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Chapter 20

Section I

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Homeowners Insurance Basics

Analysis of Homeowners 3 Policy
Section I Coverages
Section I Perils Insured Against
Section I Exclusions
Section I Conditions
Section I & II Conditions

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Homeowners Insurance Basics

Homeowners insurance forms, drafted by the

Insurance Services Office (ISO) are widely used in
the US
They are designed for the owner-occupants of family
A policy can be used to cover the dwelling, other
structures, personal property, additional living expenses,
personal liability claims, and medical payments to others
Six forms are available

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Current Homeowners Policies

HO-2 (broad form): covers the dwelling, other structures, and personal property on a
named perils basis
HO-3 (special form): covers the dwelling and other structures on a risk-of-direct-physical
loss basis. All direct physical losses are covered except those losses specifically
excluded. Personal property is covered on a named perils basis
HO-4 (contents broad form): covers a tenants personal property on a named perils basis
HO-5 (comprehensive form): provides open perils coverage (all-risks coverage) on the
dwelling, other structures and personal property. All direct physical losses are covered
except those losses specifically excluded
HO-6 (unit owners form): covers personal property on a named perils basis. A minimum
of $5,000 of insurance is also provided on the condominium unit that covers
improvements and additions
HO-8 (modified coverage form): designed for older homes. Dwelling and other structures
are based on the amount required to repair or replace using common construction
materials and methods

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Exhibit 20.1 Comparison of ISO
Homeowners Coverages (cont)

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Exhibit 20.1 Comparison of ISO
Homeowners Coverages

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Analysis of the HO-3 Policy
The HO-3 policy has two sections of coverage:

Section I: Property Coverages

Coverage A: Dwelling
Coverage B: Other Structures
Coverage C: Personal Property
Coverage D: Loss of Use
Additional Coverages

Section II: Liability Coverages

Coverage E: Personal Liability
Coverage F: Medical Payments to Others

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Analysis of the HO-3 Policy

The following persons are considered insureds

under the policy:
Named insured and spouse
Resident relatives
Other persons under age 21
Full-time student away from home
Section II coverage also includes:
Any person legally responsible for covered animals or
With respect to a motor vehicle covered by the policy (e.g., a
riding mower), persons employed by the named insured

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Section I Coverages
Coverage A covers the dwelling on the residence premises
and any structure attached to the dwelling
Materials intended for construction are included
The coverage specifically excludes land
Coverage B insures other structures on the residence
Includes a detached garage, tool shed, etc
Structures that are rented out or used for a business are excluded
The amount of coverage is based on the amount of insurance on
the dwelling (Coverage A)

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Section I Coverages
Coverage C insures personal property owned or used by
an insured
Personal property is covered anywhere in the world
The amount of coverage is 50% of the insurance on the dwelling,
but can be increased
Coverage for personal property at another residence, such as a
vacation home, is limited to 10% of Coverage C or $1000,
whichever is greater
Certain types of personal property have maximum dollar limits on
the amount paid for any loss

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Exhibit 20.2 Special Limits of

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Section I Coverages
An insured can use a schedule to insure certain personal property
for a specific amount
Coverage C also excludes certain types of property:
Articles separately defined and specifically insured
Animals, birds, and fish
Motor vehicles
Aircraft and parts
Hovercraft and parts
Property of roomers, boarders, and other tenants
Property in a regularly rented apartment
Property rented or held for rental to others off the residence premises
Business records
Credit cards, electronic transfer devices, or other access devices
(some coverage in Additional Coverages)
Water or steam

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Section I Coverages
Coverage D provides protection when the residence
premises cannot be used because of a covered loss
Coverage is 30% of the amount of insurance on the dwelling
(Coverage A)
Additional living expense is the increase in living expenses actually
incurred by the insured to maintain the familys normal standard of
For example, the cost of renting a furnished apartment
The policy pays the fair rental value for that part of the residence
that is rented to others, but is not fit to live in
Coverage applies if the home is not damaged, but a civil authority
prohibits the insured from using the premises

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Section I Coverages
Additional coverages in Section I include:
Removal of debris following an insured peril
Reasonable repairs to protect the property from further damage
Trees, shrubs, and plants, for a limited set of perils
Fire department service charge
Removal of property that is endangered by an insured peril
Unauthorized use of credit card, electronic funds transfer card or access
device; forgery and counterfeit money
Loss assessments charged by a corporation or association of property
Collapse of a building, for certain perils
Breakage of glass or safety glazing material
Landlords furnishings
Increased costs of construction or repair because of a law
Grave markers

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Section I Coverages

A deductible of $250 applies to any loss covered

by Section 1 coverages
Premiums can be reduced by increasing the deductible
In states that are vulnerable to natural catastrophes,
insurers can use percentage deductibles
Percentage deductibles for windstorm and hail losses vary from
1% to 15% of the limit of insurance on the dwelling

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Section I Perils Insured Against
The dwelling and other structures are insured against risk
of direct physical losses
All direct physical losses are covered unless specifically excluded
Personal property is insured on a named-perils basis
A direct physical loss is covered if it is caused by one of the perils
listed in the policy
Named perils include fire, windstorm or hail, explosion, riot or civil
commotion, theft, etc
The peril must be the proximate cause of the loss

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Section I Exclusions

The policy also excludes:

Any loss due to an ordinance or law, except as
described in the Additional Coverages
Property damage from earth movement
Property damage from certain water losses
Losses due to power failure
Losses due to neglect
Property damage due to war or nuclear hazard
Any intentional loss

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Section I Conditions
The insurers liability for a loss is limited to the insureds insurable
interest at the time of loss
The insured must perform certain duties after a loss occurs:
Give prompt notice to insurer
Protect the property from further damage
Prepare an inventory of damaged personal property
Exhibit damaged personal property
File a proof of loss with 60 days after the insurers request
Losses to personal property are paid on the basis of actual cash
If the insured purchases a replacement cost endorsement, there is no
deduction for depreciation
After giving notice to the insured, the insurer has the right to repair or
replace any part of damaged property with like property

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Section I Conditions
Losses to the dwelling and other structures are paid on
the basis of replacement cost with no deduction for
If the dwelling is insured for at least 80% of replacement cost at
the time of loss, partial losses are paid in full
Replacement cost is the amount necessary to repair or replace the
dwelling with material of like kind and quality at current prices
If the dwelling is insured for less than 80% of the replacement
cost, the insured receives the larger of
(1) the actual cash value of that part of the building damaged
(2) amount of insurance carried
x loss
80% x replacemen t cost

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Section I Conditions
Some insurers offer an extended replacement cost
endorsement, which pays an extra 20% or more above the
policy limits
Under a guaranteed replacement cost policy, the insurer
agrees to replace the home exactly as it was before the
loss even if the replacement cost exceeds the amount of
insurance stated in the policy
In the event of a loss to a pair or set, the insurer can elect
either repair or replace any part of the pair or set or to pay
the difference between the actual cash value of the property
before and after the loss
The appraisal clause is used when the insured and insurer
agree that the loss is covered, but the amount of loss is in
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Section I Conditions
If other insurance covers a Section I loss, the insurer will only pay the
proportion of the loss that is limit of liability bears to the total amount of
insurance covering the loss
For example, the HO policy is excess over any amount payable under a
home warranty or service agreement
The insurer is generally required to make a loss payment directly to the
named insured
The mortgage clause is designed to protect the mortgagees insurable
If the mortgagee is named in the policy, the mortgagee is entitled to receive
a loss payment from the insurer to the extent of its interest, regardless of any
policy violation by the insured
Concealment or misrepresentation of any material facts, fraudulent
conduct, and false statement relating to the insurance will void
insurance coverage

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Section I and II Conditions
Some conditions apply to both Section I and Section II
coverages These include:
A liberalization clause to address issues with broadening coverage
A waiver or change of policy provisions
Must be in writing
Terms and conditions for cancellation
Terms for nonrenewal of the policy
Assignment of the policy to another party
Insurer must give written consent
A subrogation clause to address recoveries from third parties
Extension of policy terms to a legal representative upon the death of
the named insured or spouse

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Insight 20.3 The Big Gap Between
Replacement Cost and Actual Cash Value
Can Empty Your Wallet

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