HOMEOWNERS PROGRAM REVISIONS

HOMEOWNERS PROGRAM REVISIONS COPYRIGHT 2003, 2008, 2010 AFFORDABLE-SUCCESS-FIRSTCHOICE-CLIENTELL CE (A Division of the Success Continuing Education LLC) www.affordablece.com

AffordableCE (A Division of the Success Continuing Education LLC) 2 Corporate Plaza Drive Suite 100 Newport Beach, CA 92660 Office: (949) 706-9453 Fax: (949) 706-9439 INFO@AFFORDABLECE.COM WWW.AFFORDABLECE.COM 2003, 2008, 2010 AffordableCE (A Division of the Success Continuing Education LLC) 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 American Safety Council, Inc. This publication is designed to provide general information on the seminar 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 seminar, 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.

TABLE OF CONTENTS CHAPTER 1... 1 INTRODUCTION TO HOMEOWNERS INSURANCE... 1 THE CONCEPT OF INSURANCE... 1 THE PRINCIPLE OF INDEMNITY... 1 INSURABLE INTEREST... 2 THE HISTORY OF HOMEOWNERS INSURANCE... 2 THE APPLETON RULE... 3 MODERN INSURANCE LAW... 3 PACKAGE POLICIES... 4 THE PURPOSE OF HOMEOWNERS INSURANCE... 5 RISK... 5 TYPES OF RISK... 6 MANAGING RISK... 6 POLICY COVERAGES... 7 SECTION I PROPERTY COVERAGES... 7 SECTION II LIABILITY COVERAGES... 7 HOMEOWNERS POLICY FORMS... 8 NAMED PERILS POLICIES... 9 OPEN PERILS POLICIES... 10 HOMEOWNERS POLICY FORMAT... 10 DETERMINING HOW MUCH INSURANCE IS SUFFICIENT... 12 CHOOSING THE RIGHT COVERAGE... 12 COST OF COVERAGE... 13 CONSTRUCTION CLASSIFICATIONS... 13 PROTECTION CLASS... 14 POLICY FORM SELECTED... 14 DEDUCTIBLE... 15 INSURANCE COMPANY SELECTED... 15 DISCOUNTS... 15 CHAPTER 1 REVIEW QUESTIONS... 17 CHAPTER 2... 18 PROPERTY AND LIABILITY CONCEPTS... 18 PROPERTY AND LIABILITY COVERAGE... 18 SECTION I PROPERTY COVERAGES... 18 SECTION II LIABILITY COVERAGES... 19 Coverage E Personal Liability... 19 Coverage F Medical Payments to Others... 20

PROPERTY CONCEPTS... 20 REAL PROPERTY... 20 PERSONAL PROPERTY... 20 PROPERTY NOT COVERED... 21 PERILS... 21 HAZARDS... 21 Physical Hazard... 21 Moral Hazard... 22 Morale Hazard... 22 Legal Hazard... 22 LOSS... 22 TOTAL VS. PARTIAL LOSS... 22 DIRECT VS. INDIRECT LOSS... 22 PROXIMATE CAUSE... 23 CONCURRENT CAUSATION... 23 INSURANCE TO VALUE RATIO... 23 VALUATION... 24 ACTUAL CASH VALUE (ACV)... 24 REPLACEMENT COST... 25 VALUED POLICIES... 25 OTHER INSURANCE... 25 POLICY LIMITS... 25 LIABILITY CONCEPTS... 25 CASE SCENARIO... 26 SECTION II COVERAGE E... 26 LEGAL LIABILITY... 26 ESTABLISHING LEGAL LIABILITY... 26 TORTS... 27 Intentional Torts... 27 Negligent Torts... 27 Strict or Absolute Liability Torts... 27 VIOLATION OF LAW... 27 CONTRACTUAL LIABILITY... 27 NEGLIGENCE... 28 ESTABLISHING NEGLIGENCE... 28 Legal Duty... 28 Breach of Duty... 28 Proximate Cause... 28 Damages... 29 DEFENSES TO NEGLIGENCE... 29 Assumption of Risk... 29 Contributory Negligence... 30 Comparative Negligence... 30 DAMAGES... 30 TYPES OF DAMAGES... 30 Compensatory Damages... 31

Punitive Damages... 31 SECTION II COVERAGE F... 31 CASE SCENARIO... 32 LIMITS OF LIABILITY... 32 CASE SCENARIO... 33 CHAPTER 2 REVIEW QUESTIONS... 34 CHAPTER 3... 35 THE ISO HOMEOWNERS 2000 PROGRAM... 35 INSURANCE SERVICES OFFICE, INC. (ISO)... 35 CHANGES TO ISO HO 2000... 35 DEFINITIONS... 36 AIRCRAFT, HOVERCRAFT, WATERCRAFT AND MOTOR VEHICLE LIABILITY... 37 BUSINESS... 37 EMPLOYEE... 38 INSURED... 38 RESIDENCE EMPLOYEE... 38 RESIDENCE PREMISES... 38 SECTION I PROPERTY COVERAGES... 39 COVERAGE B OTHER STRUCTURES... 39 COVERAGE C PERSONAL PROPERTY... 39 Limit for Property at Other Residences... 39 Special Limits of Liability... 39 Property Not Covered... 40 COVERAGE D - LOSS OF USE... 41 Increased Limits... 41 ADDITIONAL COVERAGES... 41 Debris Removal... 41 Loss Assessment... 41 Collapse... 41 Landlord s Furnishings... 42 Ordinance or Law... 42 Grave Markers... 42 PERILS INSURED AGAINST... 42 Vandalism and Malicious Mischief... 42 Accidental Discharge or Overflow of Water or Steam... 42 Smoke... 42 Freezing... 42 Sudden and Accidental Damage from Artificially Generated Electrical Currents. 43 EXCLUSIONS... 43 Earth Movement... 43 Water Damage... 43 Intentional Loss... 43 CONDITIONS... 43

Suits Against Us... 43 SECTION II LIABILITY COVERAGES... 43 EXCLUSIONS... 43 Motor Vehicle and Watercraft Liability... 43 Hovercraft Liability... 44 Expected or Intentional Injury... 44 Business... 44 ADDITIONAL COVERAGES... 44 Claim Expenses... 44 CHAPTER 3 REVIEW QUESTIONS... 45 CHAPTER 4... 46 POLICY COMPONENTS... 46 HOMEOWNERS EXPOSURES... 46 ELIGIBILITY... 46 HO-2 BROAD FORM... 47 HO-3 SPECIAL FORM... 47 HO-4 CONTENTS BROAD FORM... 47 HO-5 COMPREHENSIVE FORM... 47 HO-6 UNIT OWNERS FORM... 48 HO-8 MODIFIED COVERAGE FORM... 48 THE INSURANCE POLICY CONTRACT... 49 THE DECLARATIONS PAGE... 49 THE INSURING AGREEMENT... 50 POLICY DEFINITIONS... 50 Aircraft Liability, Hovercraft Liability, Watercraft Liability and Motor Vehicle Liability... 50 Aircraft... 50 Hovercraft... 50 Watercraft... 50 Motor Vehicle... 51 Bodily injury... 51 Business... 51 Employee... 51 Insured... 51 Insured Location... 52 Occurrence... 52 Property Damage... 52 Residence Employee... 52 Residence Premises... 52 DEDUCTIBLE... 53 SECTION I PROPERTY COVERAGE... 53 Coverage A... 53 Coverage B... 53

Coverage C... 53 Coverage D... 53 ADDITIONAL COVERAGES... 53 PERILS INSURED AGAINST... 53 EXCLUSIONS... 54 CONDITIONS... 54 SECTION II LIABILITY COVERAGES... 54 Coverage E Personal Liability... 55 Coverage F Medical Payments to Others... 55 EXCLUSIONS... 55 ADDITIONAL COVERAGES... 55 SECTION II CONDITIONS... 55 SECTION I AND II CONDITIONS... 55 CHAPTER 4 REVIEW QUESTIONS... 56 CHAPTER 5... 57 COMPARISON OF POLICY FORMS... 57 SIX HOMEOWNERS POLICY FORMS... 57 HO-2 BROAD FORM... 58 COVERAGES A AND B... 58 Fire or Lightning... 58 Windstorm or Hail... 58 Explosion... 58 Riot or Civil Commotion... 58 Aircraft... 59 Vehicles... 59 Smoke... 59 Vandalism or Malicious Mischief... 59 Theft... 59 Falling Objects... 60 Weight of Ice, Snow or Sleet... 60 Accidental Discharge or Overflow of Water or Steam... 60 Sudden and Accidental Tearing Apart, Cracking, Burning or Bulging... 60 Freezing... 61 Sudden and Accidental Damage From Artificially Generated Electrical Current. 61 Volcanic Eruption... 61 COVERAGE C... 61 COVERAGE D... 62 HO-3 SPECIAL FORM... 62 COVERAGES A AND B... 62 COVERAGE C... 62 COVERAGE D... 62 HO-4 CONTENTS BROAD FORM... 62 COVERAGE C... 63

COVERAGE D... 63 HO-5 COMPREHENSIVE FORM... 63 COVERAGE A AND B... 63 COVERAGE C... 63 COVERAGE D... 63 HO-6 UNIT OWNERS FORM... 63 COVERAGE A... 63 COVERAGE C PERSONAL PROPERTY... 64 COVERAGE D... 64 HO-8 MODIFIED COVERAGE FORM... 64 COVERAGE A AND B... 64 COVERAGE C... 65 COVERAGE D... 65 LIMITATIONS... 65 MOBILE HOMES... 66 USEFUL CHARTS... 66 CHAPTER 5 REVIEW QUESTIONS... 68 CHAPTER 6... 69 SECTION I PROPERTY COVERAGES... 69 PROTECTION FOR DWELLING, OTHER STRUCTURES AND PERSONAL PROPERTY... 69 COVERAGE A DWELLING... 69 REPLACEMENT COST... 70 INSURANCE TO VALUE... 70 COVERAGE B OTHER STRUCTURES... 70 COVERAGE C PERSONAL PROPERTY... 71 SPECIAL LIMITS OF LIABILITY... 71 PROPERTY NOT COVERED... 72 COVERAGE D LOSS OF USE... 73 ADDITIONAL LIVING EXPENSES... 73 FAIR RENTAL VALUE... 74 CIVIL AUTHORITY PROHIBITS USE... 74 ADDITIONAL COVERAGES... 74 DEBRIS REMOVAL... 74 REASONABLE REPAIRS... 74 TREES, SHRUBS AND OTHER PLANTS... 75 FIRE DEPARTMENT SERVICE CHARGE... 75 PROPERTY REMOVAL... 75 CREDIT CARD, ELECTRONIC FUND TRANSFER CARD OR ACCESS DEVICE, FORGERY AND COUNTERFEIT MONEY... 76 LOSS ASSESSMENT... 76 COLLAPSE... 76 GLASS OR SAFETY GLAZING MATERIAL... 77

LANDLORD S FURNISHINGS... 77 ORDINANCE OR LAW... 77 GRAVE MARKERS... 77 PERILS INSURED AGAINST... 78 COVERAGE A AND B... 78 COVERAGE C... 80 COVERAGE D... 80 CHAPTER 6 REVIEW QUESTIONS... 81 CHAPTER 7... 82 SECTION I EXCLUSIONS AND CONDITIONS... 82 EXCLUSIONS... 82 ORDINANCE OR LAW... 82 EARTH MOVEMENT... 82 WATER DAMAGE... 82 POWER FAILURE... 83 NEGLECT... 83 WAR... 83 NUCLEAR HAZARD... 83 INTENTIONAL LOSS... 83 GOVERNMENT ACTION... 83 OTHER EXCLUSIONS... 83 CONDITIONS... 84 INSURABLE INTEREST AND LIMIT OF LIABILITY... 84 DUTIES AFTER LOSS... 84 LOSS SETTLEMENT... 85 LOSS TO A PAIR OR SET... 85 APPRAISAL... 86 OTHER INSURANCE AND SERVICE AGREEMENT... 86 Case Scenario... 86 SUIT AGAINST US... 87 OUR OPTION... 87 LOSS PAYMENT... 87 ABANDONMENT OF PROPERTY... 87 MORTGAGE CLAUSE... 87 NO BENEFIT TO BAILEE... 88 NUCLEAR HAZARD CLAUSE... 88 RECOVERED PROPERTY... 88 VOLCANIC ERUPTION PERIOD... 88 POLICY PERIOD... 88 CONCEALMENT OR FRAUD... 88 LOSS PAYABLE CLAUSE... 88 Case Scenario... 89 CHAPTER 7 REVIEW QUESTIONS... 90

CHAPTER 8... 91 SECTION II LIABILITY COVERAGES... 91 THIRD-PARTY BENEFITS... 91 COVERAGE E PERSONAL LIABILITY... 91 NECESSARY COVERAGE... 92 ESTABLISHING LIABILITY... 92 DEFENSE COSTS... 93 PREJUDGMENT INTEREST... 93 POLICY LIMITS... 94 COVERAGE F MEDICAL PAYMENTS TO OTHERS... 94 LIABILITY NOT NECESSARY... 94 COVERED MEDICAL EXPENSES... 94 POLICY LIMITS... 95 CHAPTER 8 REVIEW QUESTIONS... 96 CHAPTER 9... 97 SECTION II EXCLUSIONS, ADDITIONAL COVERAGES AND CONDITIONS... 97 EXCLUSIONS... 97 MOTOR VEHICLE LIABILITY... 97 Exceptions... 98 WATERCRAFT LIABILITY... 98 Exceptions... 99 AIRCRAFT LIABILITY... 99 HOVERCRAFT LIABILITY... 99 COVERAGE E PERSONAL LIABILITY AND COVERAGE F MEDICAL PAYMENTS TO OTHERS... 99 Expected or Intentional Injury... 100 Business... 100 Professional Services... 100 Insured Premises - Not an Insured Location... 100 War... 101 Communicable Disease... 101 Sexual Molestation, Corporal Punishment or Physical or Mental Abuse... 101 Controlled Substance... 101 Certain Exclusions Do Not Apply... 101 COVERAGE E PERSONAL LIABILITY... 102 Liability... 102 Property Damage to the Insured s Property... 102 Other Property Damage... 102 Bodily Injury... 102 Bodily Injury or Property Damage... 103 Bodily Injury to an Insured... 103 COVERAGE F MEDICAL PAYMENTS TO OTHERS... 103

Residence Employees Off the Insured Location... 103 Workers Compensation... 104 Nuclear Accidents... 104 Residence Employees Residing at the Insured Location... 104 ADDITIONAL COVERAGES... 104 CLAIM EXPENSES... 104 FIRST AID EXPENSES... 104 DAMAGE TO PROPERTY OF OTHERS... 105 LOSS ASSESSMENT... 105 CONDITIONS... 106 LIMIT OF LIABILITY... 106 SEVERABILITY OF INSURANCE... 106 DUTIES AFTER OCCURRENCE... 106 DUTIES OF AN INJURED PERSON COVERAGE F MEDICAL PAYMENTS TO OTHERS.. 107 PAYMENT OF CLAIM COVERAGE F MEDICAL PAYMENTS TO OTHERS... 107 SUIT AGAINST US... 107 BANKRUPTCY OF AN INSURED... 107 OTHER INSURANCE... 107 POLICY PERIOD... 107 CONCEALMENT OR FRAUD... 107 CHAPTER 9 REVIEW QUESTIONS... 108 CHAPTER 10... 109 SECTION I AND II CONDITIONS... 109 CONDITIONAL CONTRACTS... 109 LIBERALIZATION CLAUSE... 109 WAIVER OR CHANGE OF POLICY PROVISIONS... 110 CANCELLATION... 110 By the Insured... 110 By the Insurer... 110 NONRENEWAL... 111 ASSIGNMENT... 111 SUBROGATION... 111 DEATH... 111 CHAPTER 10 REVIEW QUESTIONS... 112 CHAPTER 11... 113 POLICY ENDORSEMENTS... 113 CONDITIONAL CONTRACTS... 113 SECTION I PROPERTY COVERAGES... 113 MOBILE HOME ENDORSEMENT (MH 04 01)... 113 ADDITIONAL LIMITS OF LIABILITY FOR COVERAGES A, B, C AND D ENDORSEMENT

(HO 04 11)... 114 INCREASED LIMITS ON BUSINESS PROPERTY ENDORSEMENT (HO 04 12)... 114 SPECIAL COMPUTER COVERAGE ENDORSEMENT (HO 04 14)... 114 ADDITIONAL INSURED RESIDENCE PREMISES ENDORSEMENT (HO 04 41)... 115 INFLATION GUARD ENDORSEMENT (HO 04 46)... 115 OTHER STRUCTURES INCREASED LIMITS ENDORSEMENT (HO 04 48)... 115 BUILDING ADDITIONS AND ALTERATIONS ENDORSEMENT (HO 04 51)... 115 CREDIT CARD, ELECTRONIC FUND TRANSFER CARD, FORGERY AND COUNTERFEIT MONEY COVERAGE INCREASED AMOUNTS (HO 04 53)... 116 EARTHQUAKE ENDORSEMENT (HO 04 54)... 116 OTHER MEMBERS OF YOUR HOUSEHOLD ENDORSEMENT (HO 04 58)... 116 SCHEDULED PERSONAL PROPERTY ENDORSEMENT (HO 04 61)... 116 COVERAGE C INCREASED SPECIAL LIMITS ENDORSEMENT (HO 04 65)... 116 ORDINANCE OR LAW COVERAGE ENDORSEMENT (HO 04 77)... 117 PERSONAL PROPERTY REPLACEMENT COST ENDORSEMENT (HO 04 90)... 117 COVERAGE B OFF-PREMISES ENDORSEMENT (HO 04 91)... 117 SPECIFIC STRUCTURES AWAY FROM THE RESIDENCE PREMISES ENDORSEMENT (HO 04 92)... 118 WINDSTORM OR HAIL EXCLUSION (HO 04 94)... 118 HOME DAY CARE COVERAGE ENDORSEMENT (HO 04 97)... 118 REFRIGERATED PROPERTY COVERAGE ENDORSEMENT (HO 04 98)... 118 SINKHOLE COLLAPSE ENDORSEMENT (HO 04 99)... 119 ADDITIONAL INSURED STUDENT LIVING AWAY FROM THE RESIDENCE PREMISES ENDORSEMENT (HO 05 27)... 119 OWNED MOTORIZED GOLF CART PHYSICAL LOSS COVERAGE ENDORSEMENT (HO 05 28)... 119 UNIT OWNERS COVERAGE C SPECIAL COVERAGE ENDORSEMENT (HO 17 31)... 119 UNIT OWNERS COVERAGE A SPECIAL COVERAGE ENDORSEMENT (HO 17 32)... 119 UNIT OWNERS RENTAL TO OTHERS COVERAGE ENDORSEMENT (HO 17 3)... 119 MINE SUBSIDENCE COVERAGE ENDORSEMENT (HO 23 83)... 120 SECTION II LIABILITY COVERAGES... 120 LOSS ASSESSMENT COVERAGE ENDORSEMENT (HO 04 35)... 120 PERMITTED INCIDENTAL OCCUPANCIES RESIDENCE PREMISES ENDORSEMENT (HO 04 42)... 120 SNOWMOBILE ENDORSEMENT (HO 24 64)... 121 BUSINESS PURSUITS ENDORSEMENT (HO 24 71)... 121 INCIDENTAL FARMING PERSONAL LIABILITY ENDORSEMENT (HO 24 72)... 121 WATERCRAFT ENDORSEMENT (HO 24 75)... 121 PERSONAL INJURY ENDORSEMENT (HO 24 82)... 122 UMBRELLA OR EXCESS LIABILITY COVERAGE... 122 CHAPTER 11 REVIEW QUESTIONS... 123 ANSWERS TO CHAPTER REVIEW QUESTIONS... 124

INTRODUCTION TO HOMEOWNERS INSURANCE THE CONCEPT OF INSURANCE CHAPTER 1 Insurance is a device by which many share the losses of a few. This is accomplished when homeowners and other insureds transfer their risk of loss to an insurance company in exchange for premiums paid. Those who think they may suffer a loss contribute money to cover the financial burden of those among them who actually do sustain a loss. Of course, insurance is not necessary to cover the risk of all loss. It is used to cover the risks associated with things that would cause a substantial financial burden; for example, a house destroyed by fire or an automobile involved in an accident. Insurance is built on the concept of risk sharing. The term risk refers to the uncertainty regarding financial loss. Risk sharing divides risk among many people. For example, everyone who owns or rents a home runs the risk of suffering a loss from fire or lightning, vandalism or malicious mischief, theft of personal property and similar events. However, insurance statistics may indicate that only five homes in a certain area will actually suffer fire damage. Using insurance, each homeowner pays a small amount to benefit the unfortunate few who actually suffer this or other losses. The purpose of homeowners insurance is to protect insureds from losses caused by storms, fire, theft and other events and to provide liability protection from claims of third parties. It is important for clients to make informed decisions about their insurance needs. Fire, hurricanes, earthquakes, floods and theft are often a part of life. Accidents and natural disasters are not just a possibility, but an eventuality. THE PRINCIPLE OF INDEMNITY The principle of indemnity states that after a loss has occurred, the insured will be placed as closely as possible in the same financial position as before the loss occurred. This, of course, is subject to the amount of the insurance coverage and all policy terms and conditions being met. After a loss, the insured should be neither financially better off nor worse off. He/she should simply be placed in the same position financially, as far as possible, as occupied immediately before the loss. In effect, the principle of indemnity aims to prevent the insured from making a profit from the loss or gaining any benefit or advantage from the insurance. 1

INSURABLE INTEREST Insurable interest is any interest a person has in property when damage to that property would cause the insured a financial loss. Insurable interest is generally based upon ownership, although any legal right or possession of property is also cause for insurable interest. Insurable interest is required in all insurance contracts. In property insurance, insurable interest is any financial interest based on a legal right in the preservation of the property. For example, if an insured owns a house and the house is damaged by fire, the value of the house is reduced. Possibly there is no value at all if the house is destroyed. The insured will suffer a financial loss as a result of the fire. On the contrary, if a neighbor's house burns, this person does not suffer a financial loss from the fire. He/she has no insurable interest in the neighbor s property. An insurable interest may also be based on potential legal liability resulting from an event that could impose an obligation to pay damages. Insurers have strict underwriting rules prohibiting writing a policy if an insurable interest does not exist, or if it is apparent that no interest will exist in the near future. With respect to property insurance, insurable interest need exist only at the time of the loss. In cases where insurance is purchased before actual ownership of the property, the insurer will indemnify the insured if an insurable interest exists at the time of the loss. THE HISTORY OF HOMEOWNERS INSURANCE In 1730, a tragic fire swept through Philadelphia. The fire destroyed homes and much of the city s commercial district. In The Philadelphia Gazette, one of the city s leading residents, Benjamin Franklin, commented that the damage might have been contained if the townspeople had been furnished firefighting equipment. The city was so prompted to protect itself from a similar disaster that it created the Union Fire Company with volunteers and ladders and leather buckets for fashioning bucket brigades. In 1752, America's first insurance company, The Philadelphia Contributorship for the Insuring of Houses from Loss by Fire, was established by Franklin and other Philadelphia citizens. Its subscribers pledged to be and continue to be Contributors unto and equal sharers in the losses as well as the gains. The original Contributorship policies were in effect for seven years. Fire losses and expenses were paid from money taken from contributions of each insured. Houses that did not conform to the specifications of the Contributorship were not eligible for coverage. The company adopted fire marks that were affixed to the front of an insured's property for easy identification to firefighters. The volunteer fire brigades responded to all fires, even if a burning home had no fire mark. If a house did not have a fire mark, the fire brigade charged the uninsured homeowner for its work in fighting the fire. If a house possessed a fire mark, the Contributorship was billed. 2

Today s homeowners policies are founded upon the principles of the early Philadelphia Contributorship. THE APPLETON RULE Homeowners policies were not always as we know them today. In 1939, New York law specified the types of insurance authorized for insurers. The Appleton Rule essentially extended provisions of the New York insurance law to all states for companies admitted in New York. The Appleton Rule, a 1901 administrative rule, was devised by New York Deputy Superintendent of Insurance, Henry D. Appleton. The Appleton Rule required any insurance company licensed in New York to follow specific New York laws even when operating outside of the state, as a condition of doing business in New York. Since New York did not permit multi-line insurers and since many companies wanted to do business in New York, the Appleton Rule was a serious hurdle to the growth of multiple lines. At the time, life insurance was reserved exclusively for life insurers, and all other insurance was written by either casualty and surety insurers or fire and marine insurers. Casualty and surety companies were permitted to write accident and health insurance, burglary and theft insurance, boiler and machinery insurance, personal injury liability insurance, property damage liability insurance, workers compensation and employers liability insurance, and others. Fire and marine insurers were permitted to write fire insurance, miscellaneous property insurance, collision insurance, marine insurance, and others. Companies were required to designate themselves as either casualty and surety insurers or fire and marine insurers. It is worth noting at this point that while New York did not control the practices of other states, it did establish a pattern for the majority of insurers. The dominance of New York in the insurance industry enabled it to assert considerable influence over much of the insurance industry. In general, the intent of the prevailing law was to make the underwriting authority of the two types of insurers separate and distinct. For example, an insurer might write exclusively accident and health insurance, workers compensation and employers liability insurance or fire insurance. Under no circumstances could an insurer cross the line and write business assigned to the other type of insurer. This classification of insurers was unique to the United States and was known as the American System." It permitted insurers to specialize in particular kinds of insurance and to develop expertise in certain types of underwriting. MODERN INSURANCE LAW The laws of other states were not as constraining as those in New York, and the pressure was on for broader underwriting authority. Insurance companies felt the need for broader insurance contracts that would provide multi-line coverage to homeowners. They maintained that the combination of property and liability coverages in one contract would provide better protection for the insured than could be obtained through separate policies. 3

Coverage gaps and duplication of coverage could be eliminated. Insureds would benefit by obtaining a single policy from one insurance company. They would be provided broader protection at a lower cost than through the purchase of several policies with varying expiration dates from different insurers. Gradually, the insurance laws of a number of other states began to move away from the New York practice. In 1943, a committee was appointed by the National Association of Insurance Commissioners (NAIC) to study determining whether in the public interest it was advisable to make multiple line underwriting powers universally available to insurance companies. The Committee concluded that it would be a mistake to make a sudden departure from the American System of insurance classification and recommended, therefore, a gradual approach to the dissolution of the system. In 1944, the Committee submitted to the NAIC a recommendation that any domestic fire, marine, casualty, or surety company should be empowered to write any and all kinds of insurance or reinsurance (other than life insurance or annuities) on risks, provided it maintained an appropriate minimum policyholder surplus. The Committee suggested that an attempt be made to standardize the definitions of the various kinds of insurance; also that the numerous regulations and filing requirements now in effect be critically reviewed, so that those which no longer serve a useful purpose may be eliminated." The Committee s report was adopted by the NAIC and referred to the individual states for consideration. The program was presented to the New York State legislature and, in spite of the opposition, it was adopted. By 1948, the movement to abandon the American System had spread to most of the states. In 1948, a bill was introduced in the New York State legislature to award full underwriting authority upon both casualty and surety insurers and fire and marine insurers. The bill became effective in New York State in 1949. Only when New York State allowed multi-line companies in 1949 did the industry encourage multi-lines. Today, multiple line insurance companies are permitted in all states. A single insurer may operate in the entire field of insurance (outside life insurance). PACKAGE POLICIES Once insurers began to write both property and casualty insurance in a single contract, they began to create various forms of multi-line homeowners insurance. The barriers to operating in the entire field of insurance (outside life insurance) were removed. Restrictions on combining fire and theft and liability coverages in a single policy were eliminated. Some companies offered fire policies that included personal liability coverages by endorsement. Others combined several coverages in a single contract to meet most of a homeowner s needs. 4

Today s homeowners package policies combine property and liability coverages in a single policy. These are known as package policies. They insure homes and possessions not only against fire but against such perils as theft, vandalism, smoke damage, falling objects and other perils. Coverage can be broadened to include almost any property or personal liability exposures. Some perils (for example, floods), are not covered. However, a separate flood policy can be purchased to cover this risk. Modern homeowner policies are more convenient and less expensive than previous separate policies. All parts of the policy are mandatory. This means that property coverages cannot be purchased without the purchase of liability coverages and vice versa. THE PURPOSE OF HOMEOWNERS INSURANCE Homeowner s insurance protects the investment in a home as well as the homeowner s personal property. If a home is suddenly lost due to fire or natural disaster or if the contents are damaged or stolen, the average homeowner probably couldn't afford to replace everything at once. If a lawsuit is brought against the homeowner because of another s bodily injury or property damage caused by the homeowner, the cost of defending the suit could run into tens of thousands of dollars in legal fees regardless of the outcome of the suit. There are many different types of policies available and not all coverages are the same or are available in all states. RISK Risk is the basis of all insurance policies. Risk is the possibility or chance of loss or injury. It is represented by an insurance company's uncertainty regarding the ultimate amount of a claim payment, if any. The burden of risk is transferred from the individual to whom it attaches (the insured) to one who is willing to assume it (the insurer) in exchange for the premium. There are two types of risk: Pure risk and Speculative risk. Pure risk is the focus of insurance contracts. Pure risk involves only the probability or possibility of loss with no chance for gain. There are only two possible outcomes of pure risk: loss or no loss. There is no possibility of gain or profit. For example, the possibility of lightning striking a house and causing a fire is an example of pure risk. The only possible outcomes are the house burning or the house not burning. There is no opportunity for gain or profit here. If a strike takes place and a fire starts, a loss occurs. If the lightning does not strike and there is no fire, a loss does not occur. Remember, only pure risks are insurable. 5

Speculative risk involves three possible outcomes: Loss, no loss, or gain. An example of speculative risk is investing in the stock market. Investing could produce a loss, no loss, or a gain. Because the opportunity for gain exists, speculative risks are not insurable. TYPES OF RISK Homeowners are generally subject to three different types of risks, each of which may bring about financial loss. Direct Physical Damage Direct physical damage to property results from perils such as fire, wind, water, explosion, smoke and similar causes of loss. Property Loss Property loss results from theft, vandalism or damage from any covered peril. Liability Liability results from one s legal responsibility for the costs of another person s injuries or damage to another person s property. A homeowners policy is the most practical means of managing the risks associated with owning or renting a home. A homeowners policy allows the insured homeowner to transfer these risks to an insurance company. MANAGING RISK Risk management encompasses the procedures used to identify, assess, control and finance accidental loss. It is also the application of resources to reduce identified loss exposures. Risk may be controlled or managed using one or more of the following techniques: Risk Avoidance Using risk avoidance as a risk management technique avoids the risk entirely. An example of risk avoidance is storing flammables away from a hot water heater and thereby avoiding combustion. Risk Reduction Risk reduction minimizes loss frequency and severity by employing loss reduction or prevention techniques. Such techniques include burglar alarms, sprinkler systems and deadbolts. These devices reduce a homeowner s chance of loss. Risk Retention Risk retention is retaining all or part of a risk. A homeowners policy deductible is an illustration of risk retention. Through the deductible, the insured maintains part of the risk, the part that he/she is responsible for. A person could retain all of the risk associated with owning a home by not purchasing insurance, although such a method of risk management is not practical. 6

Risk Transfer Risk can be transferred to others. As a means of risk management, risk transfer takes the form of an insurance contract. The financial risk of loss is shifted from the insured to the insurance company. POLICY COVERAGES All homeowners forms are designed to provide both property and liability coverages. The policy forms differ in property coverage only, depending upon the type of property covered. All of the forms provide the same liability coverages. Homeowners policy forms are divided into the following sections: SECTION I PROPERTY COVERAGES Coverage A Dwelling Coverage A applies to the dwelling and attached structures. The limit of insurance for Coverage A is based on the value of the home and what it would cost to replace it. Coverage B Other Structures Coverage B applies to detached structures such as a garages or storage sheds. The limit of coverage is typically 10 percent of the dwelling coverage, although the insured can purchase a higher limit of coverage. Coverage C Personal Property Coverage C provides worldwide coverage for the insured s personal property. Special limits apply to some types of property, and some property is excluded from coverage. The overall limit for Coverage C is 50 percent of the dwelling limit, although Coverage C can be modified in several ways with endorsements. Coverage D Loss of Use Coverage D applies in the event of a loss under Coverage A. If the insured were to temporarily lose use of the dwelling, this coverage would apply. Coverage D pays for expenses incurred to live elsewhere when a dwelling is not suitable for living. Additional Coverages Additional Coverages either expand the property coverage provided under the homeowners form or add extra coverage. For example, the insurer will pay as additional coverage reasonable costs for the necessary measures taken to protect covered property from further damage when the property has been damaged by a peril insured against. SECTION II LIABILITY COVERAGES Coverage E Personal Liability Coverage E provides liability coverage if a claim is made or suit is brought against an insured because of bodily injury or property damage for which the insured is legally liable. 7

Coverage F Medical Payments to Others Coverage F pays the necessary medical expenses for bodily injury of others, regardless of the insured s liability. Additional Coverages All of the Additional Coverages found in Section II are in addition to the policy limits. For example, Coverage E provides coverage for reasonable expenses incurred by an insured, including loss of earnings for assisting the insurer in the investigation or defense of a claim or suit. This coverage does not count toward the policy s limit of liability. Additional Coverages provided are subject to limitations and certain conditions. Endorsements can be added to all of the homeowners forms to provide expanded coverage or additional coverage limits. For example, the Personal Property Replacement Cost endorsement amends coverage to provide for the full cost to repair or replace personal property that has been lost or damaged. The Scheduled Personal Property endorsement can be used to increase the limits of jewelry, fur, cameras, musical instruments, silverware, golf equipment, fine arts, collectible stamps and coins and other specified highly valued personal property. The policy sections and coverages will be discussed in detail in Chapter 4, Policy Components. HOMEOWNERS POLICY FORMS There are many versions of homeowners policies, but most insurers use the forms published by Insurance Services Office (ISO). Some insurers use their own forms which are similar to the ISO forms, and some policy forms are promulgated by individual states. In 1976, ISO developed the homeowners program known as the Homeowners 76 Policy Program. The forms were revised in 1982, 1984, 1991, and 2000. The ISO Homeowners 2000 Program (HO 2000) is the subject of our discussion. The HO 2000 forms have been filed in every state. However, agents should check with their companies to confirm that their states have adopted the filings or adopted modified versions of the forms. A more detailed discussion of the changes made by the HO 2000 Program and a comparison of the new forms to the previous forms will take place in Chapter 3, The ISO Homeowners 2000 Program. The various policy forms and their uses will be discussed in detail in Chapter 5, Comparison of Policy Forms. At this point, be aware of the following forms that are used to provide homeowners coverage. HO-2 Broad Form The HO-2 form is a broad form policy that covers two groups of named perils commonly referred to as the Basic and the Broad Form perils. 8

HO-3 Special Form The HO-3 form is the policy that most homeowners purchase. It insures the dwelling and other structures against risks of direct physical loss on an open perils basis. This means perils are covered unless they are specifically excluded by the policy. Personal property is covered on a named perils basis. HO-4 Contents Broad Form The HO-4 form covers only personal property against listed perils. This policy form is used by tenants who wish to cover the contents of a residence they rent. The standard policy covers the Broad Form named perils in the HO-2 form. HO-5 Comprehensive Form The HO-5 form provides the broadest property coverage of any of the homeowners forms. The dwelling, other structures, and personal property are protected on an open perils basis. HO-6 Unit Owners Form The HO-6 form is for use by condominium and cooperative unit owners. This form covers the personal property of the insured for the named perils listed in the HO-2 form. In addition, there is coverage for alterations, fixtures and improvements that are part of the residence premises. HO-8 Modified Coverage Form The HO-8 covers the dwelling, other structures, and personal property against certain listed perils. This form covers repairs at actual cash value, not rebuilding costs. This form is used generally when the historic or architectural aspects of a home make replacement cost significantly higher than its market value. Note that the HO-1 was withdrawn in the early 1990s; therefore, this form will not be discussed further. NAMED PERILS POLICIES A basic difference among the homeowners policy forms is the way in which the perils are covered. Some policies provide coverage on a named perils basis, and others provide coverage on an open perils basis. A named perils policy protects property only against losses caused by the perils listed in the policy; for example, windstorm, hail, fire or explosion. A named perils policy provides coverage only if a loss is caused by one of the perils specifically named or identified in the policy. If a peril is not listed, it is not covered. A named perils policy may also specifically exclude certain causes of loss, certain types of property, or certain conditions under which coverage will be provided. The HO-2, HO-4, HO-6 and HO-8 forms provide coverage entirely on a named perils basis. The HO-3 provides named perils coverage for personal property and open perils coverage for the dwelling and other structures. 9

OPEN PERILS POLICIES Some insurance policies provide coverage on an open perils basis. This means that the property is protected against perils not specifically excluded by the policy. The HO-5 is an open perils policy. The HO-3 provides both named perils and open perils coverage. Under the HO-3, the dwelling and other structures are protected on an open perils basis, and personal property is protected on a named perils basis. The following chart shows the various homeowners forms and where named perils and open perils coverage applies: FORM COVERAGE A DWELLING COVERAGE B OTHER STRUCTURES COVERAGE C PERSONAL PROPERTY HO-2 Named perils Named perils Named perils HO-3 Open perils Open perils Named perils HO-4 N/A N/A Named perils HO-5 Open perils Open perils Open perils HO-6 Named perils N/A Named perils HO-8 Named perils Named perils Named perils HOMEOWNERS POLICY FORMAT Regardless of the policy form selected, each homeowner s policy contains the following sections: The Declarations Page The Declarations page contains the policy number, period of coverage, the insured s name and address, the agent s name, the location of the insured premises, the mortgagee (if any), policy limits, any applicable deductible, the premium amount and any endorsements that are part of the insurance contract. The Insuring Agreement The Insuring Agreement is an introduction to the policy. It establishes that the insurer s obligations under the policy are contingent upon the insured s payment of the policy premium and compliance with the policy provisions. 10

The Definitions Section The Definitions section of the policy lists commonly used terms found within the policy and explains each one. Terms such as bodily injury, business, insured, and property damage are defined in this section. Section I Property Coverages Section I relates to property coverage and describes the insurance provided for Coverage A Dwelling, Coverage B Other Structures, Coverage C Personal Property, and Coverage D Loss of Use. Section I Additional Coverages The Additional Coverages section outlines the added coverage provided under the property section of the policy. Section I Perils Insured Against In a named perils policy, this part lists the perils covered by the insurance. In an open perils policy, the policy contract states that the company insures against risk of direct physical loss to the property described in Coverages A and B (unless specifically excluded) and goes on to describe the exclusions. Section I Exclusions Here, risks or losses not covered under the property section of the policy are listed. Section I Conditions The Conditions section outlines the duties and obligations of both the insured and the insurer in the event of property damage covered by the policy. Section II Liability Coverages Section II relates to liability coverages and describes the insurance provided under Coverage E Personal Liability and Coverage F Medical Payments to Others. Section II Exclusions The Exclusions section defines losses not covered under the liability portion of the policy. Section II Additional Coverages Additional Coverages outlines the added coverage provided under the liability section of the policy. Section II Conditions Section II Conditions describes the duties and responsibilities of the insured and the insurer under the liability portion of the policy. Sections I and II Conditions The conditions found here apply to both the property and liability sections of the policy. 11

DETERMINING HOW MUCH INSURANCE IS SUFFICIENT The standard amount of insurance coverage for Other Structures, Personal Property, and Loss of Use coverages varies with the form selected. Once the homeowner has decided upon the amount of insurance to carry on the dwelling, the amounts for the other coverages are automatically selected. In the HO-2, HO-3, HO-5 and HO-8 forms, the limits for other structures, personal property, and loss of use are a specified percentage of the amount of insurance on the dwelling. If additional amounts of coverage are needed, they are available by endorsement for an additional premium. Because dwelling coverage is not provided for tenants (HO-4) or condominium unit owners (HO-6), the amount for Coverage D Loss of Use is based on the amount selected for Coverage C - Personal Property. 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 must be prepared to supply the homeowner with the answers to the following questions: What losses are covered by the policy; and What losses are not covered by the policy? In order to determine how much homeowners insurance a person needs, the home must be analyzed. Many factors go into determining coverage and premiums. Some of these include: 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; Proximity to fire station; and Proximity to fire hydrant. Most homeowners insurance policies have features that allow the policy to be customized to suit individual needs. CHOOSING THE RIGHT COVERAGE Choosing the right coverage is important. A helpful way to determine the cost of the structure is to contact a builder's association or real estate agent to find out the cost per square foot of similar homes 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. Most insurers require the structure to be insured for at least 80 percent of the actual cost to rebuild it. 12

With respect to coverage amounts for personal property, an inventory of possessions not only helps determine how much homeowners insurance is sufficient, but it can also help with the replacement or the return of items if they are stolen. Detailed records of antiques, jewelry, silver, sporting goods, major appliances and collectors items are very important as these items are difficult to value once they're lost. A state s rating manual specifies the minimum coverage amounts or limits that may be written for dwelling, personal property and liability coverages. Homeowners policies are generally issued with the following minimum coverage limits, although these may be amended by endorsement and with an additional premium. COVERAGE A COVERAGE B COVERAGE C COVERAGE D HO-2 HO-3 HO-4 HO-5 HO-6 HO-8 Subject to state rating manual Subject to state rating manual Subject to state rating manual Subject to state rating manual Subject to state rating manual Subject to state rating manual 1 or 2 Family: 10% of Coverage A 3 or 4 family: 5% of Coverage A 1 or 2 Family: 50% of Coverage A 3 family: 30% of Coverage A 4 family: 25% of Coverage A 30% of Coverage A Same as HO-2 Same as HO-2 30% of Coverage A N/A Subject to state rating manual 30% of Coverage C Same as HO-2 Same as HO-2 30% of Coverage A N/A Subject to state rating manual 50% of Coverage C Same as HO-2 Same as HO-2 10% of Coverage A COST OF COVERAGE Insurance is a very competitive business, and the costs for homeowners insurance vary greatly depending on the insurance company. There are a number of factors that contribute to the premium charged for the coverage and ways in which homeowners can trim their premium payments. CONSTRUCTION CLASSIFICATIONS Insurance companies consider the materials used in the construction of the dwelling when determining the premium. Generally, insureds will pay more to insure a frame or brick veneer home than one made of brick, stone, or fire resistant materials because fire losses are typically greater in frame or brick veneer homes. Most companies use one of the following construction classifications as a factor in determining premiums. 13

Frame Dwellings Frame dwellings have exterior walls made of wood or other combustible materials, including combinations with other materials such as brick veneer, stone veneer and stucco on wood. Stone or masonry veneer dwellings that contain a single thickness of brick or stone are classified as frame rather than brick because they are combustible. Masonry Dwellings Masonry dwellings have exterior walls constructed of non-reinforced masonry materials such as adobe, brick, concrete, gypsum block, hollow concrete block, stone, tile or similar materials with at least a double thickness of brick or stone noncombustible materials. Fire Resistant Dwellings Fire resistant dwellings have walls, floors, and/or roofs made of fire resistant materials such as reinforced concrete. Although it is more common for commercial buildings to be fire resistant, some homes are built with these materials. Houses made of fire resistant materials cost less to insure than ordinary frame or even brick houses because the chance of severe fire loss is reduced. PROTECTION CLASS The location of the dwelling is an important factor in determining the premium rate. ISO has developed a rating protection classification based on a scale from 1 to 10, with number 1 being the best protected area in terms of fire fighting ability. Fewer losses and superior fire protection ability result in lower rates. A home s protection class is determined by two factors: The loss experience in each designated territory; and The quality of the local fire department and available water supply. For example, an area with a very responsive fire department and up-to-date equipment might be considered a protection class 2, while a rural area 20 miles from the closest town might be a protection class 9. The rural area has a greater risk of experiencing a heavy property loss because of slower response time. Therefore, the rates for this classification are higher. POLICY FORM SELECTED There are a number of policy forms a homeowner can choose from. Each can be tailored to fit a particular need. Obviously, the greater the coverage under the policy, the higher the premium will be. For example, a form such as the HO-2 form that provides named perils coverage on the dwelling and contents will be less expensive than the HO-3, which provides open perils coverage on the dwelling and other structures and named perils coverage for personal property. Policies can be amended to add coverage or increase policy limits. However, additional premium amounts will apply. 14

DEDUCTIBLE The amount of the deductible the policy owner selects will help to determine the total premium. A deductible requires the policy owner to pay up to a specified sum for each covered loss. The deductible can be used to reduce the premium. The higher the deductible, the lower the premium; the lower the deductible, the higher premium. The insured assumes the risk of small losses, those less than the deductible. Standard homeowners policies typically call for a $250 deductible to all covered perils. Agents generally recommend that insureds choose the largest deductible they can accept. The reduction in premium frequently makes up for any deductible paid in the event of a loss. For example, by increasing 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. The deductible does not apply to certain items such as credit card, electronic fund transfer card, forgery, counterfeit money, and fire department service charges. INSURANCE COMPANY SELECTED Premiums vary between insurance companies, even for identical coverages. A company s loss experience, underwriting standards, and other factors contribute to the way in which premiums are calculated. A consumer s best defense against being overcharged is knowledge. Most state insurance departments provide helpful information to educate insurance consumers and help them make informed decisions; and rating services such as Moody s or A. M. Best rate insurance companies based on their financial stability. DISCOUNTS There are many discounts available for homeowners to reduce their premiums. For example, many insurers offer discounts for loss prevention or loss reduction devices, such as closed circuit televisions, deadbolt locks and doormen. These items help make a home safer and more secure. 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 deadbolt locks. A simple burglar alarm is likely to achieve 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. Multi-line discounts are available if the homeowner s automobile or other insurance needs are insured with the same company. 15

On the other hand, some items can cause homeowners to be charged higher premiums; for example, in-ground swimming pools. The home s location near a coastline or in a tornado or lightning corridor will increase the premium. Other factors such as using the home for business purposes or renting out all or part of the home will increase liability and, therefore, will increase premiums. 16