lesson 3 homeowners policy section i - other...

Lesson 3 Homeowners Policy Section I - Other Provisions

Lesson 3 Intro p1 (PR)

In this lesson we will study the Homeowners Policy Additional Coverages, Perils, Exclusions, and Conditions.


Lesson 3 – Learning Objectives:

1. Determine whether or not a loss is covered by an Additional Coverage. 2. Describe the limitations in coverage for trees, shrubs and plants. 3. Describe the limitations for debris removal. 4. Determine the coverage provided by Additional Coverage 11, Ordinance or Law and decide

when it is necessary to recommend the endorsement to increase the amount of Ordinance or Law coverage.

5. Determine the Perils Insured Against for Coverage A - Dwelling, Coverage B - Other Structure and Coverage C - Personal Property under each of the different Homeowners forms.

6. Identify perils excluded under the different Homeowners forms. 7. Recognize the covered perils for Coverage C – Personal Property. 8. Understand exclusions and recommend endorsements to modify coverage when appropriate. 9. List the property that is covered on an actual cash value basis. 10. Apply the Loss Settlement provision for buildings to specific losses. 11. Explain the endorsements that modify the Loss Settlement provision and recommend one of

these endorsements when appropriate 12. Explain the concealment clause.


Forms that you need to print for this lesson:

• HO 04 77 - Ordinance or Law Increased Amount of Coverage • HO 04 54 - Earthquake • HO 04 95 - Limited Water Back-Up and Sump Discharge Or Overflow Coverage • HO 04 98 - Refrigerated Property Coverage • HO 04 90 - Personal Property Replacement Cost Loss Settlement • HO 04 46 - Inflation Guard • HO 04 20 - Specified Additional Amount of Insurance for Coverage A Dwelling • HO 04 11 - Additional Limits of Liability for Coverages A, B, C and D

Forms you have printed and will need for this lesson

• Homeowners Form 3 - Special Form

Insuring Personal Residential Property Course Print 08.30.2012

2

Lesson 3 Topic A - Additional Coverages

Lesson 3 Topic A Additional Coverages p1 (PR)

Learning Objective: Determine whether or not a loss is covered by an Additional Coverage.

Refer to page 5 of the Homeowners 3 - Special Form.

Homeowners Policies contain some Additional Coverages. These Additional Coverages begin in the right column on page 5 of the Homeowners 3 - Special Form. There are twelve (12) Additional Coverages in the Homeowners 3 -Special Form.



1. Debris Removal


The Homeowners Policy pays for reasonable expenses to remove debris of covered property damaged by a covered peril, or by volcanic ash, dust or particles that damage a building or property contained in a building. The policy says that this is not additional insurance, that is, the amount available for this coverage is included in the Limit of Liability for that property.

Example:

If the Coverage A limit of liability is $100,000 and $90,000 is spent to repair or replace damaged dwelling, there is $10,000 coverage left to remove debris. Likewise if the Coverage B - Other Structures limit of liability is $10,000 and $9,000 is spent to repair or replace the other structure, there would be $1,000 left for debris removal.



Debris Removal continued

However, if the cost of damage to covered property plus debris removal exceeds the Limit Of Liability for that property, the policy pays an additional 5% of that property's Limit Of Liability for debris removal. Example: If the Coverage A limit of liability is $100,000, and the $100,000 is spent to repair or replace damaged dwelling, the policy pays up to $5,000 more to remove debris.


3

There is also up to $1,000 coverage ($500 per tree maximum) to remove trees felled by perils specified, if the tree or trees cause damage to structures covered by the Homeowners Policy or blocks a driveway preventing a "motor vehicle" from entering or leaving the "residence premises" or blocks a ramp/fixture designed to assist a handicapped person to enter or leave the dwelling.



2. Reasonable Repairs


The policy pays reasonable costs to take measures to protect against further damage, if there is covered damage to covered property. This does not increase the limits of liability for the policy.

Example:

A tree branch damages the roof during a storm. This additional coverage would cover the expense of putting plastic on the roof to prevent further damage.


Learning Objective: Describe the limitations in coverage for damage to trees, shrubs and plants.

3. Trees, Shrubs, and Other Plants


The policy provides coverage for damage by limited specified perils to trees, shrubs, etc., on the "residence premises". The specified perils do not include the peril of wind. The limit for this coverage is 5% of Coverage A limit of liability, with a sub-limit of $500 per tree, shrub, plant or lawn. This is additional insurance.


Learning Objective: Describe the limitations for debris removal.

Limitations for Debris Removal


The following chart gives you a quick summary of what coverage the Homeowners Policy includes for trees


4

and their removal from the homeowner's premises.

Summary of Additional Coverages which Provide Coverage for Removal of and Damage to Trees

Debris Removal Additional Coverage

Loss to Tree, Shrubs and Other Plan Additional Coverage 3

1. $1,000 total with $500 maximum per tree A. Your tree(s) felled by: windstorm, hail, weight of ice,

snow or sleet; or B. Neighbor's tree(s) if felled by Coverage C perils C. Provides the tree(s): D. Damage(s) a covered structure, or E. Tree does not damage a covered shelter, but:

a. Blocks a driveway on the "residence premises" and prevents a "motor vehicle" licensed for road use from entering or leaving the "residence premises";

b. Blocks and prevents use of a ramp or other type of access fixture designed to assist a handicapped person to enter or leave the dwelling.

$500 per tree up to 5% of the dwelling limit Perils insured against: Fire Explosion Aircraft Civil Commotion Malicious Mischief Lightning Riot Vehicle* Vandalism Theft *May not be owned or operated by a resident of the "residence premises."



4. Fire Department Surcharge


If a fire department from outside "your" town or municipality responds to a call to save or protect covered property from a covered peril there is up to $500 coverage to pay a service fee assumed or contracted for, by an insured. No deductible applies.



5. Property Removed


If covered property is moved from a premises threatened by a covered peril there is coverage for damage to the property moved caused by any loss, for up to 30 days. This is true all risk coverage. At the end of the 30


5

days, all risk coverage ceases; however, the property is still covered for whatever coverage is provided by Coverage C.

Example:

John and Ethel’s house is threatened by a forest fire so they rent a truck and move most of their household goods to another location. Those household goods are covered for damage caused by any cause of loss for 30 days. If a flood damages the household goods at the other location, the damage is covered even though flood damage is excluded by the Homeowners Policy.



6. Credit Card, Fund Transfer Card, Forgery and Counterfeit Money

Refer to pages 6 and 7 of the Homeowners 3 - Special Form.

There is up to $500 coverage for loss caused by theft or unauthorized use of credit cards, electronic fund transfer cards or access device, forgery and acceptance of counterfeit money is included. There are exclusions and limitations on this coverage found on the left side of page 7 of the Homeowners 3 - Special Form.



7. Loss Assessment

There is coverage for assessments against "you" as a member of a homeowners association for damage to property owned collectively by all the members of the association, if the property is damaged by a covered peril. The limit is $1,000 and can be increased to $50,000 with endorsement Supplemental Loss Assessment Coverage (HO 04 35).

Tip: The endorsement should be recommended to anyone who is a member of a homeowners association.



8. Collapse

Refer to pages 7 and 8 of the Homeowners 3 - Special Form


6

There has been much debate about what is, and what is not, a collapse. On page 7 of the Homeowners 3 - Special Form in the right hand column a definition of collapse is stated with respect to additional coverages. The Homeowners Policy covers damage to covered property caused by collapse of a building, if the collapse is caused by:

• A Coverage C named peril, (We will study perils in Topic B and Topic C of this lesson.) • Hidden decay, • Hidden insect or vermin damage, • Weight of contents, equipment, animals or people, • Weight of rain collected on a roof, • Use of defective building materials or methods, if the collapse occurs during the course of

construction or renovation.

Loss to specified types of property is excluded unless there is a collapse of a building.



9. Glass or Safety Glazing Material


This provision grants coverage for breakage of specified glass and specified damage done by broken glass. The policy also will pay for replacement of covered glass with safety glazing material, if required by ordinance or law. If the "residence premises" has been vacant for more than 60 consecutive days immediately before the loss, there is only coverage if the glass breakage is caused by earth movement.



10. Landlord's Furnishings


The Homeowners Policy includes $2,500 coverage for loss caused by specified perils to appliances, carpeting and other household furnishings in an apartment, on the "residence premises", which is rented or held for rental. The specified perils are the Coverage C perils minus theft. We will discuss Homeowners Policy perils shortly.


7


Learning Objective: Describe the coverage provided by Additional Coverage 11, Ordinance or Law and decide when it is necessary to recommend the endorsement to increase the amount of Ordinance or Law coverage.

11. Ordinance or Law


An insured has 10% of the Coverage A limit of liability for loss caused by enforcement of a building ordinance or law that requires:

Construction, demolition, remodeling, renovation or repair of the part of a building that is damaged by a covered peril. This coverage can be very important, because these types of damage are excluded from the perils for Coverage A and Coverage B.

Example:

The damaged part of the dwelling can be rebuilt for $40,000 using materials and methods the same as the original structure. The city building code requires that rebuilding be done to code, which costs $47,000. The $7,000 difference is covered by this provision so long as the additional amount does not exceed 10% of Coverage A.



Ordinance or Law continued


Demolition and reconstruction of the undamaged part of a building, because part of the building is damaged by a covered peril.

Example:

A house worth $100,000 is damaged by fire. The amount of damage is $55,000. The city ordinance requires that the undamaged portion of the building be torn down (demolished). The value of the undamaged portion is $45,000 and up to 10% of Coverage A could be used for this part of the loss. However, assuming a Coverage A limit of liability of $100,000, there is not enough coverage to pay for the demolition, debris removal and the rebuilding of the undamaged portion of the dwelling.


8



Ordinance or Law continued


Remodeling, removal, etc., of the part of a building that is undamaged, when necessary to complete repairs to the damaged part of the building.

Example:

A two-story house is damaged by fire on the first floor. Structural damage to the first floor requires removal of a portion of the second floor in order to replace supports. The additional cost of removing the portion of the second floor is covered by this provision.

Tip: The limit of liability for this coverage can be increased, to 25%, 50%, 75%, or 100% by using the Ordinance or Law Increased Amount of Coverage (HO 04 77).



12. Grave Markers


The last Additional Coverage is grave markers. To provide coverage for grave markers, including mausoleums, whether they are on or away from the "residence premises" the Additional Coverages section pays up to $5,000 for loss caused by a peril insured against under Coverage C. This coverage does not increase the limits of liability that apply to the damaged covered property.


9



Summary of Additional Coverages

The following chart summarizes the Homeowners Policy additional coverages.

Coverage Limit Additional Insurance

Deductible Applies

1. Debris Removal Includes in Cov. A unless it exceeds Cov. A limit, then up to 5% of the dwelling limit and no more than $500 per tree, shrub, plant or lawn.

If it exceeds Cov. A limit

Yes

2. Reasonable Repairs Included in Cov. A No Yes 3. Trees, shrubs, plants, and lawns. Perils: Fire/Lightning, Explosion/Riot, Civil Commotion, Aircraft, Vehicles, Vandalism and Malicious Mischief, and Theft

5% of Cov A; Max of $500 for one tree, shrub, or plant Lawn to limit

Yes Yes

4. Fire Department Service Charge $500 Yes No 5. Property Removed (30 Days) Included in limit for property damaged No Yes



Summary of Additional Coverages continued

Coverage Limit Additional Insurance

Deductible Applies

6. Credit Card, Fund Transfer Card, Forgery and Counterfeit Money

$500 Yes No

7. Loss Assessment $1,000 Yes Yes 8. Collapse Included in limit for property damaged No Yes 9. Glass or Safety Glazing Material Included in limit for property damaged No Yes 10. Landlord’s Furnishings Covered for specified peril

$2,500 Yes Yes

11. Ordinance or Law 10% of Cov. A Yes Yes 12. Grave Markers $5,000 No Yes

Please refer to the end of Lesson 3 Topic A to complete Self Quiz 7 at this time.


10

Lesson 3 Topic B - Introduction to Perils Insured Against

Lesson 3 Topic B Intro to Perils Insured Against p1 (PR)

There are 3 different levels of protection found in Homeowners, often called:

• Basic coverage, • Broad coverage and • Special coverage.


Perils Insured Against continued

Basic Coverage

Protection against certain limited named perils. There are 10 named perils covered in the limited Homeowners 8 and the Dwelling Basic Form 1. Basic perils include loss caused by fire, lightning and wind.

Broad coverage

Provides protection against 16 named perils, adding important perils like plumbing discharge and falling objects to the perils found in Basic coverage. In Homeowners 2, 3, 4 and 6, Coverage C - Personal Property is insured for Broad perils. In Homeowners 2 and 6 coverage for loss to structures is also provided for Broad perils.


Perils Insured Against continued

Special coverage

Protects property against all types of direct loss that are not later excluded. This form of coverage in the past was often called all risks, but is now referred to as open perils. Many in the industry worry that the term all risk coverage is misleading to consumers since many risks of loss are in fact excluded. The Homeowners 3 insures the dwelling for Special or open perils. One of the advantages to consumers of using Special Form or open peril coverage is that the burden of proof in a claim is shifted to the insurance company.

If a direct loss occurs to the insured’s home, it is up to the company to pay the loss or to show where in the policy the loss is excluded. Otherwise it’s covered. On the other hand, when the insured has Basic or Broad coverage, the insured must show that the loss was caused by one of the named perils or the company does not have to pay the claim.


11


Learning Objective: Determine what perils of loss are insured for Coverages A, B and C under each of the different Homeowners Forms.

Note: We will discuss the perils covered under the Homeowners 3 Special Form. For a summary of the perils covered under all of the ISO Homeowners Policies refer to the summary of Perils Insured Against Exhibits which follows this discussion.

Perils Insured Against Basic Broad Special Fire or Lightning Yes Yes Yes Windstorm or Hail Yes Yes Yes Explosion Yes Yes Yes Riot or Civil Commotion Yes Yes Yes Aircraft Yes Yes Yes Vehicles Yes Yes Yes Smoke Yes Yes Yes Vandalism or Malicious Mischief Yes Yes Yes Theft Yes Yes Yes


Learning Objective: Determine what perils of loss are insured for Coverages A, B and C under each of the different Homeowners Forms.

Perils Insured Against Basic Broad Special Falling Objects No Yes Yes Weight of Ice, Sleet, or Snow No Yes Yes Accidental Discharge or Over-Flow of Water or Stream No Yes Yes Cracking, Burning, Bulging of Heating System or AC or Hot Water Heater No Yes Yes Freezing No Yes Yes Sudden and Accidental Damage from Artificially-Generated Electric Current No Yes Yes Volcanic Eruption Yes Yes Yes All Other Direct Causes of Loss That are Not Excluded No No Yes


12

Lesson 3 Topic C - Perils Insured Against for Coverage A and B

Lesson 3 Topic C Perils Insured Against Coverage A & B p1 (PR)

Learning Objective: Identify perils excluded under the different Homeowners forms.


The perils begin on page 9 of the Homeowners 3 Special Form.

This section begins with Coverage A and B, promising to insure against direct loss not later excluded. These few words provide some of the broadest coverage by insuring for open perils. Therefore the policy will pay for any direct loss to structures covered under Coverage A and Coverage B, unless the cause of that loss is excluded.

SECTION I - PERILS INSURED AGAINST

A. Coverage A - Dwelling and Coverage B - Other Structures 1. We insure against direct physical loss to property described in Coverages A and B. 2. We do not insure, however for loss

a. Excluded under Section I - Exclusions; b. Involving collapse, including any of the following conditions of property or any

part of the property:



Exclusions for Coverage A and B


The following exclusions limit coverage for loss to property insured under Coverages A and B. There is another set of exclusions (Section I – Exclusions) that applies to losses to all property. We will look at those exclusions later in this lesson.

Many of these exclusions remove coverage for non-fortuitous losses, that is, things that are bound to happen. Others keep the policy from paying for losses that are controllable by the insured.



Collapse


13


Collapse is excluded here so that the policy will only cover the types of collapse described in Additional Coverage 8 – Collapse that we discussed earlier in this lesson.



Freezing


Freezing of plumbing Loss caused by the freezing of plumbing, heating, air conditioning or fire sprinkler systems isn’t covered. This exclusion doesn’t apply and coverage is provided IF, "you":

1. use reasonable care to maintain heat in the dwellings; or 2. shut off and drain the plumbing system.

Freezing, thawing or pressure or water to certain outdoor property Freezing, water and ice damage to fences, pavements, patios, pools, foundations and docks is excluded because many of these losses are certain to occur in colder climates.



Theft to dwellings under construction


No coverage is provided for theft loss of any property when a home is under construction. Theft coverage begins when the home is finished and occupied.



Vandalism & Mold


14


Vandalism or Malicious Mischief when vacant

The Homeowners Policy excludes vandalism or malicious mischief losses when a home has been vacant for more than 60 consecutive days and any ensuing loss caused during the course of the vandalism or malicious mischief. Note that this exclusion does not apply to homes that are being constructed.

Mold, fungus, or wet rot

Insurers have reported a rise in claims for damage to dwellings and other structures caused by fungus. To clarify the coverage intention for fungus, it was added to the policy language; also, mold and wet rot were separated from the exclusion discussion about "smog, rust or other corrosion, or dry rot." There is limited coverage for these types of losses.



Wear, Smog, & Pollutants


Wear and tear, mechanical breakdown

The Homeowners Policy is not a maintenance agreement. Most insurance policies exclude loss that is limited to things just wearing out and needing replacement.

Smog, rust or other corrosion, or dry rot

Some of these are preventable losses the policy doesn’t intend to cover. Many companies will cover hidden water damage caused by plumbing leaks. In those cases, only loss that occurred prior to the damage becoming visible is covered.

Damage caused by pollutants

Damage caused by pollutants is not covered unless it is caused by one of the named Coverage C perils (which we will look at later in this lesson). So, loss caused by smoke and soot, which are considered pollutants, would be covered as long as they were caused by fire, which is a named peril for Coverage C. Smoke damage from a fire from other sources is still covered.

The policy also excludes smoke from agricultural mudging or industrial operations.


15



Settling & Animal Damage


Settling of pavements, patios, foundations walls, floors, roofs and ceilings

This represents another wear and tear type of exclusion. This exclusion also applies to damages to walls, floors, roofs and ceilings.

Animal damage

The policy has the three exclusions for damages caused by animals.

1. Loss caused by birds, rodents and insects. For example, if a rat gets into the crawl space of the dwelling and chews holes in the wiring and plumbing pipes, the damage to the wiring and pipes is not covered.

2. The policy also excludes the following damage by an animal: nesting or infestation or discharge of waste products or secretions. Damages from these actions are excluded regardless of the type of animal causing the damage.

3. There is no coverage for damages caused by any animals owned or kept by an insured. There’s no coverage for damage caused by the insured’s new puppy that chews up valuable property. But, there is coverage for damage caused by a neighbor's dog, since it is not owned or kept by the insured.



Refer to pages 9 and 110 of the Homeowners 3 – Special Form.

For all of these exclusions, ensuing losses, caused by covered perils, are often covered. Coverage is given back for loss that ensues or follows from an excluded loss. Although animal damage is excluded, if a puppy chews through a power cord, which causes an electrical short and ultimately a fire, the ensuing fire damage is covered.

Water damage that results from most causes is covered. Water damage that results from a burst pipe inside the dwelling is typically covered. The policy also clarifies that it will pay all of the cost to tear out and replace any part of the building that’s required to repair failed plumbing. The cost to repair the pipe that failed is often still excluded, but other damage is covered.


16

Please refer to the end of Lesson 3 Topic C to complete Self Quiz 8 at this time.


17

Lesson 3 Topic D - Covered Perils for Coverage C - Personal Property

Lesson 3 Topic D Covered Perils for Coverage C p1 (PR)

Learning Objective: Recognize the covered perils for Coverage C – Personal Property.

Refer to pages 10-12 of the Homeowners 3 - Special Form.

Personal property is covered for the following 16 Broad named perils. The Homeowners Policy gives personal property coverage for the causes of loss listed below:

• Fire or Lightning • Windstorm or Hail • Explosion • Riot or Civil Commotion • Aircraft • Vehicles • Smoke • Vandalism or Malicious Mischief • Theft • Falling Objects • Weight of Ice, Snow, or Sleet • Accidental Discharge or Overflow of Water • Sudden Rupture of Water Heaters, Etc. • Freezing of Plumbing, Etc. • Artificially Generated Electrical Currents • Volcanic Eruption



Covered Perils


Covered Perils for Coverage C – Personal Property

Fire or Lightning

Windstorm or Hail

There is no coverage for damage caused by rain, snow, sleet, sand or dust unless the building sustains damage that creates an opening in the building. Coverage for personal property located outdoors is not


18

limited here, except to watercraft. Watercraft must be in a fully enclosed building for windstorm or hail coverage.

Explosion

Riot or Civil Commotion

Rioters damage the insured's personal possessions.

Aircraft

Loss is caused by an aircraft.

Vehicles

The Homeowners 3 covers loss to personal property caused by any kind of vehicle.

Smoke

Damage caused by smoke must be sudden and accidental. There is no coverage for smoke from agricultural smudging or industrial operations.

Vandalism or Malicious Mischief

All Homeowners policies except the HO 3 and HO 5also exclude vandalism losses that occur when a home has been vacant for over 60 days. The HO 3 and HO 5 only have this limitation on Coverages A and B.



Covered Perils


Covered Perils for Coverage C – Personal Property

Theft

Theft includes loss of property from a known place when it is likely that the property was stolen. There is no coverage when an "insured" simply misplaces something. However, signs of forcible entry are not required and theft of property is covered anywhere in the world subject to the theft coverage limitations.

Theft Coverage Limitations

There is no coverage for theft when:


19

• Committed by an “insured”. This takes away coverage for loss by theft committed by "you", resident family members and others under age 21 in the care of an "insured".

• In or to a dwelling under construction until it’s finished and occupied. Some companies will allow the buy back of coverage, though it’s often limited to building materials and may not cover theft of tools and equipment.

• From a part of the residence rented to others. If the "insured" rents part of their home to others, there’s no coverage for theft of property in the part of the home occupied by the renter. This would apply to property in the part of a duplex rented to others as well as property in a room rented to a roomer or boarder.

There is no coverage for theft away from the “residence premises” involving:

• Property at other residences owned or rented to an “insured”, except while the “insured” is staying there. For example, theft of personal property at a summer cabin wouldn’t be covered unless the theft occurred while the "insured" was spending time there.

• The policy specifically addresses theft of student’s property at a college residence, giving coverage as long as the student has been there within 90 days prior to the loss.

• Watercraft, their equipment and outboard motors.

• Trailers or campers.

Falling Objects

Damage to the falling object itself isn't covered. Personal property in a building is insured only when the falling object first damages the building. Personal property in the open is covered without this requirement.

Weight of Ice, Snow, or Sleet

Property is only covered for weight of ice, snow or sleet if contained in a building.

Accidental Discharge or Overflow of Water

This peril insures personal property against damage caused by water that escapes from a plumbing, heating, air conditioning or fire sprinkler system. This peril doesn't include loss to the system itself, though it may be covered elsewhere in the policy. It also doesn't include freezing, which is handled as its own peril. There is no coverage for water damage, if the leaking or discharge occurs off-premises.

Damage caused by the backup of sumps, sump pumps and related equipment is not covered here, though some coverage can be added by endorsement with Limited Water Back Up and Sump Discharge or Overflow Coverage (HO 04 95).

Sudden Rupture of Water Heaters, Etc.

This peril covers water damage resulting from the sudden and accidental tearing apart, cracking, burning or bulging of hot water heaters, air conditioning systems and fire sprinkler systems. Combined with the


20

previous peril it presents one of the most common causes of loss to homeowners.

Freezing of Plumbing, Etc.

Damage to personal property caused by the freezing (and later thawing) of plumbing systems is covered, as long as 1) "you" use reasonable care to maintain heat or 2) the system is shut off and drained.

Artificially Generated Electrical Currents

Coverage is provided for damage caused by electric currents that are artificially made, meaning created by humans. Damage to certain electronic components is excluded. Note that there was no similar restriction on the peril of lightning. Lightning is a naturally generated electric current and damage it causes to electronic equipment is covered.

Volcanic Eruption

ISO added this peril to the Homeowners Policy in 1984 following the 1980 eruption of Mt. St. Helen's in Washington State.

Because an insured's personal property is covered only for the named perils we have just discussed, many types of losses are not covered.

Policyholders who have valuable personal property would be well advised to either insure valuable items for more causes of loss by endorsement or by using the Scheduled Personal Property Endorsement (HO 04 61).

Please refer to the end of Lesson 3 Topic D to complete Self Quiz 9 at this time.


21

Lesson 3 Topic E – Exclusions

Lesson 3 Topic E Exclusions p1 (PR)

Learning Objective: Understand exclusions and recommend endorsements to modify coverage when appropriate.

If you need to review the exposures and coverages associated with ordinance or law, please review Topic A of this lesson.

The following exclusions apply to all Section I (Property) Coverages.

Ordinance or Law

The Additional Coverage 11 - Ordinance or Law automatically provides, as additional insurance, 10% of the Coverage A limit of liability to pay for certain increased costs incurred due to the enforcement of an ordinance or law.

In Section I - Exclusions, a loss requiring or regulating the construction, demolition, remodeling, renovation or repair of property, including removal of any resulting debris is not covered. However, this exclusion does not apply to the amount of coverage that may be provided for under Additional Coverage 11. Page 12 left hand section of Homeowners 3-Special Form details this exclusion.

Increased coverage is available with ISO’s Ordinance or Law Increased Amount of Coverage (HO 04 77).



Exclusions continued


Earth Movement

The language in this exclusion has been revised because some courts have interpreted earth movement as only applying from natural causes while others have even more restrictively interpreted the exclusion to only apply to natural, catastrophic incidents.

Therefore the statement that all incidents of earth movement are excluded whether caused by an act of nature or any other cause has been added to the exclusion. Coverage is provided for fire or explosion damage that ensues. Page 12 of the HO 3 can be reviewed for greater detail of this exclusion.

Coverage can be added for earthquake (not landslide) using HO 04 54 – Earthquake.


22



Water


The water exclusion has 4 main parts.

Section 1 Exclusions A.3.a

The first removes coverage for water damage caused by flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these. Flood coverage can be purchased from the National Flood Insurance Program or directly from a participating company. Flood insurance is often required for homes in a flood zone. Difference in Conditions policies can also protect against flood loss and may cover loss caused by surface water, which may not be covered by a flood policy.

Section 1 Exclusions A.3.b

The second part excludes water which backs up through sewers or drains or sump pump overflow. Some courts have held that sewer backup caused by a blockage in the "insured's" own plumbing system, before it connects to the municipality's sewer line, is not excluded since it is the named peril of accidental plumbing discharge. Some coverage for sump overflow can be added with Limited Water Back-Up and Sump Discharge or Overflow Coverage (HO 04 95).

Section 1 Exclusions A.3.c

The third section removes coverage for damage from water below the surface of the ground that seeps or leaks through foundations, swimming pools or other structures. Damage from water leaking into a basement is consequently not covered.

Section 1 Exclusions A.3.d

The final section removes coverage for waterborne material carried or otherwise moved by any of the above described water.

The water exclusion applies regardless of cause. Any fire, explosion or theft loss that ensues from excluded water damage is still covered. For example, if flooding caused an electrical short that causes a fire, the resulting fire damage would be covered.


23





Power Failure

Loss due to power failures that originate off-premises is excluded. A policyholder that loses power in an area wide ice storm doesn't have coverage for the expenses of staying in a motel under Coverage D - Loss of Use, unless the power failure was due to damage to power lines at the "residence premises".

Coverage for loss to refrigerated property can be bought back with Refrigerated Property Coverage (HO 04 98). The endorsement provides $500 in coverage for loss to freezer contents, whether caused by power failure or mechanical failure of the refrigerator or freezer.

Neglect

The insured must take reasonable steps to protect property against further loss.

War and Nuclear Hazard

Damage caused by war or nuclear events is not covered.





Intentional Loss

Any loss intentionally caused by an insured is not covered.

Governmental Action

The destruction, confiscation or seizure by order of any governmental or public authority of property described in Coverage A, B, and C is excluded. This exclusion does not apply, however, when such action is taken at the time of a fire to prevent its spread, if the fire is covered under the policy.


24



Concurrent Causation Exclusions


The final three exclusions are often called the concurrent causation exclusions referring to court cases in California in the early to mid 1980’s. In these cases, attorneys argued that homeowners policies should pay for normally excluded losses like landslide and flooding on the basis that there were other concurrent causes like faulty design or poor zoning which were not excluded by the policy. To prevent the application of this concurrent causation doctrine, these were added to the policy.

1. Contributing Weather Conditions This exclusion applies to weather conditions that contribute with a cause of loss found in the first group of exclusions (ordinance or law, earth movement, governmental action, nuclear, utility services, war or flood losses).

2. Acts of Persons or Authorities This includes losses due to acts or decisions, including failure to act, of any persons or authorities.

3. Inadequate Design or Maintenance This includes losses due to faulty, inadequate or defective planning, design, materials or maintenance.



Concurrent Causation Exclusions continued


Contributing weather conditions

Torrential rains cause a mudslide and destroy a home. Prior to having this exclusion, the argument was that the loss was not caused by mudslide, which is clearly excluded, but rather caused by weather conditions, which were not excluded. Courts often agreed, citing the concurrent causation doctrine.

Acts of persons or authorities


25

Assume that a river authority neglects to open floodgates, resulting in flooding of homes above the dam. Without this exclusion, one could claim that the cause of the loss was negligent failure of the river authority to act, rather than flood.

Inadequate design or maintenance

An architect improperly designs the structure of a custom built home, causing it to collapse.

Please refer to the end of Lesson 3 Topic E to complete Self Quiz 10 at this time.


26

Lesson 3 Topic F - Conditions: Section I

Lesson 3 Topic F Conditions: Part I p1 (PR)

There are 19 conditions in Section I - Property Coverages. This lesson is very long so we have broken it into two parts to make it easier for you to digest. Part 1 will cover Conditions 1 – 4, while conditions 5 – 19 will be covered in the next topic, Conditions Part 2. Condition 4, Loss Settlement, is particularly long. However, it is very important that you understand this concept.

Policy conditions determine how certain situations are handled. Some of the Conditions, such as Loss Settlement, are a sort of conversation between the insurance company and the insured in which the company says, if you do this, then we will do this. Others, such as Insurable Interest and Limit of Liability, are statements of how a certain situation will be handled.


Section I - Conditions A – C


A. Insurable Interest and Limit of Liability No matter how many people are insureds, the policy does not pay any insured more than that insured's insurable interest and does not pay more than the limit of liability for a loss.

B. Deductible The insurance company pays only the amount in excess of the deductible that is shown in the Declarations. If more than one deductible applies to a loss, only the highest deductible is applied.

C. Your Duties After Loss This condition tells insureds what they must do in order to receive payment for a loss. Not every duty must be complied with for every loss. For example, companies seldom require an examination under oath.

SECTION I - CONDITIONS

A. Insurable Interest and Limit of Liability Even if more than one person has an insurable interest in the property covered, we will not be liable in any one loss:

1. To an "insured" for more than the amount of such "insured's" interest at the time of loss; or

2. For more than the applicable limit of liability


27


D. Loss Settlement


This is a long and important condition. It determines how much is paid for each kind of loss. For loss to personal property, awnings, carpeting, household appliances, outdoor antennas, outdoor equipment, structures that are not buildings, and grave markers, the policy pays the least of:

• Actual cash value • The cost to repair • The cost to replace

D. Loss Settlement In this Condition D., the terms "cost to repair or replace" and "replacement cost" 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 E.11. Ordinance Or Law under Section I - Property Coverages. Covered Property Losses Are settled as follows:

1. Property of the following types: a. Personal property; b. Awnings, carpeting, household appliances,


Learning Objective: List the property that is covered for actual cash value.

The policy pays whichever of the three amounts (actual cash value, cost to repair, cost to replace) is less. The term actual cash value means replacement cost minus depreciation.

The coverage for personal property and for awnings, carpeting, household appliances, outdoor antennas and outdoor equipment can be changed to replacement cost with an endorsement, Personal Property Replacement Cost Loss Settlement (HO 04 90).


Insurance to Value


For loss to buildings under Coverages A and B the policy pays replacement cost, but only if the insured maintains a limit of liability equal to or more than 80% of the full replacement value of the damaged building at the time of the loss.

http://magma.magma.scic.com/Elearning/PR_PDF/HO04900511.pdf

http://magma.magma.scic.com/Elearning/PR_PDF/HO04900511.pdf


28

In this case, replacement cost means payment for the loss to the covered property with no deduction for depreciation. Remember, the policy does not pay more than the limit of liability for the damaged property. Many companies require a purchase of insurance equal to 100% of the full replacement value of the dwelling, and that value is calculated by an estimator provided by the company.

D. Loss Settlement 2. Buildings covered under Coverage A or B at replacement cost without deduction for

depreciation, subject to the following: a. If, at the time of loss the amount of insurance in this policy on the damaged

building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, without deduction for depreciation, but not more than the least of the following amounts:


Insurance to Value continued


Example: If John and Ethel's house has a replacement cost of $150,000, they are required by this Condition to maintain a Coverage A limit of liability of at least $120,000 (80% of $150,000) in order to be paid replacement cost for any losses to the dwelling.

If they have a Coverage A limit of liability that is less than $120,000, the policy begins to apply a penalty. The amount the company will pay is either the amount calculated by a formula or the actual cash value, whichever is greater.

Note: If you've studied Commercial Property insurance, you'll note that the following sounds like coinsurance; however, it operates differently as the examples illustrate.


Learning Objective: Apply the Loss Settlement provision for buildings to specific losses.

Applying the Loss Settlement Provision: Step 1


The first step in applying this Condition is always to calculate the amount of insurance required by the


29

policy. This is simply 80% or .80 times the replacement cost of the building at the time of loss. If the replacement cost of the building is S100,000, the calculation is .80 times S100,000 equals S80,000

Example:

(.80) X ($100,000) = ($80,000)



Applying the Loss Settlement Provision: Step 2


The second step is to compare the amount of insurance required, which is the answer to your calculation in step one, with the limit of liability that applies to the damaged building. If the limit of liability is equal to or greater than the amount of insurance required, the policy will pay replacement cost for damage to the building, up to the limit of liability.

Insurance carried (limit of liability) Insurance required (% X replacement cost)

So, if we use the dwelling in step one as an example, we have a required amount of insurance of $80,000. If the limit of liability applying to that building is $80,000 or more, the policy pays replacement cost and we do not need to apply the formula to the loss. See the examples on the pages that follow for more illustrations of this Condition.

Tip: Always recommend a Coverage A limit of liability at the full replacement cost of the dwelling.

Tip: Remember that this Condition also applies to buildings covered under Coverage B. Make certain the limit of liability is sufficient to provide replacement cost on these buildings as well.



Examples of the Loss Provision Settlement


Let's take a look at some examples of how this provision works. We will use the same loss and calculate the loss payment at four different Coverage A limits of liability. The loss is a kitchen fire that results in building damage with a replacement cost of $18,000 and actual cash value (ACV) of $14,000. At the time of loss, the


30

replacement value of John and Ethel’s home is $150,000.




Example 1: Policyholder is adequately insured. Homeowners Coverage A Limit is $120,000.

Step 1

To determine the loss payment:

Calculate the amount of insurance required by the policy. Multiply the replacement cost of the home at the time of loss by 80%.

$150,000 X .80 = $120,000

Step 2

Compare the Coverage A limit to the amount of insurance required.

Since the Coverage A limit satisfies the required amount, the loss is paid in full at replacement cost subject to the deductible.

Carried: $120,000 Required: $120,000 They are paid $18,000




Example 2: Policyholder meets requirements but in this case suffers a total loss.

Step 1

To determine the loss payment:


$150,000 X .80 = $120,000


31

Step 2


John and Ethel have satisfied the insurance to value requirement.

Carried: $120,000 Required: $120,000

Step 3

Because the 80% requirement is met, John and Ethel's policy pays the least of the applicable limit of liability, the replacement cost, or the amount required to repair or replace the damaged building.

Carried: $120,000 Required: $150,000 Amount of Payment is $120,000, the Coverage A Limit




Example 3: Policyholder does not satisfy the requirement. In this case the Coverage A Limit of Liability is $108,000.

Step 1

To calculate the loss payment:


$150,000 X .80 = $120,000

Step 2



Step 3

Divide actual amount of insurance carried by the amount of insurance required.

108,000/120,000 = .90


32

Step 4

Then multiply your answer by the amount of loss.

.90 X 18,000 = $16,200

Step 5

Compare your answer to the Actual Cash Value (ACV) of the loss.

Payment is the greater of the two amounts.

Actual Cash Value = $14,000 Answer from Step 4 = $16,200 Amount of payment: $ 16,200




Example 4: Policyholder does not satisfy the requirement. In this case the Coverage A Limit of Liability is $84,000.

Step 1

To calculate the loss payment:


$150,000 X .80 = $120,000

Step 2



Step 3

Divide actual amount of insurance carried amount of insurance required.

84,000/120,000 = .70

Step 4


33

Then multiply your answer by the amount of loss.

.70 X 18,000 = $12,600

Step 5

Compare your answer to the Actual Cash Value (ACV) of the loss.

Payment is the greater of the two amounts.

Actual Cash Value = $14,000 Answer from Step 4 = $12,600 Amount of payment: $ 14,000




Tip: Make certain that you correctly calculate the amount required when applying this Condition. The amount required is determined by multiplying 80% X the full replacement cost at the time of the loss.

The company pays only ACV until repair or replacement is complete, and then pays any difference owed, unless the damage is less than 5% of the amount of insurance. If the damage is less than 5% of the amount of insurance and less than $2,500, the company pays whatever is owed.



Maintaining Adequate Policy Limits

In spite of your best efforts to maintain an adequate limit, there are situations in which a loss to the dwelling can exceed the Coverage A limit of liability. Some examples of this are:

• Inflation increases the value of the building, or • A catastrophe such as a hurricane or tornado causes the cost of building materials to escalate

overnight.


Learning Objective: Explain the endorsements that modify the Loss Settlement provision and


34

recommend one of these endorsements when appropriate.

Endorsements

There are three endorsements available to help provide adequate coverage in these instances:

1. Inflation Guard 2. Specified Additional Amount of Insurance for Coverage A – Dwelling 3. Additional Limits of Liability for Coverages A, B, C and D

The first is Inflation Guard (HO 04 46). This endorsement increases the Coverage A limit of liability by a specified percentage annually, applied pro rata during the policy period.


Learning Objective: Explain the endorsements that modify the Loss Settlement provision and recommend one of these endorsements when appropriate.

Endorsements continued

The other two don't increase the amount of Coverage A unless there is a loss. It is necessary with both of these for the dwelling to be insured with a Coverage A limit of liability of 100% of the replacement cost at policy inception. Both endorsements delete the requirement for insurance to 80% of the replacement cost of the dwelling.

The first of these is Specified Additional Amount of Insurance for Coverage A Dwelling (HO 04 20). With this endorsement the insured selects an additional amount of 25% or 50% of Coverage A. If there is a loss to the dwelling the company will pay up to an additional 25% or 50% of Coverage A, if needed.

Example

• Homeowners 3- Special Form with $150,000 Coverage A limit of liability • HO 04 20 endorsement with 25% option chosen • Total loss and cost to rebuild equals $200,000 • Coverage A pays $150,000 • HO 04 20 pays $37,500 (25% of Coverage A limit of liability) • Coverages B, C, and D do not change.


Both the Additional Limits of Liability for Coverages A, B, D and D and Specific Additional Amount of Insurance for coverage A Dwelling endorsements require “you” to notify the insurance company within 30 days of completion of any improvements, alterations or additions to the building insured under coverage A which increase the replacement cost of the building by 5% or more.

http://magma.magma.scic.com/Elearning/PR_PDF/HO04461000INFLATIONGUARD.pdf


35

For this reason, it is important to ask your clients if they have made improvements to their home.


Learning Objective: Explain the endorsements that modify the Loss Settlement provision and recommend one of these endorsements when appropriate.

Endorsements continued

A similar approach is Additional Limits of Liability for Coverages A, B, C and D (HO 04 11). This one increases the Coverage A limit of liability to the actual cost required to rebuild the dwelling when a covered loss exceeds the Coverage A limit of liability. Because it increases the Coverage A limit of liability, the limits for Coverages B, C, and D also increase. This is because the limit of liability for each of these coverages is a percentage of the Coverage A limit of liability.

Example

• A Homeowners 3–Special Form with $150,000 Coverage A limit of liability • HO 04 11 endorsement chosen • Total loss and cost to rebuild equals $200,000 • Coverage A pays $200,000 • Coverages B, C, D and Additional Coverages increase, e.g.;

o Coverage B from $15,000 to $20,000 o Coverage C from $75,000 to $100,000 o Coverage D from $45,000 to $60,000 o Ordinance or Law now equals $20,000 (10% of new Coverage A)


36

Lesson 3 Topic G - Conditions: Part II

Lesson 3 Topic G Conditions: Part II p1 (PR)


In this topic, Conditions Part II, we continue with outlining policy conditions that determine how certain situations are handled. Here we discuss Conditions 5 – 19, labeled in the policy as E. through S.

E. Loss To A Pair or Set In case of loss to a pair or set we may elect to:

1. Repair or replace any part to restore the pair or set to its value before the loss; or 2. Pay the difference between actual cash value of the property before and after the loss

F. Appraisal If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent and impartial appraiser within 20 days after receiving a written request...


Loss to a Pair and Appraisal


E. Loss to a Pair or Set This Condition gives the company two options for settling losses to a pair or set. The insured will not automatically be paid for the entire set if there is a loss to a part or parts of the set.

F. Appraisal The Appraisal Condition applies to disagreements regarding the amount of a covered loss. The company or the insured can demand to invoke the Appraisal Condition, and each chooses an appraiser. The two appraisers choose an umpire. If the appraisers agree on the amount, that amount is the loss. If the appraisers can't agree each submits a separate appraisal to the umpire. If any two of the three agree on an amount, that amount is the loss. The insured and company each pay their own appraiser and share the expenses of the appraisal and umpire equally.


Conditions G through K



37

G. Other Insurance If more than one policy applies to a loss, this Policy will pay its pro rata share of the loss. If the loss is also covered by a service agreement, this Policy is excess over any amounts payable under the service agreement.

H. Suit Against Us An insured must comply with all provisions of the policy before suing the company. The suit must be started within two years after the loss.

I. Our Option The company may repair or replace damaged property with like kind and quality, if it gives proper written notice to the insured.

J. Loss Payment Describes with whom and when losses are settled.

K. Abandonment of Property An insured cannot abandon ownership of property to the company.


L. Mortgage Clause


Any mortgagee named in the policy has rights, as shown below:

• The mortgagee will be named on any settlement draft or check.

• A denial of a claim to an insured does not apply to a valid claim of a mortgagee, provided the mortgagee complies with the terms set forth in this Condition.

• The company notifies the mortgagee of cancellation or nonrenewal.

• If the company denies a claim to the insured and pays a mortgagee, the company is subrogated to the rights of the mortgagee under the mortgage agreement.


38


Conditions M through O


M. No Benefit to Bailee This policy does not benefit a bailee. Example If a piece of furniture is damaged by a covered peril while in the custody of a furniture repair shop, the company pays the insured. That payment does not benefit the furniture repair shop. The company may seek recovery, or subrogate, from the repair shop, of the amount paid to the insured.

N. Nuclear Hazard Clause An exclusion of coverage for loss caused by nuclear hazard, which is defined.

O. Recovered Property This Condition discusses the handling of a situation wherein the company pays an insured for property and the property is subsequently recovered by either the company or the insured.


Learning Objective: Explain the concealment clause.

Conditions P through S


P. Volcanic Eruption Period If a volcano erupts more than once in a 72-hour period the policy considers it one eruption and therefore one loss.

Q. Policy Period The policy applies only to loss which occurs during the policy period.

R. Concealment or Fraud There is no coverage under the policy if, before or after the loss, an insured intentionally conceals, misrepresents, engages in fraudulent conduct or makes false statements relating to the insurance.


39

S. Loss Payable Clause If the Declarations Page shows a loss payee, the definition of insured includes the loss payee with respect to that property. If the insurer does not renew or cancels the policy, the loss payee is notified in writing.

Please refer to the end of Lesson 3 Topic G to complete Self Quiz 11 at this time.

lesson 3 homeowners policy section i - other...

Documents