How to Get the Most Knowledge from This Course!

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1 How to Get the Most Knowledge from This Course! To enhance the learning and knowledge process, this course uses learning strategies designed to increase your comprehension and retention. The format includes traditional headings and subheadings, as well as highlighting and text borders to bring attention to critical concepts and facts that will help you pass the exam. 1. Highlighting: Pay particular attention to areas highlighted in yellow. Understanding concepts and facts contained within these areas are critical to successful completion of the final examination. 2. Text Borders: In order to reinforce certain material in the text it will be set apart through the use of text borders such as the one surrounding this paragraph. When you encounter text surrounded by a text border, pay particular attention to the point being made. Material within the text border will be reinforced later in the course through the use of review questions. 3. Case Studies: Some of the more variable concepts will be illustrated using case studies. These case studies are designed to reinforce the concept being discussed and it is recommended that you take the necessary time to digest the points made within the case studies. 4. For Insurance Licensees in Non-Monitored States, our exclusive web-based search feature allows quick retrieval of important data for maximizing the learning process. Simply execute Ctrl + F (the Ctrl and F keys at the same time) and enter keyword(s) or key phrase(s) to locate those items electronically in the course material. Understanding all of the material in this text is necessary to achieve the overall learning strategies that have been incorporated to Success Continuing Education copyrighted courses to increase exposure to portions of the text that are fundamental to the learning process and help you pass the test. *Not all courses currently have review questions or case studies.

2 HOMEOWNERS & AUTOMOBILE INSURANCE COPYRIGHT 2010 SUCCESS CONTINUING EDUCATION, LLC A Member of the Success Family of CE Companies.

3 Success Continuing Education, LLC. 2 Corporate Plaza Drive Suite 100 Newport Beach, CA All Rights Reserved. No part of this publication may be used or reproduced in any form or by any means, transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of Success Continuing Education, LLC. This publication is designed to provide general information on the topic presented. It is sold with the understanding that the publisher is not engaged in rendering any legal or professional services. Although professionals prepared this information, it should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.

4 TABLE OF CONTENTS PART I:...1 HOMEOWNERS INSURANCE...1 SECTION THE NEED FOR HOMEOWNERS INSURANCE...1 PROTECTION... 1 HOW MUCH INSURANCE IS ENOUGH?... 2 WHAT IS TOO MUCH?...3 SAVING MONEY ON INSURANCE COSTS... 3 IN-GROUND POOLS... 5 SECTION BASIC POLICIES...6 GOVERNMENT REGULATION... 6 DISCRIMINATION... 6 POLICIES... 7 HO-1 POLICY...7 HO-2 POLICY...8 HO-3 POLICY...9 Additional Property Coverage...10 HO-4 POLICY...11 HO-5 POLICY...11 HO-6 POLICY...12 HO-8 POLICY...13 STANDARD HOMEOWNERS POLICY...13 GUARANTEED REPLACEMENT POLICY...14 SECTION POLICY STRUCTURE & COVERAGES...16 APPLICATION CREDIT RATING POLICY STRUCTURE DECLARATIONS PAGE...17 PROPERTY COVERAGE SECTION...18

5 SUPPLEMENTAL COVERAGE ENDORSEMENTS...18 PERSONAL UMBRELLA LIABILITY INSURANCE...18 HOME PROTECTION PLAN LOSS OF USE ADDITIONAL LIVING EXPENSE...19 FAIR RETAIL VALUE...19 PERSONAL PROPERTY FIREARMS...21 JEWELRY...21 SPORTS EQUIPMENT...21 EXCLUSIONS...22 COVERED AUTOMOBILES...22 PERSONAL LIABILITY COVERAGE EMPLOYEE OR INDEPENDENT CONTRACTOR NEGLIGENCE...23 PERSONAL LIABILITY EXCLUSIONS...24 DOG OWNERS MEDICAL PAYMENTS COVERAGE DISABILITY INSURANCE COVERAGE LIFE INSURANCE HOME AND AUTO LIABILITY MINIMIZE DAMAGES SECTION DIFFERENT TYPES OF HOMES...27 HISTORIC HOMES OLDER HOMES NEW HOME CONSTRUCTION CONDOMINIUMS TITLE INSURANCE...30 CLAIMS...31 RENTAL PROPERTY RENTER S NEEDS...31 RENTAL PROPERTY OWNER S NEEDS...32 MANUFACTURED HOMES DETACHED STRUCTURES IN-LAW APARTMENT...34 SEASONAL RESIDENCE SECTION PROTECTING THE OUTSIDE...35 INCLUDED COVERAGE LANDSCAPING... 36

6 FLOOD INSURANCE HURRICANE INSURANCE CATEGORY ONE...39 CATEGORY TWO...39 CATEGORY THREE...39 CATEGORY FOUR...39 CATEGORY FIVE...39 DEADLIEST HURRICANES IN THE 20TH CENTURY...40 Hurricane Andrew Category Hurricane Hugo Category Galveston Texas - Category Hurricane Camille Category CITIES RATED WORST FOR HURRICANES...41 SECTION IDENTITY THEFT COVERAGE...42 THE VICTIM SHOCKING STATISTICS FUTURE PROTECTION COVERAGE SECTION KIDNAP & RANSOM COVERAGE...46 EXTENDED COVERAGE BASIC PROTECTION ADDITIONAL COVERAGES AVAILABLE SECTION CLAIMS...48 OBLIGATIONS FILING A CLAIM DWELLING COVERAGE...51 Coverages...51 Extent of Repairs...52 Repair Costs...52 The Amount...52

7 PERSONAL PROPERTY...53 Coverages...54 Scope of Loss...54 Establish Replacement Cost...54 Actual Cash Value...54 SUBROGATION...54 STATEMENTS...55 Informal Statement...55 Formal Statement...55 NONWAIVER AGREEMENT...55 SALVAGE...55 SECTION POLICY CANCELLATION...56 REQUIREMENTS PART II:...58 AUTOMOBILE INSURANCE...58 SECTION THE NEED FOR AUTO INSURANCE...59 PROTECTION STATE REQUIRED LIABILITY TERMINOLOGY INSURER REPUTATION...63 POLICY CONTENTS...63 SECTION COVERAGES...64 NO-FAULT INSURANCE ADVANTAGES...64 Streamlining...64 Timeliness...64

8 DISADVANTAGES...64 Interpretable Damages...64 Boundaries...64 Vehicle Damage...64 Liability Thresholds...65 GENERAL INSURING AGREEMENT...65 Special Provisions...65 DECLARATIONS PAGE...65 ISO Personal Auto Policy Form...67 COVERAGE PARTS...67 EXCLUSIONS...67 Other Insurance Provision...68 CONDITIONS...69 DEFINITIONS/GENERAL PROVISIONS...69 PERSONAL DAMAGE COVERAGE LIABILITY COVERAGE BODILY INJURY...70 Single Limit...71 Split Limit...71 UNINSURED/UNDERINSURED MOTORIST...72 Fault 72 Pain & Suffering...73 PROPERTY DAMAGE...73 MEDICAL PAYMENTS COVERAGE COMPREHENSIVE & COLLISION COVERAGE COMPREHENSIVE...74 COLLISION...75 EMERGENCY ROADSIDE SERVICE/TOWING RENTAL & TRAVEL EXPENSES CAR RENTAL...77 TRAVEL EXPENSES...78 ADD-ONS & ENDORSEMENTS TAPES COVERAGE...78 SOUND RECEIVING/TRANSMITTING COMPONENTS OR EQUIPMENT...78 STATED AMOUNT...78 CUSTOM EQUIPMENT...78 NON-OWNER COVERAGE...78 MISCELLANEOUS VEHICLE...79 EXCLUSIONS GAP INSURANCE BASIC FORM...80 BROAD FORM...80 Blanket Basis...80 Optional Purchase...80

9 MOTORCYCLE INSURANCE LIABILITY...80 COLLISION...81 UNINSURED MOTORIST COVERAGE...81 UNDERINSURED MOTORIST COVERAGE...81 CUSTOMIZED CYCLE...81 STATED VALUE COVERAGE...81 SECTION COSTS...83 PREMIUMS COMPARISON SHOP TERRITORIAL RATING PERSONAL STATISTICS AGE 84 GENDER...84 MARITAL STATUS...85 AUTOMOBILE USE TYPES OF CARS POPULARITY FOR THEFT...86 DRIVING RECORD AMOUNT OF DESIRED INSURANCE DISCOUNTS AVAILABLE HIGHER DEDUCTIBLE...87 MULTI-CAR...87 MULTI-POLICY...87 DRIVER EDUCATION...88 GOOD STUDENT...88 GOOD DRIVING RECORD...88 ANTI-THEFT...88 PASSENGER RESTRAINTS/SEAT BELTS...88 STANDARD RISK...88 ANTI-LOCK BRAKES...88 AIR BAGS...89 LOW MILEAGE...89 LOCATION...89

10 SECTION AUTO ACCIDENTS...90 NOTIFICATION PARTIES INVOLVED...90 WITNESSES...90 THE POLICE...91 INVESTIGATION...91 MEDICAL EXAMINATIONS...92 ACCESS TO RELEVANT PERSONAL RECORDS...92 ADMINISTERING FIRST AID...92 SECTION POLICY CANCELLATION...93 POLICY PERIOD BINDING PERIOD...94 WHITE POLICY IS STILL EFFECTIVE NON-RENEWAL AT EXPIRATION SECTION NON-STANDARD MARKET...96 HIGH-RISK COVERAGE TEENAGE AND SENIOR DRIVERS AUTOS RANKED SAFEST SECTION COMMERCIAL AUTO INSURANCE THE BASICS GROSS VEHICLE WEIGHT (GVW) APPLICATION POLICY STRUCTURE SECTION I - COVERED AUTOS SECTION II LIABILITY COVERAGE SECTION III PHYSICAL DAMAGE COVERAGE SECTION IV BUSINESS AUTO CONDITIONS SECTION V DEFINITIONS...105

11 EXCESS AUTOMOBILE LIABILITY INSURANCE HOME-BASED BUSINESSES LARGE CORPORATIONS INSPECTIONS SECTION DECISION-MAKING PROCESS GLOSSARY OF TERMS...110

12 PART I: HOMEOWNERS INSURANCE

13 Section 1 THE NEED FOR HOMEOWNERS INSURANCE PROTECTION Insurance is a protection against financial loss caused by an accident, vandalism, theft and other risks The purpose of insurance, any insurance, is to place the injured party as nearly as possible in the same financial position as if the loss had not occurred. Everyone is familiar with the phrase, A Man s Home is His Castle. Being politically correct, A Person s Home is Their Castle. Buying homeowners insurance is a small price to pay in order to protect what is most likely the single most valuable possession and biggest investment a person makes Their Castle. Not only the castle itself, but the contents within as well as the land it sits on - and everything that sits on that land. Homeowners insurance protects that investment as well as family and household possessions. If a home is suddenly lost due to fire or natural disaster, or the contents are damaged or stolen, the average homeowner probably couldn't afford to replace everything all at once. If a lawsuit is brought against the homeowner because of injury or damage caused by the homeowner on the property, the cost of defending that suit could run into thousands of dollars in legal fees regardless of the outcome of the suit. Homeowners insurance is designed to return the home and possessions to the same condition they were in before a loss occurred. Many different types of policies are available, and not all coverages are the same or are available in all states. Home ownership is a basic part of the American Dream. However, this dream can turn into a nightmare if the home is not protected. A homeowners insurance policy can protect that dream. Many people don't realize it, but homeowners insurance covers a lot more than just a house. A standard homeowners insurance policy provides broad protection for personal property and other structures located in and around the home. (See Protecting the Outside, Section 5.) The most important thing to keep in mind about homeowners insurance is that it does not have to be complicated, foreign or difficult. Another thing is that technical knowledge is not necessary. If you have an inquisitive attitude, use some common sense, and are willing to address questions that come up in the area of homeowners insurance, you will find these to be more important than facts or information. 1

14 HOW MUCH INSURANCE IS ENOUGH? To ensure that the homeowner is carrying the appropriate amount of insurance to suit his/her needs, there are two basic questions the agent should be prepared for. The agent (or company representative) must be prepared to supply the homeowner with the answers to the following two questions: What losses does the policy cover; and What losses doesn t the policy cover? In order to determine how much homeowners insurance a person needs, their home must be analyzed. Many factors go into determining the coverage and the premiums, such as: The age of the home; The materials used to build it; Location; Size (square footage and number of rooms); Heating unit; Home s overall condition; How many occupants; Proximity to fire station; and Proximity to fire hydrant. Most homeowners insurance policies have features that allow a policy to be customized to suit the homeowner s individual needs. Traditional homeowners programs offer protection for the home's structures, personal property and liability coverages. Choosing the right coverage is important. A helpful way to determine the cost of the structure is to contact a Builder's Association to find out what the cost per square foot is in the area. Multiplying the total square footage of the house by the local per square foot building cost will give a reasonably good idea of what it would take to replace the structure. A standard rule of thumb is to insure the structure for at least 80 percent of the actual cost to rebuild the structure. Two of the most important things the homeowner should think about are: The assets that need to be protected; and The structure of the home, which includes the cost of rebuilding or repairing if it is damaged or destroyed by covered perils. 2

15 An inventory of possessions not only helps determine how much homeowners insurance is enough, but it can also help get things replaced (or returned) if they should be stolen. Detailed records of antiques, jewelry, silver, sporting goods, major appliances, and collector's items are very important, as these items are difficult to value once they're lost. WHAT IS TOO MUCH? Many mortgage lenders will insist that the home be insured for at least the amount of the loan balance. However, a home s replacement cost does not hinge on the amount of the mortgage, especially if it is in an area where home prices are appreciating rapidly. Insuring the home for more than its replacement cost may even be a violation of laws in some states. The insurance agent should know the advantages of insuring personal property for depreciated cost rather than replacement cost. By insuring for depreciated value the homeowner could save as much as 20 percent in premiums. SAVING MONEY ON INSURANCE COSTS Insurance is a highly competitive business and the costs for homeowners insurance vary greatly depending on the insurance company with which the homeowner intends to do business. Companies offer several types of discounts, but they may not always offer the same discount or the same amount of discount. Following is a brief synopsis of ways that the homeowner can lower insurance costs. More items are described further in this Section in more detail. Shop around Insurance prices vary from company to company. Raise the deductible Deductibles on homeowners policies typically start at $250. By increasing the deductible to $500, $1,000, $2,500, or $5,000. Purchase homeowner s and automobile insurance through the same insurer; Insure the house Not the land; Security items Smoke detectors, security systems, dead-bolt locks, closed-circuit televisions, interior sprinkler systems (some companies even honor doormen as security measures); Stop smoking It has been reported that as many as 24,000 residential fires per year are caused by someone smoking inside the home; Senior discounts Some companies offer discounts for people at the age of 55 and or at retirement. Re-evaluate once a year Take inventory of possessions and notify insurance company if any changes to coverage need to be made. 3

16 Insurance companies offer a veritable cornucopia of discounts. The homeowner could save money if the home is equipped with an alarm system, smoke detectors, closed-circuit televisions, deadbolt locks and doormen. Those items help make a home safer and more secure. Normally, if a condominium homeowner is insured with the same company that underwrites the building s policy, insurance companies will grant a reduction in premiums. Multi-line discounts are available if the homeowner s automobile is insured with the same company. More discounts might be available depending on the owner s age or if he/she is a non-smoker. Building location and amenities also play a role in rates. Typically, the better quality and newer the dwelling, the lower the premiums will be. Most, if not all, insurers give discounts on the homeowners policy premium if a home security system is installed. The performance and sophistication of the typical home security system varies dramatically depending on what is bought and how much is spent. Similarly, premium discounts will vary too. Usually, insurers will give a 5 percent discount merely for installing dead-bolt locks. A simple burglar alarm is likely to get yet another 5 percent. If the homeowner decides to go with a more sophisticated home security system, complete with monitoring services, he/she can expect a discount of up to 20 percent. In addition to discounts for security devices, discounts are also available for installing safety devices such as smoke detectors or sprinkler systems. The owner needs to keep in mind that only the home needs to be insured, not the land, even though the original purchase price of a home includes both. For example, if a $120,000 house sits on a parcel worth $20,000, the homeowner should pay insurance on $100,000 (the value of the house alone). One of the most commonly known ways in which to cut costs on insurance, any insurance, is to increase the deductible. By raising the deductible from $250 or $500 to $1,000 or $2,000 per insured loss, most insurers will reduce premiums by 10 to 20 percent. Conversely, there are specific items that can cause the homeowner to be charged higher premiums, such as: If the home is equipped with an in-ground pool; If the home has a trampoline; If the home is located in a higher risk area (coastline, for example) If the home is used for any business purposes; or If the homeowner plans on renting the house (even just a portion of it). Any of the above can increase liability. 4

17 IN-GROUND POOLS A backyard swimming pool is one of the largest in the high-risk category. There are several rules of safety that the homeowner can follow that will likely decrease potential liability exposure and perhaps effect coverage costs. Many insurance companies give discounts in regard to an in-ground pool if the homeowner installs a fence around the pool area. This decreases the odds of someone accidentally falling into the pool - especially children. Children are the most vulnerable to pool drowning accidents. A small child should never be left unsupervised in or around a pool they can even get caught in the suction of a pool filter and drown because they couldn t pull away from the force of the suction. If a homeowner has decided to add a pool to the property, he/she needs to notify the insurance company right away. Should an accident occur without the insurance company s knowledge of an existing pool, coverage probably would not be provided. Even though a swimming pool is considered an outside structure, it is a high-risk item and is subject to additional premium costs. All building contractors are required to carry liability insurance. The homeowner should make certain that the contractor hired has sufficient liability insurance. Otherwise, the homeowner may be held liable if a worker is injured while on the job. 5

18 Section 2 BASIC POLICIES Each individual state regulates its own insurance compliance laws GOVERNMENT REGULATION There is no federal regulatory agency that oversees insurance companies. Each insurance company in the United States is regulated by their individual state s Department of Insurance, (Division of Insurance, Insurance Bureau or similar name). A Commissioner or Director of Insurance is either elected or appointed by the state Governor to preside over the agency. Each state s Department of Insurance oversees the insurance companies in its state to ensure compliance with financial stability thereby possessing the ability to meet the obligations of any claims that might be filed. Insurance companies are required to periodically demonstrate (usually on an annual basis) that it is financially sound and continues to meet or exceed the state s minimum financial requirements. The Department of Insurance has the power to secure action against any insurance company that fails to meet these requirements. In addition, the Department of Insurance reviews and approves policy forms used by insurance companies and approves rates charged for various types of insurance to ensure compliance with state insurance rate regulation laws. If the homeowner is having difficulty getting a home insurance policy, the state may offer Fair Access to Insurance Requirements (FAIR) Plans. FAIR plans were created in the late 1960s to make property insurance more readily available to people who can't obtain it from private insurers because their property is considered "high risk." DISCRIMINATION It is illegal for insurance companies to refuse to sell insurance to anyone on the basis of: Race; Color; Sex; Religion; or National origin or ancestry. 6

19 Some states also prohibit refusal on the basis of: Marital Status; Age; Occupation; Language; Sexual orientation; Physical or mental impairment; or Geographical location. In order for an insurance company to refuse to sell someone insurance, there must be a link to a specified risk. POLICIES There are standard policies available throughout the United States, and they contain a standardized numbering system. Detailed descriptions of the different policies are detailed below. ( HO" = Homeowners ) Several different types of policies are available to the homeowner dependent upon individual needs and type of structures being protected. There are standard policies available throughout the United States, and they contain a standardized numbering system. We will look at the basic policies, HO-1 through HO-8. Certain states have variations on these basic policies and each state should be researched to be familiar with your particular state s variations. HO-1 POLICY This form is the most basic of policies. The HO-1 and HO-2 policies are often referred to as "Named Peril Policies. The HO-1 policy includes the same perils as the HO-2 as applied to the dwelling and the personal property coverage. HO-1 excludes coverage from the following losses: Fire and Lightning; Removing damaged property; Explosion; Hail or Windstorm; Smoke Damage; Riots/Civil Commotion; 7

20 Damage to dwelling caused by vehicles or aircraft; Theft; Breakage of Glass; and Malicious mischief or vandalism. Even though the cost of HO-1 is low, it is becoming less and less popular due to the fact that each of the above losses is usually followed by a paragraph of numerous exclusions. HO-2 POLICY The HO-2 policy offers broader coverage than the HO-1 policy and therefore costs more. Premiums for the HO-2 policy are generally 5-10 percent more than the HO-1 policy. In addition to the coverages afforded in HO-1, the HO-2 policy covers loss caused by any of the following: Falling objects; Weight of snow, ice or sleet; Overflow of water from plumbing; Tearing, cracking, burning or bulging of a steam or hot water heating system; Freezing of plumbing; and Artificially generated electrical currents. HO-2 excludes coverage from the following losses: Fire and lightning; Removing damaged property; Explosion; Hail and windstorm; Riot/civil commotion; Damage to dwelling caused by vehicles or aircraft; Damage from smoke that is sudden or accidental; Falling objects; Weight of ice, sleet or snow; Theft; Breakage of glass; Collapse of building; Accidental rupture of hot water heater or steam heater; 8

21 Accidental overflow of water from a plumbing appliance; Freezing of heating, air conditioning or plumbing appliances; and Accidental injury from electrical currents artificially generated. As you can see, the HO-2 form gives a broader form of coverage and the exclusions are not as intensive as those in HO-1. HO-3 POLICY The HO-3 policy is the one most commonly used by homeowners and is considered the special homeowners policy and is often referred to as a "broad-risk form," because it covers everything except the exclusions specifically outlined in the policy. Approximately 84 percent of homeowners are insured with an HO-3 policy. Premiums for the HO-3 policy are generally percent more than the HO-1 policy. HO-3 excludes coverage from the following losses: Those losses shown for HO-1 and HO-2 above; Flood; Surface water; Waves and tidal waves from other bodies of water; Back up water and sewage or drains; Water below the surface of the ground that flows, seeps or leaks through side walls, driveways, basements, walls, foundations, through doors, windows or floors; Earth movement, volcanic eruption, earthquake, landslide, mud flow, earth sinking, shifting or rising; Damage to air conditioning, heating and plumbing systems caused by leaking or as a result of freezing; Wear and tear; Deterioration; Marring or scratching; Mechanical breakdown, inherent vice or latent defect; Rust; Wet or dry rot; Mold; 9

22 Act of war; Smog; Contamination; Acts of Government; Nuclear reactions; Smoke from industrial operations or agricultural smudging; Shrinkage, cracking, settling, bolting, expansions of walls, floors, roofs, ceilings, foundations, patios, pavement; Domestic animals, insects, rodents, vermin, and birds; Continuous leakage from within a plumbing system or seepage; Theft to a dwelling under construction including materials and supplies, vandalism and glass breakage; and Wind, ice, hail, snow or sleet damage to outdoor television antennas or outdoor radio antennas including towers, masts and wiring. Additional Property Coverage Additional property coverage can be purchased through most insurance companies that can cover the following: Trees, shrubs and plants: Usually up to 5 percent of the dwelling limit (up to $500 per item) for fire, lightning, explosion, riot, aircraft, vehicles not owned or operated by a household resident, vandalism and malicious mischief; Credit cards, forgery & counterfeit currency: Coverage for loss due to theft or unauthorized use of credit cards or fund transfer cards (usually up to $500, with no deductible); Fire department service charge: Coverage for charges incurred each time these services are required to save or preserve the insured property (usually up to $500, with no deductible.) Note: In most cases, this service is provided by the city without charge and no payment is made by the homeowners policy; 10

23 Ordinance or law: Coverage for extra expenses incurred following a covered loss to bring the home "up to code." (usually up to 10 percent of the dwelling limit); Losses and expenses related to: Debris removal; Property that must be removed from the premises in order to preserve it; Collapse of the covered structure; Glass breakage; Repairs that were made in order to protect the property against further damage; and Loss assessment. The HO-3 policy has the capacity to offer all-risk coverage to a dwelling. This is a particularly valuable facet of this policy and is what really sets the HO-3 policy apart from the HO-1 and HO-2. HO-4 POLICY The HO-4 policy is known as the Renters Policy. It covers many perils and includes liability coverage; however, it does not insure the dwelling itself. The HO-4 is a tenant policy designed for people who rent houses or apartments and it also applies to owners of cooperative apartments. The HO-4 policy is very similar to the HO-6 policy (the condominium owner s policy). Both cover personal property and improvements to the residence made by the policy owner. Improvements can be cosmetic such as additions, paneling or shelves. The HO-4 affords coverage of up to 10 percent of the policy amount for improvements. Therefore, if a renter s personal property is insured for $50,000, any improvements would be covered up to $5,000 (10 percent of $50,000). Payment under the HO-4 (as well as the HO-6) policy is based on the actual cash value - not replacement cost. HO-5 POLICY The HO-5 policy affords the homeowner the most extensive coverage. It covers damage from just about everything except earthquakes, wars and floods. 11

24 The HO-5 is very similar to the HO-3 policy in that again, the dwelling is covered on an all risk basis. Personal property, however, is covered under the all risk condition also in the HO-5 policy. This constitutes the major difference between the HO-3 and the HO-5. The HO-5 policy is the most comprehensive standard homeowners policy available. However, again, citing you get what you pay for, the coverages in this policy are quite expensive. This policy is rarely used today because agents prefer to attach endorsements to the HO-3 policy. HO-6 POLICY The HO-6 policy is known as the policy for condominium owners or for owners of co-ops. It provides coverage for personal property as well as providing liability coverage. The HO-6 policy is also designed to provide specific coverage of improvements to the owner s unit. (Note that the owner s association usually covers most of the actual structure.) The HO-6 provides $1,000 worth of coverage for improvements. In the case of condominiums, the structure and public areas are insured by an owner's association. Both the HO-4 and HO-6 are considered named perils, which means the property is insured for damage resulting from certain perils. HO-4 and HO-6 policies exclude coverage from the following losses: Fire and lightning; Removal; Windstorm or hail; Explosion; Riot or civil commotion; Aircraft; Vehicle; Smoke; Vandalism or malicious mischief; Theft; Falling objects; Weight of ice, snow, or sleet; Collapse of building; Damage from hot water heating systems; Damage from appliances or plumbing; 12

25 Damage from freezing of plumbing appliances; and Damage from electrical currents artificially generated. Payment under the HO-6 (as well as the HO-4) policy is based on the actual cash value - not replacement cost. (NOTE: There is no HO-7 Form) HO-8 POLICY The HO-8 policy is specially designed for older homes. It covers the same perils as the HO-1 policy; however, it pays only for repair costs or actual cash value. Costs to replace an older home (replacement cost) would make the HO-8 policy extremely expensive. STANDARD HOMEOWNERS POLICY While policies may vary slightly from company to company, the standard homeowners policy provides the following coverages: Dwelling (home and garage); Other structures on the premises; Personal property; Additional living expenses/loss of Use; Liability (damage or injury caused to others); and Legal defense & court awards. All coverages contain maximum limits and deductibles. Coverage to protect the homeowner s property may be provided on an actual cash value basis (the amount required to repair or replace the home minus any depreciation). A standard homeowners insurance policy protects against: Fire; Lightning; Wind; Storms; Hail; Explosions; Riots; Aircraft wrecks; 13

26 Vehicle crashes; Smoke; Vandalism; Theft; Breaking glass; Falling objects; Weight of snow or sleet; Collapsing buildings; Freezing of plumbing fixtures; Electrical damage; and Water damage from plumbing, heating or air conditioning systems. Special coverage such as earthquake or flood protection typically requires a special policy. GUARANTEED REPLACEMENT POLICY In approximately 80 percent of all claims, less than 10 percent of the property insured is affected by loss. Therefore, it could be said that a person is buying insurance to only cover 10 percent of the property in question and coverage will be adequate 80 percent of the time. All homeowners policies contain a replacement cost provision that requires a policyholder to purchase an amount equal to 80 percent of the replacement cost of the insured dwelling. The purpose of this requirement is to make the determination of insurance rates simple and allow premiums to be based on a fixed cost per $100 worth of insurance. Calculating replacement cost for the purpose of buying insurance is somewhat different than estimating the cost of buying a new home. There are two reasons why it is essential to accurately determine the replacement cost of the home: To be certain that the coverage is adequate and that it complies with the replacement cost requirement; and To be secure in the fact that you are not being sold an excessive amount of insurance and the higher premiums that go along with it. Coverage to protect the homeowner s property may be provided on a replacement cost basis (the amount required to repair or rebuild the home with similar materials). This kind of coverage costs from about $400 to $1,000 a year or more, depending on the area and the price of the home. Some larger insurance companies have started to limit the amount they'll pay to 120 percent of the policy's face value. 14

27 When this coverage is purchased, the insurance company reimburses at today's cost to repair or replace personal property. For example, if a television that was purchased 5 years ago for $500 is struck by lightning, the company will reimburse for the cost to replace that item at today's prices. If it costs $1,000 to replace that item today, the insured would be reimbursed that amount less the deductible. A homeowner who did not purchase this coverage would be reimbursed as follows: The television would be depreciated, for example purposes let's use $50 per year. This would bring the value of the television down to $250. If the homeowner had a $100 deductible, then he would only be reimbursed $150 by the insurance company. Guaranteed replacement insurance is better in some respects and not as good in others than the standard homeowners insurance policy. Guaranteed replacement insurance is more comprehensive and costly than standard homeowners insurance, but not necessarily better. It completely covers the cost of replacing a destroyed house even if the cost to rebuild is more than the policy's limit. Standard homeowners policies usually limit replacement costs. However, guaranteed replacement policies are not available on every property. Insurance companies frequently will not issue such policies on older homes, for example (see Older Homes, Section 4). Replacement cost can be defined as the cost to replace damaged property with like kind and quality: Similar in basic style; Similar in basic quality; and Similar in basic function. Straight replacement cost coverage, or cash value coverage, is a cheaper and more limited option - about 25 percent less per year than guaranteed replacement coverage. 15

28 POLICY STRUCTURE & COVERAGES APPLICATION The Application sets the wheels in motion Section 3 A great deal of information is required in the application. The following is considered basic information and will be asked of every applicant: Current occupation of applicant; Employment history; Marital status; Previous addresses; Date of birth; and Social Security number. This information will give the insurance company enough knowledge to perform the necessary research required in order to provide the applicant with the requested homeowner s coverage. Criminal records, credit status, credit history and insurance loss history will be investigated. This information will enable the insurance company to determine the level of risk involved in providing the proposed insured with a homeowners policy. CREDIT RATING Credit rating is vital when the insurance company is considering approving an application for insurance coverage. Upon receipt of the application, the insurance company will request a credit report from a reporting agency. The agency will supply such things as the applicant s past credit history as well as his/her present credit status. Insurance companies have always had this right, but in recent years that right is being exercised more and more. 16

29 POLICY STRUCTURE Every homeowners policy contains five basic sections: Definitions; Coverage; Perils Insured Against; Exclusions; and Conditions. The Insurance Services Office (ISO) developed a number of homeowners insurance policies, designated as HO-1 through HO-8 inclusive. (Note, however, there is no HO-7 policy.) (For detailed explanation of the HO policies, see Section 2.) DECLARATIONS PAGE The Declarations Page is the first page of the homeowners policy and shows exactly what is covered and for how much. The following information is presented on the Declarations Page: Full name of the insured; Insured s address; Insured property address; Insurance company name; Insurance company s address; Agent's name; Policy number; Policy period: Effective date of contract Expiration date and Expiration time (usually 12:01a.m. on the date following the listed expiration date); Extent of coverage; and Premium calculations. 17

30 PROPERTY COVERAGE SECTION In a homeowners policy, the Property Coverage Section covers: The insured structure in its entirety (also referred to as dwelling ); Any detached structures located on the property (see Detached Structures, Section 4); Personal property (see Personal Property, this Section); Loss of use of the structure (see Loss of Use, this Section); and Any extra coverages (see Endorsements below). SUPPLEMENTAL COVERAGE ENDORSEMENTS Knowing exactly what the homeowners policy covers and what is excluded helps to figure out if special coverage for the exclusions is necessary. That s where endorsements come into play. The homeowner may want extra coverage on certain items that their present policy does not provide. Endorsements are available for purchase at an additional cost that will increase the coverage on these items. Some of the most common endorsements are purchased to cover: Jewelry; Expensive or specialized camera equipment; Artwork; Computer equipment; Coin and/or stamp collections; Furs; and Firearms. Basic coverages for these items are detailed later in this section (see Personal Property Table, this Section). PERSONAL UMBRELLA LIABILITY INSURANCE In addition to the liability coverage provided under a homeowners policy, additional liability coverage to protect assets in the event of a liability judgment that exceeds the limits of the homeowners insurance policy should be considered. Such coverage may be called an excess liability policy, or a personal umbrella liability policy. This type of coverage supplements the liability coverage provided under a homeowners policy. If the homeowner decides on purchasing more liability coverage than his/her existing homeowners policy provides, consider the Umbrella Policy. A Personal Umbrella Liability policy usually adds $1 million (or possibly more) in excess liability coverage to the homeowners insurance policies. It also covers claims excluded from most basic policies such as libel, slander, defamation and mental anguish. 18

31 For example, most policies provide liability coverage that covers not only accidents that occur on the insured property but accidents that occur elsewhere. If the family dog bites a neighbor in front of another neighbor's house, for example, the dog owner's homeowners policy will usually compensate the neighbor for injuries and necessary medical expenses. (For more information on dog ownership protection, see Dog Owners, this Section.) HOME PROTECTION PLAN Either the buyer or seller may pay the cost of a home-protection plan. Buyers and sellers often agree to split the cost of a protection plan. If the seller is not offering to pay for a home warranty and the buyer would like one, this request should be included in the original offer to purchase. Otherwise, the seller may only provide a standard coverage policy. The kind of coverage the buyer would like needs to be specified in the contract to prevent any discrepancies should repairs become necessary after closing. LOSS OF USE Due to a fire or other covered loss, the homeowners policy will pay for lodging and food costs over and above normal living expenses should it be damaged by a peril covered under the policy. This coverage is automatically included at a limit of 20 percent of the dwelling limit. For example, if the home is insured for $100,000, the Loss of Use policy limit would be $20,000. ADDITIONAL LIVING EXPENSE Additional living expenses usually require a higher monthly outlay. If the home is destroyed by fire, chances are it would be necessary to rent another residence while the home is being rebuilt. The policy will pay additional living expenses that are incurred to allow the insured and family to continue to live in the style to which they are accustomed. FAIR RETAIL VALUE The homeowner may elect to receive a benefit that will pay the fair retail value for the residence, less any expenses that do not continue while the home is uninhabitable. Either way (additional living expense or fair retail value), it must be for the shortest time required to replace or repair the damages to the property; or, if the homeowner chooses to permanently relocate, the shortest time within which to do so. However, if the uninhabitable property was not the principal place of residence, compensation for additional living expenses is the only option available. PERSONAL PROPERTY Virtually all policies cover contents loss up to the policy limit for personal property. Personal property is defined as the contents of the primary residence, such as furniture, clothing, carpets, small appliances, toys, accessories such as lamps and other items which are used for decor. Personal property items that are typically located on the outside property of the home, such as patio furniture and lawnmowers are also covered. Coverage applies wherever the items happen to be, whether at home, in storage or in transit. Homeowners insurance provides limited coverage for personal property. Under a standard 19

32 homeowners policy, the coverage for all personal property is limited to 50 percent of the total coverage amount on the home. Homeowners policies also set specific dollar limits for particular categories of personal property. Insurance companies want to limit their exposure to fairly common incidents. Therefore, for some categories (such as jewelry, firearms and furs), the policy specifies a limit only for theft, not for damage or destruction since these items are especially susceptible to theft. Damage or destruction of these items is less common and, therefore, insurance companies are more willing to cover them up to their actual cash value. Below is a listing of some standard coverage limits for particular categories of personal property. Personal Property Items Covered Standard Coverage Limits Money, bank notes, bullion, gold, silver, coins, and metals $200 Securities, accounts, deeds, letters of credit, notes other than bank notes, manuscripts, personal records, passports, tickets, and some other related items $1,000 Theft of jewelry, furs, watches, and precious and semi-precious stones $1,000 Theft of firearms $2,000 Theft of silverware, silver-plated ware, gold ware, gold-plated ware, and $2,500 pewter ware For property at the residence used for business purposes $2,500 For property used away from the residence for business purposes $250 Artwork No Standard Coverage 20

33 The insured always has the option of increasing personal property coverage by purchasing either an endorsement or a floater. An increased jewelry limit may be needed, for instance, for covering engagement or wedding rings; or separate coverage for an art collection that is valued at more than 50 percent of the dwelling. In order to buy additional personal property coverage, the insured must be able to verify the cost and condition of the item. Most insurance companies require professional appraisals for certain items, such as jewelry, antiques, art and special photography equipment. Photos or a video can be used to inventory property; however, the inventory should be kept away from the premises (in a safe deposit box, for example). FIREARMS Hunting rifles are considered personal property and therefore if they are damaged, lost or stolen, they would be covered under the homeowners policy, less deductibles of course. Gun ownership does not affect eligibility or premiums. However, there is a standard limit for firearms, typically $2,500. Therefore, if the insured owns guns whose values exceed the standard limit, he/she might want to consider purchasing a gun floater for the policy. Most homeowners insurance policies also cover damages caused by the accidental use of firearms. In some instances, however, coverage may be excluded if the firearm is taken off the premises. The policyholder may want to consider sporting firearm coverage, collector's firearm insurance or gun club liability insurance. JEWELRY If the policyholder owns jewelry whose value exceeds the insurance policy coverage limits, he/she can purchase a floater or an endorsement, which will provide a specific amount of coverage based on appraised value; or, a stand-alone policy that is specially designed to protect valuable items. SPORTS EQUIPMENT Sports equipment should be covered under the named perils section of the homeowners insurance policy for both on and off premises damage. For example, if the homeowner s mountain bike is lost while he/she is on vacation or stolen from the home, it will most likely be covered under the homeowners policy. However, a claim might not be worth filing; especially if the actual value of the bike is less than the policy deductible. It is important to note that if the policyholder decides to go ahead and file a claim, most homeowners insurance policies offer actual cash value coverage, which would reimburse for the replacement value of the bike minus depreciation. However, if the policy offers replacement cost coverage, then the actual cost of the bike without depreciation would be reimbursed. 21

34 If the homeowners policy does not provide adequate coverage for any specialized equipment owned (such as a mountain bike) he/she might consider purchasing a floater. A floater covers more perils, provides replacement cost coverage and has no deductible. However, like jewelry, the insurance company would probably require an appraisal of the equipment when the floater is purchased. EXCLUSIONS Typical exclusions to Personal Property coverage are: Animals (domestic or wild); Aircraft; Bookkeeping records; and Credit cards. COVERED AUTOMOBILES Automobiles and other motor vehicles are normally covered under an automobile insurance policy. However, there are two exceptions: The vehicle does not require motor vehicle registration and is used to service an insured's residence; or The vehicle is used to assist the handicapped. In either of these cases, the loss would be covered as Personal Property. PERSONAL LIABILITY COVERAGE Liability insurance is very important to a homeowner's coverage because it helps protect the owner and the family from financial disaster if someone files a claim against the homeowners policy, sues the homeowner or if the courts hold the homeowner legally responsible for someone else's injury or property damage. The standard liability limit for most policies is $100,000, but many people believe that additional protection is needed, especially if the homeowner has sizable assets. For a small increase in premium, an additional $300,000 to $500,000 may be obtained. Liability coverage protects in three ways: Personal liability; Damage to the property of others; and Medical expenses for injury to others. 22

35 It is the insured s legal responsibility to make financial restitution to cover any damages and/or losses incurred by individuals as a result of the homeowner s actions while those individuals are on the insured property. When an individual violates the rights of another, that individual has committed a tort. A tort can be either intentional or unintentional. Liability insurance provides coverage for unintentional torts. Hobbies, such as bicycling, horseback riding, and raising flowers, would be covered as long as they are not business enterprises. EMPLOYEE OR INDEPENDENT CONTRACTOR Anytime a homeowner hires someone to perform work is open to the potential legal hassles that can ensue if an accident occurs on the insured property. Workers, such as the neighborhood kid hired to clean the garage on Saturday could suffer an injury while on the property. After an accident, the homeowner may be held liable for injuries and/or disabilities. The homeowner s existing insurance policy may not cover the financial liability in the event of a lawsuit. One of the factors used to determine if liability for a worker's injury is whether the person is considered an employee or a contractor. Generally speaking, if the homeowner has control over what duties are to be performed by the hired person and in what manner, the worker would probably be considered an employee. However, if the hired person controls how the work is done and in what manner, the worker would probably be considered a contractor. A contractor usually uses his or her own tools and offers services to the general public in an independent business. For instance, a landscaper who uses his own equipment would be considered an independent contractor; therefore, the homeowner would not be likely to be held liable if an accident should occur. Unless, of course, there is blatant negligence on the part of the homeowner involved. NEGLIGENCE Negligence is the main ingredient in determining liability (legal responsibility). Negligence is defined as failure to exercise the care that a prudent person usually exercises. Negligence is determined by using the following four factors: There must be legal duty owed; A breach of legal duty owed must occur; There must be proximate cause; and There must be damages. 23

36 If the homeowner is sued by another party for negligent acts, the homeowners policy will also pay for a legal defense. A homeowners policy will pay up to the limit of coverage for acts in which the homeowner or a member of the family can be held liable. This would include payment to others for bodily injury as well as property damage. PERSONAL LIABILITY EXCLUSIONS The liability portion of the homeowners policy will not cover such items as are listed below: Bodily injury to the insured; Damages caused by failure to render professional services or by rendering professional services; Damages caused by motor vehicles unless The vehicle is not subject to motor vehicle registration and is used to service an insured's residence; or The vehicle is designed to assist the handicapped; Damages caused by operation of an aircraft unless injuries are caused by model hobby planes; Communicable diseases; War; Workers' Compensation injuries; Damages caused by water craft; Non-insured locations; Intentional or malicious acts of the insured; or Business activities. DOG OWNERS According to the Humane Society of the United States, it is estimated that approximately 40 percent of households in America have at least one dog. And approximately 70 percent of dog bites occur on the owner s property. abcnews reported that according to the Insurance Information Institute, dog bites account for almost a third of homeowners insurance claims, costing about $310 million a year. Also according to the Insurance Information Institute, more than $1 billion in litigation costs per year are incurred through lawsuits due to dog bites. Therefore, it is extremely important that agents be familiar with any legislation and/or laws pertaining to incidences in which a homeowner s dog might be involved. 24