TECH TALK Insuring a Personal Condo Under the Dwelling Policy... and Why Would You? November 2016 Irene Morrill, CPCU, CIC, ARM, CRM, CRIS, LIA, CPIW Vice President of Technical Affairs An agent lamented recently that the company made him put a rented condo on a dwelling form and not the HO-6 with the HO-17 Unit-owners Rental to Others. WHY he asked. ISO HO Forms and the Definition of Residence Premises The HO-6 Unit-owners Form is a personal lines form. Is renting a condo out all year round truly a personal risk or is it really a business? If you have a one family home that is rented out all year round would you sell an Homeowners policy? Probably not as the definition of residence premises under the HO-3 Special Form ISO HO-2000 states: 11. Residence premises means: a. The one family dwelling where you reside; b. The two, three or four family dwelling where you reside in at least one of the family units; or c. That part of any other building where you reside; and which is shown as the residence premises in the Declarations. Residence premises also includes other structures and grounds at that location. The ISO HO-2011 has the exact same definition and the HO-91 edition is similar. The residence premises definition assumes YOU live there. Who is you? A. In this policy, you and your refer to the named insured shown in the Declarations, and the spouse if a resident of the same household. We, us and our refer to the Company providing this insurance. Again, the ISO HO-2000/2011 definition and the ISO HO-91 are almost identical. If YOU are the named insured, you MUST reside in the house not just own it. What about the HO-6 Unit-Owner Form? The definition of you has a similar requirement to the HO-3. The definition of residence premises in the ISO HO-2000/2011 is: 11. Residence Premises means the unit where you reside shown as the residence premises in the Declarations. If you don t live there you DON T have a residence premises. Owning the unit or house is not enough to qualify for the HO policy. How does the lack of residence premises affect coverage under the HO-6? HO-6 and Residence Premises The Coverage A limit won t pay out if you don t live there: SECTION I PROPERTY COVERAGES A. Coverage A Dwelling 1. We cover: a. The alterations, appliances, fixtures and improvements which are part of the building contained within the residence premises; Massachusetts Association of Insurance Agents 91 Cedar Street - Milford, MA 01757 TECH Hotline 800.870.7091 * 800.972.9312 * 508.634.2900 * 508.634.2929 (FAX)
November 2016 2 b. Items of real property which pertain exclusively to the residence premises; d. Structures owned solely by you, other than the residence premises, at the location of the residence premises. Coverage D Loss of Use won t pay out: C. Coverage D Loss Of Use The limit of liability for Coverage D is the total limit for the coverages in 1. Additional Living Expense, 2. Fair Rental Value and 3. Civil Authority Prohibits Use below. 1. Additional Living Expense If a loss by a Peril Insured Against under this policy to covered property or the building containing the property makes the residence premises not fit to live in, we cover any necessary increase in living expenses incurred by you so that your household can maintain its normal standard of living. Payment will be for the shortest time required to repair or replace the damage or, if you permanently relocate, the shortest time required for your household to settle elsewhere. 2. Fair Rental Value If a loss covered under Section I makes that part of the residence premises rented to others or held for rental by you not fit to live in, we cover the fair rental value of such premises less any expenses that do not continue while it is not fit to live in. Payment will be for the shortest time required to repair or replace such premises. Section II Coverage E Bodily Injury and Property Damage and Coverage F Medical Payments To Others could be problematic. Coverage E responds to BI/PD to others and Coverage F could provide medical payments to others if there is no exclusion. However, there IS an exclusion applicable to both Coverage E and F. E. Coverage E Personal Liability And Coverage F Medical Payments To Others Coverages E and F do not apply to the following: 4. Insured s Premises Not An Insured Location Bodily injury or property damage arising out of a premises: a. Owned by an insured; b. Rented to an insured; or c. Rented to others by an insured; that is not an insured location; What is the definition of insured location you ask? Well, it starts out: 6. Insured location means: a. The residence premises; Again, ISO HO-2000/2011 language but HO-91 is similar. Oops we don t have an insured location because if YOU don t live in the unit there is no residence premises. HO-17 33 Unit-owner rental to others, does it fix the issue of residence premises? The title of the endorsement SOUNDS good and, IF it works, it removes the exclusion under Coverage C for personal property in a regularly rented apartment. If it works it removes the Section II exclusion for Coverage E Liability and Coverage F Medical Payments Business Exclusion for when an insured location is rented occasionally. But remember, if it is not an insured location, then there is an overall Coverage E and F exclusion. The first paragraph of the HO 17 33 is the problem: Coverage provided by this policy is extended to apply while the residence premises is regularly rented or held for rental to others. If you don t EVER live in the unit and rent it out all year round, then you don t have a residence premises and, therefore, this endorsement does you no good. If you live in the unit a portion of the year, then you could qualify for the HO-6. If the company wants to sell the HO 17 33 Unit-owner Rental to Others then the rental restrictions on Coverage C and Coverage E would be resolved.
November 2016 3 When the owner never lives in the unit, then the unit does NOT belong under an HO-6 unless the insurance company is TRULY aware of the exact extent of the rental and allows the HO-6 with the HO 17 33. Dwelling coverage is the answer when the owner no longer qualifies for the HO-6 Is there a dwelling fire rule regarding condos under the DP forms? Yes. Rule 505 discusses Building items Condo Unit-owner. Step one Pick a Dwelling Coverage Form We have a choice of DP-1 or DP-2. HOWEVER, if we want to make building items open perils or special, then we MUST use the DP-2. So, we pick the DP-2 as a base form Step two Add the DP 17 66 Unit-owners Coverage Endorsement Then, if we want building coverage, we add it by an endorsement. Coverage is purchased in $1,000 increments. Whatever Coverage A limit was on the HO-6 should be transferred to the DP 17 66 Unitowners Coverage Endorsement. The definition of dwelling under the DP-2 doesn t work. And, if you use the definition of dwelling on the DP-2 for the building coverage, then you would also be stuck with the loss settlement provision. You know the one that if one doesn t carry at least 80% of the building value, then one is penalized with the under-insurance penalty. The definition of Unit-owners Building Items under the DP 17 66 is almost the same as the Coverage A discussion under the HO-6: Unit-Owners Building Items We cover for direct physical loss caused by the Perils Insured Against:
November 2016 4 1. The alterations, appliances, fixtures and improvements which are part of the building contained within your unit; 2. Items of real property which pertain exclusively to your unit; 3. Property which is your insurance responsibility under a corporation or association of property owners agreement; or 4. Structures owned solely by you, other than the Described Location, on the premises of the Described Location. However, we do not cover: The DP 17 66 also modifies the DP-2 loss settlement provision to read like the HO-6: 2. Loss Settlement Unit-Owners Building Items losses are settled as follows: a. If the damage is repaired or replaced within a reasonable time, at the actual cost to repair or replace; b. If the damage is not repaired or replaced within a reasonable time, at actual cash value but not exceeding the amount required to repair or replace. In this provision, the terms repaired or replaced do not include the increased costs incurred to comply with the enforcement of any ordinance or law, except to the extent that coverage for these increased costs is provided in Paragraph E.12. Ordinance Or Law. No under-insurance penalty. If the insured does the repairs they are paid repair/replacement cost. The DP 17 66 Unit-owner Coverage Endorsement also modifies Fair Rental value to be activated whether the unit OR the building containing the unit is damaged just as Coverage D Loss of Use in the HO-6 reads. 3. Fair Rental Value The following sentence is added to the Fair Rental Value Coverage in all policies covering Fair Rental Value: We also cover the fair rental value if a loss to the building containing the property described in this policy by a Peril Insured Against under this policy makes that part of the Described Location rented to others or held for rental by you unfit for its normal use. The DP-2 merely activates fair rental value if the covered property is damaged. Step 3 Make Unit-owner building items covered on a Special form basis DP 04 65 This endorsement is like the HO 17 32 Coverage A Special Form added to the HO-6 named peril form. The DP 04 65 makes unit-owner building items covered unless excluded like the HO-3 for building losses. And, since building is open perils, the Fair Rental Value will be activated by these same open perils. The Perils Insured Against listed below apply to either of the following coverages, if provided in this policy: 1. Improvements, Alterations and Additions; or 2. Unit-Owners Building Items. PERILS INSURED AGAINST 1. We insure against risks of direct physical loss to the property described above.
November 2016 5 Step 4 Loss Assessment Property Coverage DP 04 63 There is no free additional coverage for loss assessment under the DP policy. One must remember to add it. One needs to INCREASE loss assessment under the HO policy. I would take whatever limit that was on the HO-6 Loss Assessment endorsement HO 04 35 and list it on the DP 04 63 Loss Assessment Property Schedule. One can buy the same $50,000 under the DP form as one can under the HO form. Step 5 Premises Liability Coverage So far we only have property coverage. We must remember liability. If one can extend liability coverage from the owner s homeowners form to this rented condo unit through the HO 24 70 Additional Residence Rented to Others great. Many HO carriers no longer allow this and MPIUA is one of them. To obtain premises liability for this rented unit one needs TWO dwelling liability forms. DL 24 01 Personal Liability is necessary. It is an 8-page form that looks pretty much like Section II under the HO policy. This provides definitions and worldwide liability which is more than what one needs. DL 24 11 Premises Liability (Non-owner occupied dwelling) This endorsement reinforces that the location is covered for BI/PD to others. The MPIUA version is FP DL 01 1/15, and it is almost identical The DL 24 01 giveth the world. The DL 24 11 or FP DL 01 restricts liability coverage to the designated premises. Both endorsements are necessary as the long form DL 24 01 contains all the necessary definitions. Step 6 Personal Injury Liability DL 24 82 If one provides liability to the dwelling property by HO 24 70 Residence Rented to Others attached to the HO policy and one also has the HO 24 82 Personal Injury added to the HO policy, then one doesn t need to add this endorsement to the Dwelling policy. If one adds Dwelling Liability to the DP form through the DL 24 01 and DL 24 11, then one MUST add the Personal Injury coverage to the Dwelling Liability. Wrongful eviction, wrongful entry into and invasion of the right of private occupancy would be covered under this endorsement. Step 7 Loss Assessment Liability DL 24 14 There is no loss assessment in the DL 24 01 liability form. One must add it by endorsement. Again, I would use the $50,000 limit that is usually purchased under the HO form. Step 8 Loss of Rental Income One must remember to add the coverage as there is none for free under this unit-owner format. I personally would suggest buying 18-24 months of loss of rental income. If one still has a mortgage on the unit, then the purchase of loss of rental income is vital. Step 9 Coverage C Personal Property If one rents a furnished unit, then consider a realistic limit. Unfortunately, unlike the HO-6, there is NO ability to purchase replacement cost coverage for personal property.
November 2016 6 Step 10 Other Endorsements and Coverage Ordinance or law? Earthquake? Increased Mold coverage; Sump Pump or Sewer Back Up coverage; Inflation Guard, etc. But we ve got the big stuff, and we have transferred coverage from the HO-6 with HO-17 33 to the Dwelling long term rental format. * * * * * Good luck. If I can be of service to you, please call me, Irene Morrill, Vice President of Technical Affairs, at 800.870.7091 or email me at imorrill@massagent.com. This article has been developed expressly for the members of MAIA. Reprint by other than members without the express permission of the author is not permitted.