Insuring Property and Liability Risks
Chapter 6
What Are We Insuring Against?
Perils
Everyone faces perils. Webster’s 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. Citizens buy policies that protect them only from specific dangers. No policy can protect an individual from the emotional stress of personal loss, but insurance can protect against financial loss. So, insurance policies only attempt to protect individuals financially from losses. While monetary payment will help with the financial stress of loss, benefits will not protect individuals from the emotional stress when they lose someone they love (life insurance), or from the loss of personal items burned in a fire (property insurance). Insurance producers often provide what is called “peace of mind.” In reality, producers 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? (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. Insurance is probably one of the few contracts entered into
without examining the contents. People tend to read the warranties on their
toasters better than they read their 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. Insurance producers have the responsibility of reviewing 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
Fire, as a peril, is not defined by the Standard Fire Policy. 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 may not be covered by his
policy (depending on contract language) because the camera was destroyed by a friendly
fire. If the camera were lost to a hostile fire, it probably would be
covered. John’s 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 Ralph’s camera into the friendly fire, it is likely that his insurance would cover Ralph’s 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 overheating 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 in most cases, while hostile fires are typically 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 damage from overheating will be covered may vary according to specific situations, including contract language. 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 usually lumps lightning in with fire claims in general). The latest actual study of lightning occurred about ten years ago, although there are statistics that are more current than the study.
Around the world, there are around 8 million lightning strikes daily. Annually an average of 22 million recorded cloud-to-ground lightning flashes hit the United States and surrounding coastal waters. An estimated 62,189 lightning insurance claims are filed each year in the United States.
In 2024 there were 12 reported direct lightning fatalities compared with 21 in 2018, according to the National Weather Service[2]. Between 2013 and 2024 on average 21 people died each year in the United States due to lightning strikes. Florida and Texas report the highest numbers of fatalities and injuries due to lightning strikes.
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 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 one’s 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 to preserve property. Since the policy specifically allows the removal of property 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. Today’s policies are typically 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. They 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 American’s 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:
1) It is the insured’s residence and not simply a place of storage, and
2) 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 which 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 “insured’s” 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. As an example of how a policy could read, the coverage might include the following:
1) Loss by fire or other perils insured against in the policy caused directly or indirectly by the following: 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 from any of the perils excluded by the policy. 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.
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 insured’s 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.” 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 company’s 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 insured’s knowledge) would be covered by their policy.
Arson
Arson is the malicious burning of a building and, understandably it is illegal. Arson trends and patters is available through the NFPA’s data information.
Suspicious fires (suspected arson in other words) on structures have actually decreased, but even so, it remains the number one cause of property damage in the United States.
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 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.
Insurance producers 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. Insurance producers 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 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 (that is 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 jurisdiction 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 allow 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.”
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 (fruit stands, 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 were 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 excludes several items: “This policy shall not cover accounts, bills, currency, deeds, evidence 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, 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.
This concept is further carried in the policy, which 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.[3] The additional perils do not increase the insurer’s 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. Today’s 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 might 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. Golf ball size hailstones are capable of breaking windows, awnings, signs, and antennas. They will dent aluminum and wood siding as well as cars. Some hailstones the size of softballs have 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 1970’s 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.
Many states participated in the insurance pools. All real and personal property was eligible when it fell 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 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 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 used 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 home’s 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 Homeowner’s 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 1960’s coverage for riot was part of the general policy. It represented very little cost to the insured. At that time, the risk was considered to be very small. As the nation saw riots and civil commotions surge in the ‘60’s and early 70’s into a very real threat to property, 27 states at that time 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.
On January 6th, 2021, America saw civil unrest that was unheard of previously as thousands of people (130,000 people by some estimates) overtook the United States Capital in Washington D.C. in protest over the Republican loss of the presidential seat. Of the arrests made that day, only one person was from Washington D.C. All the other people arrested had traveled there specifically for the planned riot. At the time of this printing, there were no estimates available of the damage.
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, insured’s 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 Homeowner’s 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 fireplaces is 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 insurer’s 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 insurer’s 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:
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Example 1 |
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Policy A Fire and Extended Coverage: |
$10,000 |
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Policy B Fire (no Extended Coverage): |
5,000 |
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Fire Loss totaling $3,000 |
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Policy A Pays: |
$2,000 |
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Policy B Pays: |
1,000 |
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Example 2 |
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Policy A pays: |
$2,000 |
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Policy B pays: |
Zero |
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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.
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Example 3 |
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Policy A Fire and Extended Coverage: |
$10,000 |
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Policy B Fire (no Extended Coverage): |
5,000 |
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Policy C Windstorm Coverage (only): |
2,500 |
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First Apportionment |
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Policy A pays: |
$2,000 |
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Policy B Pays: |
Zero |
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Policy C (1/5 of loss) pays: |
600 |
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Second Apportionment |
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Policy A pays: |
$2,400 |
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Policy B pays: |
Zero |
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Policy C pays: |
600 |
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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 policy’s 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 Homeowner’s plans automatically include vandalism and malicious mischief coverage.
Vandalism and malicious mischief are not the same thing. Vandalism is the intentional destruction of another’s 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:
1. Glass that is part of a building or outside structure or sign. However, glass building blocks would be covered.
2. 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 items were actually stolen.
3. Losses from steam boiler explosion.
4. Losses if the premises have been vacant or unoccupied beyond 30 days.
5. 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 may be an endorsement on some fire contracts, but often earthquake coverage is written separately from the primary policy. Elsewhere, it tends to be written as a separate earthquake and volcanic eruption policy. There have 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.[4]
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
does not 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:
1. by extending the fire insurance policy to cover earthquake losses,
2. by converting the fire policy into an earthquake policy, or
3. by using a separate policy designed for that purpose. It is called an Earthquake and Volcanic Eruption policy.
The first two are used most often in the Pacific Coast territory, which includes Arizona, California, Idaho, Montana, Nevada, Oregon, Utah, and Washington. The first and third method is used most often 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 five 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 two to five 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. Today’s 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 the items listed will not necessarily be covered. It is necessary to 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, let us 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 individual applications.
Water Damage
The Basic Water Damage policy covers direct loss caused by:
1. 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
2. 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, Homeowner’s, 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:
1. loss caused by street water supply or fire hydrants,
2. damage caused by accidental discharge of refrigerants, and
3. 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 yet the coverage for this peril is relatively new in comparison to other insurances that could be purchased. Insurance coverage for the flood peril only began in 1968 with the passage The National Flood Insurance Act of 1968. The first known insurance contract that was not tied to contracts or loans surfaced in Genoa in the 14th century.
The Water Exclusion Clause found in the coverage extensions to the Standard Fire Policy uniformly excludes the peril of flood.[5] There are at least three reasons for this exclusion. They are:
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. As previously mentioned, 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 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 were authorized to sell flood insurance through a single private insurer, which acted as a servicing company. The National Flood Insurer’s 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.
In October 2021, the Federal Emergency Management Agency (FEMA) switched to a rating system called Risk Rating 2.0. According to FEMA, flood zones will no longer solely be used in calculating a property’s flood insurance premium following the introduction of Risk Rating 2.0. Instead, the premium will be calculated based on the specific features of an individual property, including structural variables such as the foundation type of the structure, the height of the lowest floor of the structure relative to base flood elevation (BFE), and the replacement cost value of the structure. The current rating system includes two sources of flood risk: the one percent annual chance fluvial (river) flood and the one percent annual chance coastal flood. Risk Rating 2.0 will incorporate a broader range of flood frequencies and sources than the current system, as well as geographical variables such as the distance to water, the type, and size of nearest bodies of water, flood frequency, and the elevation of the property relative to the flooding source.
According to FEMA, although flood zones on a FIRM will not be used to calculate a property’s flood insurance premium, flood zones will still be used for floodplain management purposes, and the boundary of the Special Flood Hazard Area will still be required for the mandatory purchase requirement.
As of April 1, 2023, FEMA has fully implemented the NFIP Risk Rating 2.0. Some are saying that the premiums are too high for some regions while others are stating that the premiums are too low. There are so many issues at play as to why the NFIP is in such debt (about $20 billion as of this writing), however, FEMA tried to combat this debt by addressing some of the premium disparities. There is also the issue of people still building in floodplains and paying too low of premiums for the risk those buildings have.
End of Chapte 6