Perils
Everyone faces perils.
Websters dictionary defines a peril
as danger. There are dangers all
around us. Whether we are crossing a
street, riding a bicycle, driving a car, or simply plugging in an appliance we
face danger. Obviously, it would be
impossible to insure against every peril or danger. We buy policies that protect us only from specific dangers. No policy can protect an individual from the
emotional stress of a loss. Insurance
policies only attempt to protect us financially from such losses. While monetary payment will help with the
financial stress, it will not protect us from the emotional stress when we
loose someone we love, or from the loss of personal items burned in a
fire. Agents often provide what is called
peace of mind. In reality, agents
provide peace of financial loss rather than peace of mind. Of course, that is a reference to the lack
of worry about a loss, but when a loss occurs there really is no way to relieve
the stress of the loss itself. Policies
merely make life easier by replacing physical items or replacing lost income.
Defining the losses
For most consumers, when they purchase insurance they want to
know primarily three things: (1) Which items are covered? (2) How do I collect on a loss? and (3) How
much does the policy cost?
Consumers expect very simple answers, but sometimes these
questions cannot be simply answered.
The main source to the questions is contained in the policy itself. Few policyowners (or even agents) read their
policy in its entirety. Fortunately
losses are few compared to the number of policies written. Even so, consumers often do not realize what
is and is not covered until a loss happens.
Consumers find themselves pouring over their contract as their house
burns or as a tow truck hauls their car off.
At this point the policy becomes a source of anger for the consumer as
they realize that everything is not covered.
The truth is, no policy covers everything. As we said, it would be impossible to purchase a policy that
covered every possible loss. With the
possible exception of marriage, insurance is probably the only contract entered
into without examining the contents. We
tend to read the warranties on our toasters better than we do our insurance
policies.
No policy pays for everything.
This cannot be stated often enough.
All coverage is subject to limitations of some kind. Policyholders have the responsibility of
reviewing these limitations in advance of a loss. Agents have the responsibility of advising of these limitations
at the time of purchase. If both are
done, clients can avoid both over-insuring and under-insuring.
Every policy lists the perils (dangers) that are covered. Some are obvious. For example, life insurance policies insure against a premature
death. Consumers know this when they
purchase the policy. Other policies are
more complicated, such as health insurance.
Whereas a life insurance policy is fairly simple (one is either dead or
alive), health coverage is very complex containing deductibles, coinsurance,
and other limitations. A property
policy may appear to be straightforward but actually contain subtleties that
may not be recognized by the consumer.
It is important to realize that every insurance policy is a contract and
must, therefore, contain legal wording that can have specific meanings not
readily recognized by the general consumer.
Such legal wording is required in policies since they are a legal
document. There is the joke regarding
insurance policies which states: Every policy requires three attorneys: one
to write it, one to contest it, and one to decide who is right.
Loss and Damage By Fire
The Standard Fire Policy does not define fire, as a peril. Therefore it is given its ordinary meaning
by the courts. Specifically, fire is defined as oxidation of a degree
sufficient to produce a visible flame or glow.
Exactly when the flame or glow is produced can be significant in some
cases. Such is the case of fires in
stored food products. One example has
to do with what is called bin burn.
This is the organic heating of agricultural crops stored for extended
periods of time. Since the storage
areas are getting larger and larger and the value higher and higher, the
potential loss from fire (or anything else for that matter) is great. Insurance claims become complicated in the
event of fire because it can be very difficult to establish when a flame or
glow actually began. If the stored food
lost value (due to age or exposure to degenerative elements) prior to the
actual flame, this affects how the insurance company would compensate for the
loss. By contract terms, the insurer is
liable only for the value at the time of fire (an actual flame or glow) although
there could have been a loss of value prior to that due to extensive exposure
to the elements that caused the fire.
Again, the insurer is liable for the fire loss only. Although scientific evaluation will produce
some insight, the final decision will depend upon negotiation and probably some
compromise.
There can be an additional limitation on loss due to fire. Fire is divided into two categories: hostile
fire and friendly fire. A hostile fire is one that is uncontrolled,
whereas a friendly fire is one
contained in a proper receptacle. If a
friendly fire moves from its proper place to an improper place, it changes from
a friendly fire to a hostile fire. This
is what happens when a campfire becomes a forest fire. The campfire is friendly but once it leaps
its proper boundaries into the forest it becomes a hostile fire.
No policy benefits are available as long as a fire remains
friendly. For example, John, Ralph,
and Mike are camping. They are sitting
around a campfire (contained so therefore friendly) when John accidentally drops
his camera into the fire. It probably
would not be covered by his policy because the camera was destroyed by a
friendly fire. If the camera were lost
to a hostile fire, it probably would be covered. Johns policy also would not cover any damage resulting from the
friendly fire to surrounding items, such as camping equipment.
Using the same example, if John accidentally dropped Ralphs
camera into the friendly fire, it is likely that his insurance would cover
Ralphs loss since John would be legally liable for it.
Policies generally do not cover loss due to intentional use of
fire. The first thing that comes to
mind is arson. Policies specifically
exclude coverage if the policyholder intentionally burns his own property or
pays someone to burn his own property.
There are other situations that would also apply. If heat is mismanaged, such as in a
manufacturing plant, the policy is not likely to cover the damage sustained as
a result of that mismanagement. One
authority stated it this way:
If a
fire is used for culinary and heating purposes, or for the purpose of
generating power, the fire being confined within the limits of certain agencies
for producing heat, or if it is used by chemists, artisans, and manufacturers
as a chemical agent, or as an instrument of art or fabrication, or for any of
the other numerous purposes of like character, and if in such cases it is used
or applied by design, and a loss occurs in consequence of over heating or by
unskillfulness or negligence of the operator, and his mismanagement of heat as
an agent or instrument of manufacture or other useful purpose, this is not a
loss within a fire policy. [1]
To make this clear, if the fire or heat remains within the confines
it is supposed to be in, any damage sustained to surrounding areas or items is not
covered. However, if the fire
or heat spreads outside of the intended confines, damage to surrounding areas
or items would then be covered by the policy. Friendly fires are those flames within the
intended confinement; hostile fires are those flames that spread outside of the
intended confinement. Friendly fires are not a covered peril; hostile fires are a
covered peril.
Borderline situations can occur where it is uncertain whether the
damage would be considered the result of friendly or hostile fires. Cigarette burns often fall into this
category. Often cigarette burns are
covered for two reasons: (1) Swerdling versus Connecticut Fire
Insurance Company stated such burns were hostile fires even though no
actual flame or glow existed and (2) for public relation purposes.
Another area that may be borderline when it comes to losses
concerns overheating. Whether or not
damage from overheating will be covered may vary according to specific
situations. There have been successful
legal arguments that when there are thermostatic controls and the heat from a
fire that was restricted to its normal confines causes damage; the fire is
still hostile (rather than friendly) if it was due to a malfunction. Because the fire is then considered hostile,
the resulting damage would be a covered peril.
The doctrine of proximate cause states that any loss caused by a
hostile fire is a covered peril providing the loss is a direct result of the
fire and not a remote consequence.
Under this doctrine, when covered property has been damaged by smoke,
heat, by the efforts of firefighters, by water used in extinguishing a fire, or
damage caused by falling walls or other building structures, insurance
companies have commonly been held liable for damages. Courts often settle the extent to which insurance companies are
liable.
Lightning
Although lightning often causes loss by fire, lightning itself is
a peril separate and distinct from fire.
However, since fire is so often the result, the two perils are treated
together in many cases.
Surprisingly, few statistics have been kept on lightning on a
segregated basis (statistics lump lightning in with fire claims in
general). One company did keep
segregated statistics from 1958 through 1960 in the Midwest. Those figures dealt with an area
experiencing 40 to 50 thunderstorm days per year. Florida actually leads the country with 90 thunderstorm days per
year. However, 40 to 50 thunderstorm
days is considered our nations average.
Based on those three years statistics, the total number of fire
and lightning losses amounted to 11,118. Of these, 8,848 or 79.5 percent were the result of lightning;
22.8 percent of the total dollar losses were the result of
lightning.[2]
Removal of goods
The Standard Fire Policy is a fixed, named location
coverage. While it may be possible to
literally move buildings from one location to another that is not the usual
scenario. Typically, removal of goods
refers to types of property that can be moved without severe difficulty. The only variation on the fixed location is
found in the section of the insuring agreement, which states and by removal
from premises endangered by the perils insured against in the policy. This statement allows for removal if it is
to protect the property from insured perils.
It is important to note that this specifically restricts removal based
on insured perils. This is important
to the insurance company since they based their premium rates on the location
of the property. Coverage during the
process of removal is held to be virtually all risk. At one time, theft was excluded during the
removal process, but the courts have generally disallowed this exclusion. Breakage and exposure to weather is
typically covered during the removal process.
The doctrine of proximate cause provides the rationale during this
period of time.
Removal of goods is based upon Line 22 of the policy contract
that requires the insured to use all reasonable means to save and preserve the
property at and after a loss. Removal
of insured property is often the only way to preserve it. For example, if ones home were burning, it
would make sense to remove valuable jewelry and art. Of course, even removing furniture and clothing is preserving
insured property, but no insurance company would recommend endangering life in
order to preserve property. Since the
policy specifically allows the removal of property in order to preserve it, it
stands to reason that the company would also insure it during this period of
time.
There are restrictions involved.
The policies typically provide a window of time during and immediately
following a loss that coverage would be active. Companies realize that it would be impractical to expect an
insured to arrange for a change of location endorsement, so the insuring
agreement provides coverage as follows: pro rata for five days at each
proper place to which any of the property shall necessarily be removed for
preservation from the perils insured against in this policy, but not
elsewhere.
This includes several situations. First, pro rata means
that if property is removed to more than one location, coverage is prorated to
each of the locations in relation to what the value at the particular location
bears to the total remaining value of the property. This qualification is not so important now because how the
policies are written has changed.
Originally policies were non-continuous. Non-continuous policies
are those in which the amount of coverage is reduced by the amount of
loss. Todays policies are continuous.
That means any loss paid under the policy does not reduce the amount of
insurance remaining. Newer policy forms
omit any reference to pro rata distribution and simply state that property
removed is still subject to the same policy limits as those that applied at the
original location.
The time limitation of five days still applies because it is felt
that this provides enough time for the property owner to arrange coverage at a
new location. If a home fire is the
result of the property transfer, the newer forms include an endorsement that
allows thirty days to establish a new location. Under the Standard Fire Policy, once property is removed from the
original location and located elsewhere, the coverage reverts back to exactly
the same perils as those provided for in the original contract. That is, the all risk coverage applies
only during the removal process. Newer
policy versions are likely to state that the coverage is for direct loss from
any cause for up to thirty days.
Americans are a mobile group of people. We tend to move often. As
it relates to insurance, this mobility affects how policies are written. Rates are based, in many types of policies,
upon the location of the property. Due
to the American mobility, policy language has been adapted in recent years. Most policies have adopted rules covering
residential contents that provide automatic protection of household contents at
new locations if:
It is the insureds residence and not simply a place of
storage, and
It is in the same state as the previous location.
In those areas where policies have this new language, this provision
is made automatic by the liberalization clause, so no extra premium is
required. The Liberalization clause provides that any such
alterations that might broaden or extend the policy without causing additional
premium is automatically available for the benefit of the insured. If the items insured are not household items
or if the policy covering the items does not include the extension available
under the liberalization clause, then a change in location may require an
endorsement for insurance coverage to be effective. It is important to remember that coverage does not extend to
damage due to the actual physical moving of the insured items. There is no trip transit protection. There are policies that do specifically
cover the move itself.
Some Homeowner Policies include insuring agreements that read:
We cover personal property owned or used by an
insured while it is anywhere in the world.
At your request, we will cover personal property owned by:
1) Others while the property is on the part of the
residence premises occupied by an insured;
2) A guest or a residence employee, while the property
is in any residence occupied by an insured.
This insuring agreement contains a dollar limitation on coverage
for property usually located at an insureds residence other than the one
specified in the policy and for property used for business reasons.
Exceptions
No policy covers everything.
The Standard Fire Policy does not cover everything. It specifically lists several causes of loss
that would not be covered under the policy.
Those include:
1)
Loss by fire or other perils insured against in the policy
caused directly or indirectly by: enemy attack by armed forces, including actual
or an immediately impending enemy attack; invasion; insurrection; rebellion;
revolution; civil war; usurped power; order of any civil authority except acts
of destruction at the time of and for the purpose of preventing the spread of
fire, provided that such fire did not originate form any of the perils excluded
by the policy (lines 13-21). The types
of losses enumerated in the preceding sentence are not included for the
following reasons: they represent a catastrophe exposure which the insurer is unwilling
to assume; they are usually extraordinary losses occurring under conditions
that make the extinguishments of fire difficult; and in many cases, they may be
recovered from the state, or municipality.
The readable policy changes are editorial only for this and or number 2
that follows.[3]
2)
Loss caused by neglect of the insured to use all
reasonable means to save and preserve the property at and after a loss, or when
the property is endangered by fire in neighboring premises. It is not always easy to prove neglect on
the part of the insured. The purpose of
this exception is to reduce the payable loss due to the insureds neglect or
carelessness.
3)
Losses caused by theft.
This exclusion often applied to Removal of Goods which Line 24
expressly excluded. The added peril of
theft occurring during the confusion at and following a fire is very high. Unfortunately, there are people who look for
the opportunity to steal at this time.
Insurance companies are aware of this unusually high risk of theft and
wish to limit their liability. When
loss to fire is extensive it is hard to prove what was lost to fire and what
was lost to theft. However, in the case
of multiple-line policies that cover this peril, there is no theft exclusion.
4)
Loss as a result of explosion or riot, unless fire
ensures, and, in that event for loss by fire only (lines 36-37). In early legal cases the courts ruled that
insurance companies were liable for certain types of explosions that caused
fires and combustion losses. To avoid
these payments, underwriters inserted clauses either excluding explosion losses
entirely, or, as is currently done, excluding only the concussion loss. Proximate cause states that if an explosion
is merely an incident of a preceding fire, the entire loss is recoverable even
if the principal damage resulted from the explosion, and this is true despite
an exception in the policy against explosion.
However, the fire must be established as hostile. Otherwise, there may not be any
coverage. Fire must happen due to a
flame or glow that escaped its original friendly state into a hostile
state. In that case, only if fire
ensues is there coverage and then only for the fire loss. This is an important point and should not be
overlooked. Explosion losses present
difficult cases for adjustment because where fire immediately follows an
explosion it can be impossible to determine the amount of loss due to the
explosion and the amount of loss due to the fire. Since only the fire is covered this is an important point for the
insured.
Loss by riot is not covered by the policy except where fire results from
the riot. Like losses from explosion,
the insurance companys liability is limited to the damage actually caused by
the fire rather than by the riot. Both
explosion and riot may be covered if there is an endorsement on the policy
including them. Newer policies, again,
are now multiple-line so they include a sizable number of perils. These
policies include riot and explosion (except boiler) so no endorsement would be
necessary.
5)
Losses caused by the intentional acts of the insured are
not covered. If it can be proven that
the insured purposely caused a fire or other peril for the purpose of
collecting on their insurance policy, such losses would not be covered. However, mere negligence or fault by the
insured or his or her employees or agents or even the willful act of his or her
agents or employees (without the insureds knowledge) would be covered by their
policy.
Arson
Arson is the malicious burning of a building and, understandably,
it is illegal. It is estimated that
approximately 11.4 percent of the residential fires and 26.7 percent of the
nonresidential fires in the United States are suspected arson (some estimate a more
conservative number of 25 percent). The
dollar loss exceeds $1 billion annually.
By 1991 the number of arson fires had reached 98,000, with resulting
damage of more than $1.5 billion. [4] There were also deaths resulting from
arson. How does one place a value on
human lives?
There are different reasons for arson. Some are due to property owners attempting to collect on their
insurance policies. They may set the
fires themselves or (and this is more likely) hire someone to do it for
them. This type of arson is the most
common. Financial arson is done for
several reasons: to obtain cash from their policies, to terminate a lease, to
allow relocation of a business, or a desire to terminate an unprofitable contract.
Third parties commit arson on the property of others for several
reasons including: (1) a desire to hide another crime against the property or a
person, (2) jealousy, (3) revenge, (4) during the commission of a riot or
during vandalism, (5) terrorism or protest, (6) thrills, (7) pyromania, or (8)
sexual excitement.
Fire insurance policies will pay losses caused by third parties
with the right to seek recovery from those responsible. Fire insurance policies will not pay for
losses that can be proven against the insured.
Coverage for Fire
Department Charges
Sometimes fire departments charge a fee for answering alarms
outside of specified areas. If this is
the case, property owners will be charged for their services, which can run to
several hundred dollars. Unless there
is an endorsement on the policy, these charges for the fire department will not
be covered. Such charges are considered
to be consequential rather than direct physical damage to the property.
Agents who work in rural or extended areas must be aware of the existence
of such fire department charges.
Otherwise, when fire department charges are denied there could be some
anger towards their agent. Agents can
offer the addition of the fire department
charges endorsement to their policy. Usually this additional coverage has no deductible. Coverage will be limited to those situations
where the fire department was required to save or protect covered property
from a peril insured against. It will
not pay if the fire department is called for any other reason. Even though the Homeowners Policy labels
this as an additional coverage such payments do not increase the face or
total amount of coverage.
Debris removal
When there has been a fire, there is likely to be debris that
must be removed. Obviously, restoration
cannot take place on top of the burnt home.
In addition, county requirements may make it mandatory to remove debris
in a timely manner.
Debris removal is not the same thing as Removal of Goods. Removal of Goods refers to moving insured items
to protect them from pending perils.
Debris removal is the moving of damaged or destroyed material following
a fire or other peril.
Some insurers have contended that the policy covers removal of
debris only to the extent that is necessary to repair or replace the damaged
property. If the policy reads this way,
it may mean that it will not pay for the full cost of debris removal. To clarify the issue, a debris removal clause has been added to some
forms or is available as an endorsement.
Even though this clause may add little or no additional premium to the
policy, it does do several things: (1) with the clause attached, there is no
question as to coverage for the cost of removal. (2) It makes it clear that coverage is limited to the cost of removing
debris of covered property. (3) The
cost of debris removal is not considered when determining the value of the
property. This means that the cost of
clearing the debris is added to and becomes part of the amount of the direct
physical damage, but it is not added to the value of the property itself. This is logical when one realizes that there
would be no way to predetermine the cost of debris removal. Therefore, it would be difficult, if not
impossible, to determine how much insurance would be necessary to purchase for
this purpose.
Debris removal clauses should not be confused with demolition
insurance. This type of coverage is
used after a fire when a building must be destroyed because of building code
requirements. This would be a consequential
loss.
Exceptions to Payment
Even claims that are covered under the policy may be denied for
specific reasons. Fraud, concealment,
or misrepresentation would actually void the policy.
A policy may also be suspended.
Voiding a policy and suspending it are two different things. When a policy is voided it is rescinded or
taken back. No claims would be
paid. Some insurers may choose to
merely not automatically reinstate the policy (rather than rescind it). Others may be rescinded all the way back to
issue, with premiums refunded. How a
policy is voided will depend upon the policy type, the age of the policy, and
the situation that caused the policy to be voided.
A policy suspension will have the same effect of claim denial,
but once the conditions causing the suspension are removed, the contract will
automatically revert back to full force.
Losses following the reinstatement would be paid.
Denial of payment, whether through voiding the policy or
suspending it, may be seen in Line 31 of the Standard Fire Policy, which
states: While the hazard is increased by any means within the control or
knowledge of the insured. The premium
rate acknowledges a specific amount of risk involved (thats why there is
insurance), but the risk level may not be increased purposely by the
insured. Exactly what establishes
grounds for suspension has been determined over time by business practices and
court decisions. It is understood that
suspension can be exercised if the increase in hazard is substantial and exists
over a sustained period of time.
Specifics of suspension can and do vary from jurisdiction to
jurisdiction. Of course, illegal activity, such as arson, automatically voids
the policy.
It is difficult to specifically identify reasons for suspension. As we said, there are variations in how it
is applied, based on jurisdictions and law.
Additionally, simple knowledge of an increased hazard may not be
sufficient reason for the insurer to claim suspension of the policy. In an Illinois case of Triple X Chemical
Laboratories v. Great American Insurance Company, the insured knew of a
hazardous situation, but the court said this knowledge had not increased the
hazardous situation. Mere knowledge had
not changed the circumstance. Therefore,
the insurance company was compelled to cover the loss.
Policies give the insured permission to use the premises in the
manner considered normal as it relates to the occupation or occupancy. The work and
materials clause specifically allows the use of the premises insured
in the manner usual to the type of occupancy.
Therefore, in the case of the chemical company, their use of the
premises, even if it presented a hazard, was covered as long as use was typical
of the business type insured. The work
and materials clause may or may not increase coverage but it certainly
clarifies the intent. Under this clause
if the insured adopts a new manufacturing process, but that process is typical
or usual to their type of occupancy, the policy unquestionably remains in force.
Policies that cover dwellings have a similar clause called the permission-granted clause. This allows for such use of premises as
is usual or incidental to the described occupancy. As long as the dweller uses the home for purposes
that a home is normally used for, the insurance will cover insured losses. If a business is located in the home, that
may or may not be covered, depending upon endorsements. Since a business is not the normal use of a
home, an endorsement would be needed.
The same section of the Standard Fire Policy states the owner is
permitted to make alterations, additions and repairs and to complete
structures in the course of construction.
Line 33 of the Standard Fire Policy states: . . . while a described
building, whether intended for occupancy by owner or tenant is vacant or
unoccupied beyond a period of sixty consecutive days. A distinction must be made between
unoccupancy and vacancy. Unoccupancy means the absence of people
whereas vacancy means the absence of
both people and contents. Homes may be
unoccupied while the owners are on vacation.
A home would be vacant if no one lived in the home at all.
The sixty-day restriction is an important one for insurance
companies. Structures that are vacant
(empty of both people and contents) for an extended time period have an
increased moral hazard. The hazard
represented may have some variances depending upon location, but all of them
have the potential of trespassers vandalizing the structure or moving into
them. With either vandalism or
unauthorized occupancy, the danger of fire increases.
Policies usually have a clause that suspends coverage when a
structure is empty for more than sixty days.
The building and contents form, which is typical for commercial
buildings, does not include this. For
buildings that routinely are empty on a seasonal basis (a fruit stand, for
example) the policy typically includes permission for unoccupancy for part of
the year. When it is not routinely
typical for unoccupancy on a seasonal basis, it may be necessary to obtain
special permission to prevent policy suspension.
If a business experiences an unanticipated vacancy or unoccupancy
due to a business or operational termination there may be increased hazard. Even if the business is not sure this is the
case, it would still be advisable to obtain permission from the insurer to
continue the policy. By advising the
insurer of the situation, the company can be sure their coverage continues.
The Standard Fire Policy provides that suspension of coverage may
happen if property is removed from the stated location, even if the removal is
temporary. Under Removal of Goods,
there is a thirty-day period that provides coverage if the removal was to
prevent increased hazard (during or following a fire, for example). During this time period coverage would
continue.
If the property was removed voluntarily, with no relation to
increased hazards, coverage may not exist, unless the policy was modified by
endorsement or an attached form.
Reinstatement of coverage is automatic when the property is returned to
the named location covered by the insurance contract.
The Standard Fire Policy in lines 7 to 9 excludes several items: This
policy shall not cover accounts, bills, currency, deeds, evidences of debt,
money, or securities.
Many businesses purchase specific coverage for some items. For example, a business may buy coverage to
insure their Accounts Receivable.
Without specific coverage, it would be very difficult to determine a
value on some of these items.
Peril expansion
It is possible to include perils beyond what is normally covered
by the Standard Fire Policy. Permission
to do so is given in line 38, which states: Any other peril to be insured against
or subject of insurance to be covered in this policy shall be by endorsement in
writing hereon and added hereto.
It is because of this statement that the Standard Fire Policy
once formed the basis for insuring the majority of real and personal property. It allows a wide range of risks to be
covered by one basic policy with attached endorsements or forms.
Lines 42 to 48 carry this concept further. It states: The extent of the application
of the insurance under this policy and of the contribution to be made by this
company in case of loss, and any other provision or agreement not inconsistent
with the provisions of this policy, may be provided for in writing added
thereto, but no provision may be waived except such as by the terms of this policy
is subject to change.
This statement allows the addition of riders, clauses, permits,
endorsements, and whatever else the insurer is willing to include.
Extended Coverage
Endorsement
Although we think of the Standard Fire Contract in terms of
fires, it can be used for perils other than fire, as a separate
endorsement. As a result, the Standard
Fire Policy may be converted into a separate earthquake policy or
whatever. This is accomplished through
the use of a conversion endorsement.
The Extended Coverage Endorsement
is fairly uniform nationwide, although there will be variations with regard to
deductibles and coverage. When this
form is attached to the fire insurance policy, it includes coverage for
windstorm, hail, explosion, riot, riot attending a strike, civil commotion,
aircraft, vehicles, and smoke. The
insured must accept all or none, since no deletions are permitted. The rate for this extended coverage is
usually fairly low since all perils covered by the extension are insured for
like amounts. This spreads the risk
over many perils of varying incidence and severity. The amount of coverage for these added perils is the same as the
amount of fire insurance. If all these
perils were insured individually, the cost would be much higher. Of course, the perils could probably be
insured separately and some consumers choose to do so. When insured separately, only some of the
perils are selected rather than all of them.
Some consumers realize that they have virtually no risk for some perils
but want coverage for others.
Due to a court case of Oller v. New York Fire Insurance
Company, the addition of the Extended Endorsement has no effect on the
amount of insurance carried. It
broadens the fire policy with regard to perils only. This is accomplished by a clause in the endorsement that allows
the substitution of each additional peril in place of the word fire found in
the insuring agreement of the underlying Standard Fire Policy. The only exception to this would be the
limitations of any deductible applying to windstorm and hail losses.[5] The additional perils do not increase the
insurers liability. In one loss, the
face amount acts as one overall limit, no matter how many perils were insured
or apply to the loss.
How the deductible applies
A straight deductible is usually required for extended coverage
endorsements. This deductible would
apply to the fire as well as the perils of the extended coverage. The deductible would not apply, however, to
additional living expense or rental value coverage. The mandatory deductible typically ranges from $50 to $100
although the insured may select a larger amount. There is no provision for removing the deductible entirely. The typical deductible clause will read: This
deductible shall apply separately to each building or structure including its
contents; separately to contents in each building or structure if such building
or structure is not covered hereunder; and separately to all personal property
in the open.
Windstorm and Hail
Like fire, wind is not defined in the insurance contract. At one time, policies attempted to define
wind velocity, but since that was often difficult to determine, that practice
has been abandoned. Todays policies
use effect rather than condition. If
the wind is strong enough to cause damage, it is considered to be a windstorm,
which means the loss is covered. These
policy changes often happen because of court decisions. In this case it primarily was the result of Fidelity
Phoenix Fire Insurance Company of N.Y. v. the Board of Education of the Town of
Rosedale.
Hail is a phenomenon associated with thunderstorms. Most hailstorms are limited in area and
usually have a short duration. These
storms will cover ten to twenty square miles and last from thirty to sixty
minutes. Some areas are prone to
hailstorms due to the air currents in the region. Balls of ice have been known to be as large as baseballs. Hailstones of the baseball size can be
expected in sections of Kansas, Nebraska, South Dakota, Colorado, and
Wyoming. Golfball size hailstones are
capable of breaking windows, awnings, signs, and antennas. They will dent aluminum and wood siding as
well as cars. In 1995, Texas
experienced hailstones the size of softballs that caused insured damage of
over a billion dollars. Total damage
(insured plus uninsured) was higher. In
addition, the storm caused several deaths and multiple physical injuries to people
and animals. Unlike lightning, which we
consider not to strike twice in the same place, hail does often strike twice in
the same location.
The other provisions of the Extended Coverage Endorsement
applicable to windstorm and hail specifically exclude loss caused by
frost or cold weather and by ice (other than hailstorm), snowstorm, waves,
tidal wave, and high water or overflow whether it is driven by wind or
not. Most policies will include a
clause clarifying the intent of the coverage in situations where there may be a
question regarding the actual cause of the loss. For example, interior damage would only be covered if an insured
period (hailstorm, for example) actually made a hole in the building, roof, or
wall allowing the hailstones to damage the exposed interior. If the damage happened because the insured
left a window open, the loss would not be covered under the terms of the
policy. Policies commonly exclude
coverage for specified items, such as crops or plants, silos, or buildings
under construction. Antennas for
television and radio are also commonly excluded from coverage.
Most coverage of this type is part the Extended Coverage
Endorsement, but separate coverage can often be purchased as an attachment to
the fire policy. Whether purchased through
a separate policy, optional policy, special form, or endorsement, the usual
conditions found in the Standard Fire Contract applies to windstorm
insurance. In most states, a $50 or
$100 deductible will apply.
Beach plans
Property located on a beach, especially in some high risk areas, have
often found insurance difficult to come by.
Beach property that routinely experiences loss due to windstorm exposure
is often a risk that insurers have not wanted to cover. In the early 1970s insurance pools were
formed. Insurers operating in the high
risk areas were required to share proportionally in the underwriting of
property in these so-called beach areas.
The intent was to see that the perils of fire coverage and extended
coverage were available to those who would otherwise have difficulty obtaining
coverage on the open market.
Participating states include Alabama, Georgia, Florida,
Louisiana, Mississippi, North Carolina, South Carolina, and Texas. All real and personal property is eligible
when it falls within specified areas.
There are some exceptions such as mobile homes and motor vehicles in
most of the territories. There are
maximum coverage amounts available, usually $100,000 on personal dwellings and
$500,000 on commercial property, although some states do allow this to be increased. Deductibles do apply, usually in amounts of
$250 or $500.
Explosion
Again, like fire, explosion is not defined in the fire policy or
its endorsements. In the absence of a
specific definition, the courts apply a broad definition of any event of sudden
and violent bursting. As is so often
the case, these definitions applied by the courts came as a result of a legal
battle between an insured and the insurer.
Loss by explosion or riot is specifically excluded in line 36 by
the Standard Fire Policy. It is
possible to attach a form to the fire policy that will cover dwellings and
their contents using an Inherent Explosion
Clause. This clause offers
protection on the insured dwelling from loss by explosion from hazards inherent
within the building. The insured would
then not be liable for such things as steam boilers, pipes or other items that
are owned or operated by the insured.
The Inherent Explosion Clause is often used by business properties.
Although there are some variations between the two, the Extended
Coverage Endorsement closely parallels the Inherent Explosion Clause. In the Extended Coverage Endorsement,
coverage is not limited to losses resulting from explosions occurring in
the insured building as it is in the Inherent Explosion Clause. Secondly, the Extended Coverage Endorsement
is more specific in detailing those occurrences that are not explosions within
the intent of the clause. To make these
differences easier to understand, the 4th Edition of the book Property
and Liability Insurance uses this example: An insured home uses city
gas. There is an explosion in the gas
main outside of the insured dwelling.
The Inherent explosion coverage would not cover the loss
since it occurred outside of the dwelling, whereas the Extended Coverage
Endorsement would. If the explosion
occurred inside the homes wall, either clause would cover it.
Both types do not consider the following to be explosions, so
coverage would not fall under either of these clauses: electrical arching, bursting
of water pipes, rupture or bursting of pressure relief devices. The Extended Coverage Endorsement also
excludes shock waves caused by aircraft, generally known as sonic boom. Sonic booms are covered in all risks forms
and in the broad named perils in Dwelling and Homeowners forms. It may also be added by endorsement to the
fire policy. There is typically a $500
deductible applying separately to each building and separately to personal
property.
Riot and Civil
Commotion
Prior to the 1960s coverage for riot was part of the general
policy. It represented very little cost
to the insured. The risk was considered
to be very small. As the nation saw
riot and civil commotion surge in the 60s and early 70s into a very real
threat to property, 27 states allowed a special civil disorder rate to be
charged. The inclusion of riot perils
as part of the Extended Coverage Endorsement supersedes the specific exclusion
of this in the Standard Fire Contract.
Today, some professionals feel the rate increases in the 1960s
and 1970s may have been an overreaction to a threat that never really
developed into anything long lasting.
Surprisingly, no detailed records were kept. Coverage for riot and civil commotion cover all physical damage,
including looting and pillage that result.
Also covered are sit-down strikes where damage may be caused by
employees. The policy would not
cover changes in temperature or humidity or interruption in business income.
Not all jurisdictions define riot and civil commotion the
same. Usually there must be the threat
of violence, actual violence, and involvement by more than one person. In most states, at least three people must
be involved in the riot or civil commotion.
Both riot and civil commotion is the open defiance of
authority through the threat or actual use of violence. Civil
commotion is generally defined to be a riot for an extended period
of time. Because of this definition, it
can be redundant in the policy. Riot or
civil commotion is not the same as an armed revolt. An armed revolt is considered to be an elevated situation.
It is not the intent of the policy to cover vandalism and
malicious mischief under the riot and civil commotion clauses. Because the line between them is not always
clear, some states define riot as at least three persons engaged in a lawless
act by violence or breach of public peace.
However, insureds must be aware that even if three people are involved,
if there are no witnesses and no public disturbance was noticed, the courts
will consider the damage to be vandalism rather than riot or civil
commotion. Therefore these damages
would not be covered under the Extended Coverage Endorsement.
Aircraft &
Vehicles
The Extended Coverage
Endorsement does cover direct loss due to aircrafts or from objects falling
from aircrafts. The term vehicle refers to vehicles running on land or
on tracks. In order for the damage to
be covered, there must be direct physical contact, which is not required in
most Homeowners policies. Damage to
fences, driveways, sidewalks, or lawns are specifically excluded, no matter who
is driving the vehicle. The insured
would be covered if the damage done were by an aircraft operated by the insured
or his or her tenant.
Smoke
Under the Extended Coverage Endorsement, smoke is covered if it
is caused by the sudden, unusual, and faulty operation of an onsite heating or
cooking unit, as long as the unit is connected to a chimney by a smoke pipe or
vent. Smoke damage of this sort would
come from a friendly fire rather than a hostile fire. Therefore, a smoke clause would be necessary
to have coverage for the loss.
The wording is very specific in the smoke clause. By requiring a smoke pipe or vent, damage
from such things as kerosene heaters, which are known for causing damage, are
excluded from coverage. The sudden,
unusual and faulty requirement excludes losses that are more of an
occurrence than an accident. The normal
wear and tear that comes from smoke from heating or cooking would not be
covered. This would include such things
as discoloration of walls or drapes, damage from sparks, and grease splatters. Smoke damage from fire places are
specifically excluded since this is a common occurrence and often related to
how the insured used it.
Although the smoke clause does have some value, it is probably
one of the most restrictive in language.
It is very important that agents be specific with their clients about
this coverage.
The Apportionment
Clause
Apportion means to divide into sections. The Extended Coverage Endorsement usually
includes the following in boldface type:
When
this form is attached to one fire policy, the insured should secure like
coverage on all fire policies converting the same property.
The intent of the Apportionment Clause is to limit the insurers
liability by the application of two formulas:
Formula 1 states
that the company is not liable for a greater proportion of loss from one of the
extended coverage perils than the amount of insurance this particular policy
bears to all fire insurance covering the same property.
Formula 2 states that the insurers pro rate of
liability will be determined in relation to all other insurance covering the same
peril.
Once these two formulas are both applied, the insurer will then
pay the lesser of the two. The
insured could be penalized if he or she had other fire insurance also in force without
extended coverage. This could
be critical if both policies were necessary to be adequately insured for the
loss.
The following example shows how the formulas work:
|
|
Example 1 |
|
|
|
|
Policy A Fire and Extended
Coverage: |
$10,000 |
|
|
|
Policy B Fire (no Extended
Coverage): |
5,000 |
|
|
|
Fire Loss totaling $3,000 |
|
|
|
|
Policy A Pays: |
$2,000 |
|
|
|
Policy B Pays: |
1,000 |
|
|
|
Example 2 |
|
|
|
|
Policy A pays: |
$2,000 |
|
|
|
Policy B pays: |
Zero |
|
Example 1 shows how apportionment of the loss would cover the total
loss of $3,000. Example 2 shows a
shortage of payment because of the apportionment with all other fire
insurance even though the available amount of coverage in Policy A was greater
than the actual loss.
|
|
Example 3 |
|
|
|
|
Policy A Fire and Extended
Coverage: |
$10,000 |
|
|
|
Policy B Fire (no Extended
Coverage): |
5,000 |
|
|
|
Policy C Windstorm Coverage
(only): |
2,500 |
|
|
|
First Apportionment |
|
|
|
|
Policy A pays: |
$2,000 |
|
|
|
Policy B Pays: |
Zero |
|
|
|
Policy C (1/5 of loss) pays: |
600 |
|
|
|
Second Apportionment |
|
|
|
|
Policy A pays: |
$2,400 |
|
|
|
Policy B pays: |
Zero |
|
|
|
Policy C pays: |
600 |
|
In Example 3 the insurer issuing Policy A is only required to pay
the lesser amount ($2,000). In this
example, the insured would have been better off to only carry one policy for
$10,000 of fire with Extended Coverage with company A. Had there been no other policies, he would
have had the loss covered in full (less any deductibles under the policy). Another option to obtain full coverage would
have been to purchase Extended Coverage on both policies A and B.
Joint Loss
There is a third provision in the apportionment clause regarding
situations where the extended coverage participates with specific insurance
other than fire or windstorm. First, it
is determined the limit of liability for each policy without regard to any
other existing insurance. Any
limitations on payment are figured in.
Once the maximum limits are determined for each existing policy,
apportionment among them on the basis of each policys limit of liability in
relation to the combined limits for all policies is determined.
Although policies do reflect this provision, statements are
general and reflect the typical wording of the endorsement. Apportionment is not uniform among the
jurisdictions. In addition, rules
governing apportionment do change from time to time.
The Optional Perils
Endorsement
The Optional Perils endorsement may be added to the Standard Fire
Policy, with or without fire insurance, but with the applicable property
form. Since the Extended Coverage
Endorsement covers specific, pre-packaged perils, there may be specific perils
that the consumer does not want to purchase.
The Optional Perils Endorsement offers an alternative.
Under the Optional Perils Endorsement, the insured has four
options:
Option A:
Explosion only
Option B:
Explosion along with Riot and Civil Commotion
Option C:
Explosion, Riot and Civil Commotion, and Vandalism and Malicious Mischief
Option D:
Aircraft and Vehicle Damage to Property.
Vandalism &
Malicious Mischief Endorsement
The Vandalism and Malicious Mischief Endorsement may be added to
the Standard Fire Policy. However, to do so the Extended Coverage Endorsement
must be attached to the policy. The
intent is to place a limit of sorts on the coverage of any peril that could
cause adverse selection. Forms such as
the all risk or the broadened Dwelling forms of the Homeowners plans
automatically include vandalism and malicious mischief coverage.
Vandalism and malicious mischief is not the same thing. Vandalism is the intentional destruction of
anothers property. However, in Unhelsbee
v. Homestead Fire Insurance Co., the courts held that in insurance
contracts the term vandalism should
be limited to things of beauty or art.
Most contracts call vandalism the willful destruction of a thing of
beauty. The term willful has
also raised questions since vandalism is often the act of children who may or
may not foresee the results of their acts.
Although court cases have been divided, generally they hold that the
insurance must cover the damage if those committing the act should have been
aware of the consequences, even though they might not have had the specific
intent of causing it. Despite this,
some situations still may not come under the intent of vandalism. Children that are too young to understand or
animals who would have no ability to understand the consequences of their acts
would not be covered under vandalism or malicious mischief.
Due to the questions surrounding the definition of vandalism, the
term malicious mischief was added. Malicious means evil intent. The two terms, vandalism and malicious
mischief are combined in the endorsement. Not all policies read the same, so it
is necessary to carefully review the terms.
This endorsement does usually have some exclusions. Among these may be:
q Glass
that is part of a building or outside structure or sign. However, glass building blocks would be
covered.
q Loss by
pilferage, theft, burglary or larceny.
When vandalism or malicious mischief is part of theft, coverage under
the vandalism and malicious mischief endorsement can be questionable. Often it depends upon whether or not items
were actually stolen.
q Losses
from steam boiler explosion.
q Losses
if the premises have been vacant or unoccupied beyond 30 days.
q Losses
from change of temperature or from loss of market.
Some of these exclusions may be covered under other policies.
Earthquake &
Volcanic Eruption Insurance
Earthquake insurance is primarily purchased on the West coast and
in Alaska where there have been several occurrences. In the West it is often an endorsement on a fire contract. Elsewhere, it tends to be written as a
separate earthquake and volcanic eruption policy. There have actually been earthquakes in many parts of the
country, including New England, New York, and parts of the Midwest.
The Standard Fire Policy, and other endorsements attached to it,
usually state that there is no coverage for any loss caused by, resulting from,
contributed to, or aggravated by earthquake, volcanic eruption, landslide, or
any other earth movement. Since loss by
or because of an earthquake is a very real and present danger in many parts of
the United States, there has been rising consumer interest. The lowest areas of risk are in those states
adjoining the Gulf of Mexico and the highest risk areas are on the Pacific
Coast and in Alaska.[6] There are actually about 400 damage-causing
earthquakes in the United States each year, although some of the damage has
been minimal. Even so the loss
frequency is not regarded as high enough to be given any type of priority. That doesnt mean there is not severe damage
caused by them. The 1906 San Francisco
earthquake measured 8.3 and the 1964 Alaskan earthquake registered 8.4 on the
Richter scale. Even lesser earthquakes
as the one centered in Seattle, while not necessarily major, caused thousands
of dollars in losses as far away as Olympia.
Earthquake insurance may be provided in several ways:
By
extending the fire insurance policy to cover earthquake losses,
By
converting the fire policy into an earthquake policy, or
By using
a separate policy designed for that purpose.
It is called an Earthquake and Volcanic Eruption policy.
The first two are used in the Pacific Coast territory, which
includes Arizona, California, Idaho, Montana, Nevada, Oregon, Utah, and
Washington. The first and third method
are used in the rest of the United States.
Coverage is for direct damage caused by earthquake or volcanic
eruption. Each loss by earthquake is a
separate claim unless more than one shock occurs within a 72-hour period. In that case, all losses would be regarded
as a single earthquake and therefore considered a single loss.
Policies do not cover any loss or damage caused directly or
indirectly by fire, explosion, or flood of any nature, or by tidal wave,
regardless of whether caused by or attributable to the earthquake. Even though the fire policy excludes damage
by earthquake, it does not exclude resulting fire following it. The flood loss is similar in that it
attempts to avoid any duplication of coverage.
Coverage written in the Pacific Coast territory has a minimum
deductible, which is generally 5 percent of the property value, along with a
minimum 70 percent coinsurance clause.
Deductibles higher than the minimum can be selected for a reduced
premium rate. Since most losses from
earthquakes are partial (versus total), it makes sense to select a higher
deductible. Lower coinsurance
percentages (at least 50 percent) may be required elsewhere. Since all policies contribute to any loss,
all policies should be concurrently written with earthquake coverage.
Whatever method is used (which depends on whether it is written
for the Pacific Coast territory or elsewhere) the earthquake contract is
similar to the Standard Fire Policy except for the substitution of the word earthquake
for the word fire. Earthquake, as a
peril, is excluded from most of the new package policies. This has to do with the changing risk from
area to area of the country. In those
areas where the peril is greater, the additional premium would increase the
cost for the package to a point where it would not be equitable. Consumers may not accept the higher
rate. Perhaps more importantly, the
addition of this peril requires special terms and conditions. The use of a deductible equal to 2 to 5 percent
of the value of the insured property would be one example of this. Therefore, it is likely that the earthquake
peril will continue to be an exclusion on basic coverage, but available by
endorsement for those who wish to buy it.
Automatic Sprinkler
Coverage
There was a time when few buildings had automatic sprinkler
systems. Todays buildings must be
built to current codes and even older buildings may have situations that require
they be brought up to current code.
With the current prominence of the sprinkler systems, insurance has had
to address damage that results from them.
Coverage for automatic sprinkler systems may be purchased by
adding a Sprinkler Leakage Endorsement
to an existing Standard Fire Policy. It
may also be written as an endorsement to a separate Standard Fire contract,
which then provides coverage as a result of direct damage by sprinkler
leakage.
The definition section of the endorsement will explain how
coverage will apply to those items insured, which typically includes such
things as buildings, contents of the building, stock only, furniture and
fixtures, machinery, property of employees, and improvements and betterments if
they are the result of leakage or discharge of water or other substance from
within the automatic sprinkler system.
All of the items listed will not necessarily be covered. One must look in the policy to know.
A sprinkler system is not just the water that falls from the
ceiling. It also includes storage
tanks, the pipes, fittings, valves, and sprinkler heads. Sprinkler Leakage
Endorsements are named locations coverage although it is possible to sustain
damage from the floor above or an adjoining premise. Therefore, under some circumstances, an insured that does not
have a sprinkler system may still need sprinkler leakage insurance.
This type of endorsement covers only water from a sprinkler
system. It would not cover water damage
that originated from some other source, such as a sink overflow, for example. It also would not cover damage from the
sprinkler system if it resulted from an independent cause, such as fire,
lightning, windstorm, earthquake, explosion, rupture of a steam boiler, riot,
order of civil authority, war, or nuclear energy (its hard to imagine worrying
about a wet carpet from the sprinkler system following a nuclear crisis). It is possible to purchase additional
protection for business interruption, extra expense, and other consequential
losses resulting from a sprinkler leakage.
The cost of this type of endorsement will depend upon the
potential loss. This will be determined
by the damageability or susceptibility of the loss. Damageability is a
rough measure of the probable severity of a loss once it occurs. Susceptibility
refers to the frequency with which the peril could originate. Several factors will determine these two
elements: the building area being occupied by the applicant, the floor
construction, possibilities of water control, and watchman and alarm systems
that are in place. A coinsurance clause
is not required, but it is possible to use coinsurance as a way to reduce
premium. When coinsurance clauses are
used, they typically range from 10 percent to 80 percent. To better understand these percentage rates,
lets look at the following example:
A risk valued at $100,000, on which the rate
without coinsurance is $1, will have the rate reduced to 40 cents
per $100 of insurance if $90,000 insurance is required (10 percent coinsurance
clause), and 10 cents per $100 of insurance if $80,000 is required (20 percent
coinsurance clause). These rate quotes are examples and should not be assumed
to necessarily apply to your applications.
Water Damage
The Basic Water Damage policy covers direct loss caused by:
The accidental
discharge, leakage, or overflow of water or steam from plumbing and heating
systems, tanks, industrial and domestic appliances, refrigerating and air
conditioning systems; and
Rain or
snow admitted directly into the building through defective roofs, windows, or
open windows.
The Basic Water Damage policy may be purchased as a separate
policy, but it has a limited market because the coverage is a part of the
Dwelling, Homeowners, and Multi-Peril programs. The policy excludes water damage as a result of seepage through
building walls, flood, backing up of sewers or drains, tides or surface waters,
underground supply mains or fire hydrants, and any damage done by a sprinkler
system. Also excluded is water damage
from aircraft or falling objects.
Like other types of perils, the basic coverage can be expanded by
use of endorsements, such as those covering:
Loss
caused by street water supply or fire hydrants,
Damage
caused by accidental discharge of refrigerants, and
Loss
caused by aircraft or objects falling from aircrafts.
Rates for policies covering water damage vary with damageability
of contents. Discounts may be applied
to individual risks, use of coinsurance, superior floor construction, single
building occupancy, watchman services, and for the use of a deductible clause.
Flood Insurance
Flood is one of the oldest perils faced by man. Only recently has it become an insurable
peril for buildings and contents in fixed locations. The Water Exclusion Clause
found in the coverage extensions to the Standard Fire Policy uniformly excludes
the peril of flood.[7] There are at least 3 reasons for this
exclusion:
1. Private
insurers were not able to achieve an adequate spread of risk to safeguard
company assets against catastrophic losses.
2. Because
only those who fear the risk would purchase insurance, without subsidy, the
rates become so high that even those who desire such coverage cannot afford to
buy it.
3. Finally,
the lack of statistics regarding frequency and severity of loss makes it difficult
to price the coverage. Even average
estimates of total annual damage do not help because losses can vary from
practically zero in some years to several billion dollars in others.
Another concern is the potential of increased building in flood zones. If low cost insurance were available to
cover losses from floods, it seems likely that more people would select
locations that routinely experience flooding.
There was little offered in the way of insurance for flood by
private carriers until 1956 when Congress passed the Federal Flood Insurance
Act. The plan did not have the total
support of the insurance industry and Congress failed to appropriate the funds
necessary to make it operational. In
1968 the National Flood Insurance Act,
as part of the Housing and Urban Development Act, became law. It was amended by the 1969 Housing and Urban
Development Act and then amended again by the 1973 Flood Disaster Protection
Act. The purpose stated was to provide
a limited amount of insurance that would be available at an affordable price,
but only if the community involved exhibits a willingness to set up and enforce
standards for future control of those areas that are subject to floods.
This was not done to provide coverage that would encourage increased
building in flood zones. Rather the
intent was to encourage development away from flood areas and
also to create a positive program of flood control. Congress expects communities, through local restrictive measures,
to hinder growth in areas that are known to flood. In addition, building codes were expected to encourage
construction that would be less susceptible to flood damage and make similar
improvements on existing buildings.
Once a community had demonstrated that they had done these things, HUD
(U.S. Department of Housing and Urban Development) ordered area studies and the
setting of appropriate insurance rates.
The 1968 Act permitted the federal government to be the sole
insurer and servicing organization. HUD
operated in a partnership for the first ten years with the private insurance
companies through the National Flood Insurers Association. This association performed the sales, policy
writing, and claims functions. HUD
identified the areas of the country that were eligible for coverage and set the
rates that would be charged. HUD also
determined the maximum available policy amounts and the terms and conditions of
benefit payment. Every licensed agent
and broker was authorized to sell flood insurance through a single private
insurer, which acted as a servicing company.
The National Flood Insurers Association selected the company that would
issue the protection.
They wanted those in flood zones to purchase the insurance. To encourage sales, the 1968 Act provided
that any property owner who was eligible for a year and failed to purchase the
coverage would have any flood disaster relief benefits reduced by the amount of
insurance he might have purchased.
Detailed regulations were issued by the Federal Reserve System, the
Federal deposit Insurance Corporation, the Federal Home Loan Bank Board, and
the National Credit Union Administration.
These regulations provided that if the property was in a special flood
hazard area and had flood insurance available, the lender had to require flood
insurance equal to the amount of the loan or at least to the maximum amount of
insurance that was available.
In 1977 Congress eliminated the partnership with private
companies as well as many of the restrictions.
Today flood insurance may be written on any single-family dwelling,
including mobile homes, as long as they are on a foundation, any residence
structure such as apartment buildings, or on a small business or nonresidential
structure. Basically, flood insurance
can be written on any building and its contents located in any place identified
by the Federal Insurance Administration (FIA) of HUD.