Chapter 13 Multirisk Management Contracts: Homeowners

Coverage A—Dwelling

The dwelling on the residence premisesThe home being insured. (i.e., the home being insured) plus structures attached to the dwelling, such as an attached garage, are insured in coverage A. Also covered are materials and supplies on or adjacent to the residence premises for use in the construction, alteration, or repair of the dwelling or other structures. Land is not included.

Coverage B—Other Structures

The exposures insured in coverage B are structures on the residence premises that are separated from the dwelling, such as a detached garage. Coverage B does not apply to any structure used for business purposes or rented to any person not a tenant of the dwelling, unless used solely as a private garage. The location of this exclusion and the way it is stated illustrate two important points made in Chapter 6 "The Insurance Solution and Institutions". First, exclusions are not always called exclusions. They may appear following “we do not cover,” or “except.” Second, they may appear anywhere in the policy, not just under the heading “Exclusions.”

Coverage C—Personal Property

This part of the policy says,

We cover personal property owned or used by any insured while it is anywhere in the world.

Note that this definition includes property you own as well as that belonging to others while you are using it. If you borrow your neighbor’s lawnmower, it is protected by your insurance as if it were yours.

If the insured requests, coverage C applies to personal property owned by others while it is “on the part of the residence premises occupied by an insured” and to property of guests and residence employees while at any residence occupied by an insured. For example, if you store the property of a friend at your residence premises, you can cover the property under your policy, even if you are not using the friend’s property. Or if a guest at your vacation house (not the residence premises) has property damaged while visiting you there, that property too can be covered.

Property usually situated at an insured’s residence other than the residence premises (such as the vacation house described above) is subject to a limit of 10 percent of coverage C or $1,000, whichever is greater. Coverage C, remember, is 50 percent of coverage A unless specifically amended to provide some other amount. Protection of $100,000 for coverage A thus results in a $50,000 limit for coverage C. Ten percent of coverage C in this case is $5,000, which is greater than $1,000, and therefore is the limit on personal property usually kept at a residence other than the residence premises. If you, as a member of your parents’ household, rent a room at school, the personal property normally kept in your school room is subject to this limit. Property brought there for a special occasion, perhaps when your sister drives up for a visit, is not subject to this limit.

Two provisions in coverage C merit careful attention. One is a special limit of liability and the other is property not covered. Under the special limit of liabilitySituation in which dollar limits are placed on some property for loss caused by any peril and on other property for loss caused by theft., dollar limits are placed on some property for loss caused by any peril, and on other property for loss caused by theft. These special limits should call your attention to any gaps in coverage if you have the kind of property listed. Note that, for some items, you can be reimbursed up to $2,500, while for others, such as money in any form (bank notes, coins, even value cards and smart cards), the limit is $200. You may want to cover the gaps with a scheduled personal property endorsement added to your policy. This endorsement is explained later in the chapter.

Most of the exclusions and limitations have the purpose of standardizing the risk, with coverage available by endorsement or in other policies. For example, much of the property not covered is related to conduct of a business and therefore is not suited for homeowners coverage. A business-related policy or endorsement should be used to cover those items.

Some exclusions are of greater interest to a typical full-time college student than others. An example is the exclusion from coverage of compact discs and players when used in a motor vehicle. These items would be included in the automobile policy, sometimes under a special endorsement. As you know by now, if a certain item is covered by another policy, such as the automobile policy discussed in Chapter 14 "Multirisk Management Contracts: Auto", it would be excluded from the homeowners policy to avoid duplication. Note also that if you rent your room in a private home, the landlord’s homeowners policy does not cover your belongings. Your parents’ homeowners policy may.

Coverage D—Loss of Use

Loss of useCoverage that protects a policyholder from losses sustained if the premises cannot be lived in as a result of a direct loss to either the premises or neighboring premises. coverage protects you from losses sustained if the premises cannot be lived in as a result of a direct loss to either the premises or neighboring premises. Additional living expenseCoverage provided if a loss covered under Section I of the homeowners policy renders the residence uninhabitable. is coverage provided if a loss covered under Section I of the homeowners policy renders the residence uninhabitable. An example is the large additional living expenses paid to homeowners whose homes where plagued with toxic mold and needed lengthy remediation. If a similar loss makes the part of the residence rented to others uninhabitable, the policy pays for its fair rental value. If a civil authority prohibits you from using the premises as a result of direct damage to neighboring premises by a peril insured against in this policy, both additional living expense and fair rental value loss will be paid for a period not exceeding two weeks. The two-week limit does not apply except for loss of use due to actions by a civil authority.

An important characteristic of coverage D is that it covers only additional expenses. A family forced out of its home for a week due to fire damage will not receive payment for all expenses incurred during that week. Suppose that the family normally spends $250 a week on groceries, but had to pay $400 while away from the damaged premises. Only the difference, $150, plus other added expenses would be compensable.

Additional Coverages

You might think that every conceivable source of loss in connection with your home and personal property has been covered, modified, or excluded. Such is not the case.

Twelve additional items of coverage are provided under the additional coverages section of the policy. First is debris removal, which provides payment for the cost of removing (under Part A) debris of covered property damaged by a covered peril and the cost of removing ash, dust, or particles from a volcanic eruption that has caused direct property loss. Part B under (1) is for fallen trees, which will pay up to $1,000 for the removal from residence premises of trees that fall due to the weight of ice, snow, and sleet. This additional protection is needed because other coverages provide only for the cost of repair or replacement of damaged property, not for the cost of hauling away the debris that blocks a driveway in the residence premises or a ramp for a handicapped person.

Several provisions in the additional coverages section of the policy are intended to encourage the insured to take steps that reduce the size of a loss after it has occurred. One is a reasonable repair, which provides payment for repairs made solely to protect property from further damage. For example, a temporary patch in the roof, following a covered loss, would be paid to prevent more extensive damages inside while awaiting permanent repairs. The conditions section (later in the policy) further stipulates that if the insured fails to protect property in this way, some further damage might not be covered.

Similarly, property removed from premises endangered by a covered peril is covered while removed “against loss from any cause” for no more than thirty days. If this provision were not included, you might be better off to leave personal property in your house while it burned to the ground rather than remove it and risk having it damaged or destroyed by a peril other than those included in the policy.

The insurer also promises to pay fire department service charges incurred to save or protect covered property from a covered peril. Up to $500 per loss, without application of a deductible, is available.

Trees, shrubs, and other plants are also addressed in additional coverages. Loss to these items on the residence premises is covered if caused by one of several named perils. You should note that windstorm, ice, insects, and disease are not among the covered perils. No more than $500 per tree, shrub, or plant is available, with a total limit of 5 percent of coverage A.

Many of us have as many credit cards as we have books and DVDs. The homeowners policy will pay up to $500 for such loss under the credit card, fund transfer card, forgery, and counterfeit money coverage. The $500 limit is for loss caused by any single person, regardless of the number of cards or other instruments involved. No deductible applies to this coverage.

Many of us may also belong to an association of property owners (e.g., condominium projects). As members, we may be assessed charges for damage to association property. The loss assessment provision in the additional coverages section of the homeowners policy provides up to $1,000 to cover such charges. This provision has its greatest applicability in the condominium unit owners form (HO-6), but it is included in all of the homeowners forms.

The additional coverages section also provides for direct physical loss to covered property due to two situations previously considered as perils: collapse of a building and loss caused to or by glass or safety glazing material. The definition and covered causes of collapse are outlined in this provision. Coverage is more narrowly defined for loss caused by collapse than had been the case when it was included under the open perils protection to real property. The glass coverage actually is slightly broader than that found in previous versions of the policy.

The tenth additional coverage found in the HO-3 is for landlord’s furnishings. Up to $2,500 coverage is available to cover a landlord’s appliances and other property located in an apartment on the residence premises that is usually available for rental. The same perils that are available for coverage C apply to this protection, except that theft is excluded.

Coverages A and B—Dwelling and Other Structures

Under this heading, the policy says,

We insure against risk of direct loss to property described in Coverages A and B.

The most important aspect of the agreement is that coverage is for open perils (sometimes also referred to as “for all risk”), but a close second is the limiting phrase “we do not insure, however, for loss….” Three exceptions to coverage follow this phrase. Through these exceptions, the coverage, while it is for open perils, does not protect for all losses under all circumstances. The first exception is for collapse other than as provided in additional coverages noted above. The second exception lists six circumstances in which protection is not afforded under the policy. In general, these circumstances relate to especially hazardous situations or nonfortuitous events, such as theft in a dwelling under construction or loss due to wear and tear. One of these circumstances deals with losses arising from mold, fungus, and wet rot, which are covered only if hidden within walls or ceilings and caused from accidental discharge of water or steam. This coverage is available only for those states that did not adopt the ISO endorsement adding mold as a new exclusion.E. E. Mazier, “Alabama OKs ISO Mold Endorsement,” National Underwriter Online News Service, February 26, 2002: “In terms of property coverage, Alabama homeowners will have a choice of three limits—$10,000, $25,000 or $50,000—on claims payouts within a policy year…. The limits for liability are $50,000 and $100,000…. Liability coverage would apply if, for example, a guest developed an illness due to exposure to mold in the host’s home.” See also Michael Ha, “Maryland Regulator OKs Mold Exclusion,” National Underwriter Online News Service, July 8, 2003.

Coverage C—Personal Property

Unlike the open perils protection for the dwelling and other structures, personal property is covered against direct loss on a named perils basis, including the following:

• 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 or steam
• Sudden and accidental tearing apart, cracking, burning, or bulging of a water heating or transporting appliance
• Freezing
• Sudden and accidental damage from artificially generated electrical current
• Volcanic eruption

Most of these perils are listed along with some explanation of what they involve, as well as specific exclusions. For example, damage by windstorm or hail to personal property in a building is not covered unless the opening is caused by wind or hail. Therefore, if hail broke a window and damaged property inside, the loss would be covered. If the window was left open, however, damage to property would not be covered. Similarly, furnishings, equipment, and other personal property are covered only if such property is inside a fully enclosed building. So, if your curtains are damaged by a windstorm while the window is left open, coverage C of HO-3 will not pay for the loss.

Smoke damage is covered if it is sudden and accidental, but not if it is caused by smoke from agricultural smudging or industrial operations. If, for example, your oil furnace malfunctions and spreads smoke throughout the house, the insurer will pay for redecorating and having smoky furniture and clothing cleaned. On the other hand, if you hang your clothing outside on the clothesline and it needs cleaning because of exposure to emissions from a coal-burning power plant, you will have to pay for any resulting loss.

Theft includes damages caused by attempted theft as well as loss of property from a known location when it is likely that the property has been stolen. If someone damages your bicycle in an attempt to steal it, such damage is covered. The second part of the theft definition is sometimes referred to as mysterious disappearance. Suppose, for example, you leave your camera at your table in McDonald’s, go to the counter for another cup of coffee, return to your table, and find the camera gone. Was it stolen, or did it leave under its own power? It was probably stolen, so the loss is covered. Mysterious disappearanceCoverage that requires that there be loss of property from a known place in such a fashion that theft is the likely cause. coverage requires that there be loss of property from a known place in such a fashion that theft is the likely cause.

Several exceptions to the theft coverage are enumerated in the policy. First, the HO-3 does not include loss caused by theft committed by any insured. This appears strange until you consider how many people are included in the definition of insured, which includes any resident relative and anyone under age twenty-one in the care of one of these resident relations.

Second, theft in or from a dwelling under construction or of materials and supplies for use in the construction is excluded because the risk is too great. Theft from any part of a residence rented by an insured to someone other than an insured is also excluded. If you rent a room to an outsider, for example, and he or she steals something from that room, the loss is not covered.

The third exception is one particularly important to typical college-age students. Unless an insured is residing there, theft from a residence owned by, rented by, rented to, or occupied by an insured, other than the residence premises, is excepted. Property of students kept at school, however, is covered as long as the student has been there within forty-five days. If you go home for winter break and your dorm room (or apartment) is broken into, your property is covered if you were not gone more than forty-five days at the time of the theft, subject of course to other policy exclusions and limitations.

Falling objects is the next listed peril. If a tree falls on your canoe, the damage is covered because the tree is a falling object. This peril does not include loss to property contained in a building, however, unless the roof or an exterior wall of the building is first damaged by a falling object. If you drop a hammer on a piece of china, the loss is not covered. If the roof is damaged by a falling tree that, in turn, damages the china, the loss is covered. Similarly, damage to personal property caused by the weight of ice, snow, or sleet or the collapse of part or all of a building is covered.

Loss caused by accidental discharge or overflow of water or steam from a plumbing, heating, air conditioning, or automatic fire protective sprinkler system, or from a household appliance, is covered. Water could leak from a washing machine, for example, and cause damage to a painting hung on the wall of a room below. Sudden and accidental tearing, cracking, burning, or bulging of a steam or hot water heating system, an air conditioning or automatic fire protective sprinkler system, or a hot water heater could damage not only the premises but personal property. Such loss is covered.

Loss caused by freezing of a plumbing, heating, air conditioning, or automatic fire protective sprinkler system, or of a household appliance, is covered. This does not include loss on the residence premises while the dwelling is unoccupied, unless you arrange to maintain heat in the building or shut off the water supply and drain the system. If you leave your home during the winter for several weeks or months, losses caused by cold weather will not be covered unless you take the same precautions as would a prudent person who did not have insurance.

Damage to some property caused by a short circuit in your electrical system is covered. Excluded is loss to a tube, transistor, or similar electronic component. Thus, damage to your television or personal computer is not covered.

Duties after Loss

When a loss occurs, you must do the following:

1. Give immediate notice to the company or its agent.
2. Notify the police in case of theft.
3. Notify credit card companies, if applicable.
4. Protect the property from further damage, make reasonable and necessary repairs to protect it, and keep an accurate record of repair expenditures. If, for example, a falling tree makes a hole in the roof of your house, you should have temporary repairs made immediately to prevent water damage to the house and its contents in case of rain. The insurer will pay for such repairs, as noted in the additional coverages.
5. Cooperate with the insurer’s investigations of the claim.
6. Prepare an inventory of damaged personal property showing the quantity, description, actual cash value, and amount of loss.
7. Exhibit the damaged property as often as required and submit to examination under oath.
8. Submit to the company, within sixty days of its request, a signed, sworn statement of loss that shows the time and cause of loss, your interest and that of all others in the property, all encumbrances on the property, other insurance that may cover the loss, and various other information spelled out in the policy.

Preparing an inventory (duty 6) after a loss is, for most people, a very difficult task. Generally, the loss adjuster for the insurance company will help you, but that does not ensure a complete inventory. The only way to deal with this problem is before a loss. You should have an inventory not only before a loss but at the time you buy insurance so that you will know how much insurance you need. Often insureds will use photographs or videotapes of their homes and belongings to supplement an inventory. An up-to-date inventory of your household furnishings and personal belongings can help you do the following:

• Determine the value of your belongings and your personal insurance needs
• Establish the purchase dates and cost of major items in case of loss
• Identify exactly what was lost (most people cannot recall items accumulated gradually)
• Settle your insurance claim quickly and efficiently
• Verify uninsured losses for income tax deductions

Loss Settlement

Personal property losses are paid on the basis of actual cash value at the time of loss, not exceeding the cost to repair or replace the property. Carpeting, domestic appliances, awnings, outdoor antennas, and outdoor equipment, whether or not attached to buildings, are paid on the same basis. Typically, anything permanently attached to a building is considered to be part of the building. You would expect such losses to be settled in the same way as buildings. But the phrase “whether or not attached to buildings” makes them coverage C (personal property) losses rather than coverage A or B (real property).

The provision for settling losses to buildings may be confusing, but it is similar to the coinsurance calculations shown in Chapter 11 "Property Risk Management". Here is how it works: if the total amount of coverage equals at least 80 percent of the current replacement cost of your home (e.g., at least $80,000 on a $100,000 structure), you are paid the full cost of replacing or repairing the damage up to the policy limits. There is no deduction for depreciation.

On the other hand, if the amount of coverage is less than 80 percent of the replacement cost, the insurer will pay the larger of (1) the actual cash value, which is replacement cost minus depreciation, or (2) that proportion of the cost to repair or replace, without deduction for depreciation, which the total amount of insurance on the building bears to 80 percent of its replacement cost. An example, similar to that provided in Chapter 11 "Property Risk Management", may help clarify what the policy says. Suppose that at the time of a $20,000 loss, your home has a replacement value of $100,000. And suppose you have $70,000 worth of insurance on it. The loss could be settled as follows:

Amount of Insurance carried 80% of replacement cost × loss = payment $70,000 $80,000 ×$20,000=$17,500

If, however, the actual cash value of the loss—replacement cost minus depreciation—was greater than $17,500, you would be paid the larger amount. This example demonstrates that, unless there is no depreciation, you would usually have to bear part of the loss if the coverage is less than 80 percent of the value of the building. On the other hand, if construction of the house was completed the day before the loss occurred, depreciation would be zero, actual cash value would equal replacement cost, and the loss would be paid in full. In most cases, of course, depreciation is greater than zero, so actual cash value is less than replacement cost.

Clearly, you are well advised to carry an amount of insurance equal to at least 80 percent of the replacement value of your house. But even if you do, what happens in the event of a total loss? If you have $80,000 insurance on your $100,000 house and it burns to the ground, you will lose $20,000. Remember that insurance works best against high-value, low-probability losses. It may be valuable to know also that replacement cost estimates do not include the value of foundations or land, both of which are not insured.

Furthermore, if you have $80,000 insurance at the beginning of this year, will that be 80 percent of the value of your house later in the year? If housing values in your area are increasing, you should (1) consider adding an inflation guard endorsementEndorsement that increases the amount of insurance automatically every year, or increases the amount of insurance to between 90 and 100 percent of replacement value and keeps the amount up to date every time the policyholder pays the premium. to your policy, which increases the amount of insurance automatically every year, or (2) increase the amount of insurance to between 90 and 100 percent of replacement value and keep the amount up to date every time you pay the premium. That will ensure being paid in full for partial losses and provide more complete protection against a total loss. Some insurers also offer a replacement cost guarantee endorsement whereby replacement cost is covered, even if it exceeds the limit of liability.

Coverage E—Personal Liability

The insuring agreement for coverage E includes two promises by the insurer: to pay damages for which the insured is legally liable and to “provide a defense at our expense by counsel of our choice, even if the suit is groundless, false, or fraudulent.” Both promises are of significant value, given the frequency of lawsuits, the size of awards, and the cost of defense. Note that the coverage is on an open perils basis; therefore, all events not excluded from coverage are included. One limitation is that damages must be either bodily injury or property damage, not a nonphysical personal injury such as libel. (Coverage for nonphysical personal injuries is discussed later in the chapter.) Note the exact wording of the policy:

A. Coverage E—Personal Liability

If a claim is made or a suit is brought against an “insured” for damages because of “bodily injury” or “property damage” caused by an “occurrence” to which this coverage applies….

In addition, defense is provided only until the amount paid by the insurer for damages (court judgments or negotiated settlements) equals the limit of liability. Thereafter, the insured is responsible for defense. Therefore, deciding on a sufficient amount for coverage E is best done by considering both the exposure to liability and to extended litigation.

Coverage F—Medical Payments

You may at times be wise to pay for medical expenses of other people without requiring that they prove you’re at fault. You may, for instance, feel morally obligated, or you may merely hope to avoid litigation by remaining on friendly terms with the injured person.

Coverage F of the homeowners policy provides funds for such events. Specifically, medical expenses will be paid if incurred within three years of an accident and arising out of one of five possible situations. This coverage differs from that found in your auto policy. In the auto policy, medical expense coverage is for you and your passengers. Here (in a homeowners policy), the coverage is for losses incurred by others. The covered situations are as follows:

1. That of a person on the insured location with the permission of an insured
2. That of a person off the insured location if the bodily injury arises out of a condition on the insured location
3. One caused by the activities of an insured
4. One caused by a residence employee in the course of employment by the insured
5. One caused by an animal owned by or in the care of an insured

Expenses incurred by regular residents of the residence premises, except for residence employees, are not covered. The insured, spouse, and children living at the residence, and others living there, are excluded so that this policy does not become a first-party health insurance policy for them.

Cancellation

For various reasons, either the insured or the insurer may want to terminate the policy prior to the end of the policy period. You may cancel the policy at any time by giving the insurer written notice. State insurance regulations, however, have increasingly limited the cancellation privileges of insurers. Four situations exist under which the insurer may cancel the policy.

First, nonpayment of premium is a justified reason for cancellation. Second, a new policy in effect less than sixty days may be canceled for any reason with thirty days written notice. Third, in Section C, a material misrepresentation or substantial change (increase) in risk will permit cancellation with a thirty-day written notice. For example, an insured who began to store large amounts of flammables on the premises after purchasing the policy may cause the insurer to cancel the coverage when such use becomes known to the insurer.

Nonrenewal

In Section D, Nonrenewal, the insurer (under the most recent ISO HO-3 in Chapter 24 "Appendix A") promises the following: “We will not fail to renew this policy except for one of the reasons referred to in C. Cancellation above. We may refuse to renew for one of the listed reasons by mailing the ‘insured’ named in the Declarations at the mailing address shown in the policy or at a forwarding address, written notice at least 30 days prior to the expiration date of this policy.”

Assignment

Because of the personal nature of insurance, policy rights of ownership are not transferable (assignable) without the written permission of the insurer. As a result, when you sell your house, you cannot automatically transfer the insurance on it to the new owner.

Subrogation

Various provisions that limit overindemnification were discussed in Chapter 9 "Fundamental Doctrines Affecting Insurance Contracts". One of these was subrogation, whereby the insured is required to transfer to the insurer any rights to recovery available from a third party. The transfer is made only to the extent of payment made by the insurer. For example, if part of an airplane detaches and falls on your house, the resulting damage is covered within the limits of your policy because it is a “falling object.” Payment is limited by the loss settlement clause and deductible. If you did not have insurance, you likely would attempt to collect from the airline. The insurer, upon payment of your loss, has your right to sue the airline. Generally, the insured will be reimbursed for any out-of-pocket expenses not covered by insurance (such as deductibles and coinsurance) from any amount the insurer collects from the third party. If such collection exceeds the amount paid by the insurer to the insured, then that, too, is the property of the insured. An additional point worth emphasizing is that the insured is precluded from interfering with the insurer’s subrogation rights by, for example, settling with a negligent party without the insurer’s consent.