. Maintenance requires replacement of slates and flashing, as nails deteriorate. Violent storms can cause extensive damage to slate roofs. i. Tile roofs--are long-lasting and only require replacement of broken tiles. Improper installation, however, can result in severe storm damage. j. Wood shingles give weather protection comparable to composition shingles, but lose their fire-protective properties if not chemically re-treated periodically. Electrical systems can create a fire hazard if improperly installed, maintained, or used. A fuse or circuit breaker cuts off the electricity when the circuit s capacity is overloaded. Increased hazards are indicated by aluminum wiring, knob-and-tube circuits (antique electrical wiring usually using white glass insulators with exposed wire strung between the knobs), shoddy workmanship, and poor housekeeping. Homeowners and Dwelling Insurance 18