Chapter 1

The PC Professional

Chapter 7

Homeowner’s Insurance

Although most people want to own their own homes eventually, initially most individuals pay rent to someone else. Even though they are renting their lodging, it is likely that the individuals own possessions that have value.

Renter's Insurance

Most insurance specialists recommend that a tenant insure their possessions. If the landlord has insurance, it will only be on the structure and not the tenant's possessions. The tenant will also want liability insurance in case a visitor is injured on the premises. Depending upon the circumstances, the landlord might be responsible for injuries relating to the structure itself, but injuries relating to the actions of the tenant may not be covered by the landlord's policy. For example, if one of the children left their roller skates on the sidewalk causing a fall, the liability would rest with the tenant rather than the landlord.

A tenant's policy is similar to a homeowner's coverage, but without coverage for the structure itself. It is important to purchase enough insurance to cover at least the cash value of the contents. Many renters prefer to purchase replacement value, so that their belongings could be replaced at today's costs. Cash value is the current retail price less depreciation. Replacement value is the actual cost of replacement at current retail prices.

Insuring Your Home

Few people are able to simply walk into home ownership. For most, it is a difficult journey of saving and doing without in order to acquire the down payment. It would be most foolish to leave such a valuable asset uninsured.

Property insurance covers damage to or theft of the insured's possessions. Casualty insurance (also called Liability insurance) pays for the insured’s legal responsibility to other people for property damage or bodily injury losses. Automobile and homeowner's policies typically cover BOTH property and liability coverage.

Homeowner policies are designed to protect owners and tenants from loss or damage to their property and also to provide protection against liability claims. The point of homeowner’s insurance is to protect an individual's home and the contents within it. Some people are natural gamblers willing to play the odds that their home will never be damaged or destroyed and that their belongings will never experience a loss. If they lose that bet, it could wipe out everything they own. It makes more sense to spend a few dollars for the sake of safety.

The policies generally have two sections:

1. Property exposures and

2. Liability exposures.

Too often consumers believe an item merely mentioned in their policy receives complete coverage. This is not necessarily the case. For example, if a diamond ring is covered against theft in a homeowner’s policy, that does not necessarily mean it will also be covered should the diamond drop out of its setting and become lost. These are the types of things that need to be fully explained to the insured. A floater may possibly be added to the homeowner's policy to include the loss of the stone. A floater is a separate policy or addition that may be added to the original policy. It is often called an endorsement. Floaters may also be used to raise the dollar limits in policies. Many homeowner policies cover theft of a ring only up to $1,000 or $2,000. An endorsement or floater would increase the amount of coverage.

Often floaters or endorsements provide what is called all-risk coverage. In other words, they insure against all risks, except for specific exclusions that are listed in the policy.

The first section, property exposures, may cover such things as the structure or dwelling itself, other structures on the property, personal property, and loss of their use during repair. In addition, there may be coverage for such things as debris removal, fire department charges, trees, shrubs and other plants, theft of credit cards, property removal, and reasonable repairs following a loss.

Replacement cost means the amount it would cost to have the house repaired or rebuilt; it does not refer to market value. In some situations, replacement cost might actually equal the market value, but this is not always the case. In fact, older homes often cost more to rebuild than their market value indicates. Insurance agents must consider this when insuring older homes whose market value is below replacement costs.

As building costs rise, it is important that property/casualty agents maintain a relationship with his or her clients and continue to update their policies. A policy should never fall below 80 percent of the property’s replacement cost.

As agents, we know that consumers often hesitate to increase the premium amount of their policies (even when it makes sense). However, when the simple concept of replacement value is explained, most consumers prefer to be covered adequately. Placing a higher deductible on the policy might be an option allowing adequate coverage while keeping premiums reasonable. With higher deductibles, the consumer will be responsible for more of the smaller losses, but the major loss (the house itself) would still be covered by insurance.

The second section, liability exposures, covers personal liability and medical payments to others. It may also include coverage for claim expenses, damage to the property of others, and first-aid expenses.

Homeowner's insurance is often the broadest coverage most people will ever buy. It literally covers the roof over their heads and the shirts on their backs. In addition, it covers their legal liability to others. Even so, the average consumer generally never even attempts to understand what they are buying.

A standard homeowner’s policy does not cover many types of natural disasters. Separate coverage is needed for floods and earthquakes. In many cases, a separate policy will also be needed for those who wish to be covered for hurricane damage.

For the consumer to keep up with changing times and values, it is necessary to constantly update their coverage. It is generally considered unnecessary to insure the actual value of the land since it cannot be stolen or damaged in the same way that the structures upon it may be.

Most professionals recommend that replacement value be the determining factor in the amount of coverage needed. Replacement value is often different than market value. Market value is the amount the homeowner could sell their home for. Replacement value is the amount of money it would take to rebuild the home should that be necessary. In areas where the housing market is depressed, for example, a home may only sell for $190,000 but rebuilding it could easily cost $225,000. Determining the cost of rebuilding often requires an appraisal.

Some insurance companies calculate replacement cost by multiplying the square footage of a house by the square foot of construction costs for new homes in the homeowner's area. By doing so, an appraisal probably would not be necessary. The construction cost is often supplied by the local builders association and may be available online. Most property and casualty agents can supply this information.

Once the replacement cost is known, the policy should cover no less than 80 percent of the total replacement value.

To recap:

Replacement Value is what it would cost to replace a structure with a building of like kind and quality.

Actual Cash Value is replacement value less depreciation for its use and age.

Market Value is the dollar amount that the homeowners could sell their home for.

While the standard homeowner’s policy may automatically put replacement value on the structure, it is not unusual for it to put only actual cash value on its contents. Therefore, your clients will appreciate an exact explanation of which they have in advance of a claim.

Insurance companies typically will not pay replacement value on claims unless coverage for at least 80 percent of the total replacement value of the home is carried. If 80 percent of the total replacement value is in place, that usually qualifies as full replacement value. The reason that 80 percent would be considered full replacement is simply because few homes totally burn down. Generally, 80 percent would be more than enough to rebuild the home.

When a homeowner carries less than 80 percent of the total replacement value on their home, this also affects other claims. When a loss occurs, the insurer will likely give the greater of two amounts:

1. A percentage of the total loss based on the percentage amount of coverage carried. For example, if 60 percent of replacement value is in place, then 60 percent of the loss would be covered for things such as storm damage, theft, and so forth.

2. The actual cash value, which would be its replacement value minus depreciation for age and wear.

Either way the actual replacement value will not be paid, if less than 80 percent of the total replacement value is carried.

Inflation is part of our lives, and this is also true when it comes to our homes. As inflation rises, so should the amount of coverage carried on our homes. Labor costs are often one of the largest factors to be considered. A homeowner’s policy should be reviewed yearly and updated, if necessary.

Many insurers now offer policies which include an inflation guard clause. These policies automatically increase their coverage by a specified percentage amount at specified time intervals. Of course, the premiums increase as well. Even if an inflation guard is included in the policy, it still should be reviewed yearly. The percentage increase in the inflation guard may not equal the percentage rate of inflation. In other words, inflation may be taking away more than the inflation guard is adding. The opposite could also happen, of course. The inflation guard could be adding more than inflation is taking away. In that case, the homeowner would be paying for more coverage than is actually needed.

An inflation guard will not reflect any improvements made to the structure or property. The only way to make sure that the amount of insurance carried reflects current values is to have yearly reviews.

The amount of insurance the lien holder (usually a bank) requires is not an accurate indicator of current values. The institution that holds the mortgage is only concerned with protecting their interests, which is the amount of the loan. Therefore, as the mortgage is paid down, the bank’s interest decreases, and the homeowner’s interest increases. Eventually, the mortgage would be paid off. At that point the loaning institution has no further financial interest at all in the property, but the homeowner has a very large stake in continuing to keep the property insured.

The mortgage lender usually requires that the home be covered by fire-and-allied-coverages insurance. This means that the structures would be insured against just about anything that might damage it, which might include such risks as windstorms, tornadoes and even riots.

Homeowner’s insurance is a combination or package policy. What it contains depends upon the needs and desires of the homeowner.

Each insurance company may have slightly different policies, but they all follow the same broad outline. The homeowner’s series consists of several forms numbered in sequence.

There are different types of homeowner's policies. The consumer can buy separate coverage for fire, wind, miscellaneous hazards, theft and personal liability, or they can simply buy a policy that covers all of these in one package. Homeowner's insurance comes in three basic types. Each type is progressively more expensive.

1. Basic Form: the Basic Form protects one's home against fire, lightning, windstorm, hail, explosions, riots, aircraft, vehicles, smoke, vandalism, theft and broken glass (windows).

2. Broad Form: This is the most widely purchased form of homeowner policy. The Broad Form covers everything covered in the basic form, plus damage caused from falling objects, the weight of snow or ice, building collapse, broken steam or hot water heating systems, heaters, plumbing, frozen pipes, heating or air conditioning systems or appliances and injury from faulty electrical wiring. It will not cover damage to pavements (such as sidewalks or driveways), fences, patios or damage to pools from freezing, thawing or water. It is important to note that even though the broad form covers damage caused from broken steam pipes, it does not cover the cost of actually replacing the pipes themselves.

3. Comprehensive Form: this form covers all conceivable perils, except flood, earthquake, war, nuclear attack, and anything specifically excluded in the policy. It is very important to read the policy and know what is specifically excluded.

Any one of the three forms will cover one's house, although they generally do not apply to structures that have been built for occupancy by more than two families or farm buildings and related structures. Farmers usually get a farm owner's policy that is specially designed for their purposes. Homeowner's insurance generally will also cover detached garages, sheds or other structures as long as they are not leased out to other individuals. A homeowner's policy generally has limitations on buildings used for business (sometimes not covering them at all). Therefore, a person who uses their home as the location for their business (as is often true for independent agents) should be sure to purchase insurance that does specifically cover an in-home business.

In March of 2022, the Insurance Services Office (ISO) introduced 13 new forms and endorsements, revised 120 forms and endorsements and withdrew 11 forms and endorsements. We will not be looking at every revision. An agent will want to be aware of these changes and as a policy comes up for renewal, an agent will want to see if there is a better coverage available. A change to a designed-based form verses a coverage-based forms is a notable difference.

Section I of Form #1 (HO-1)

Section I of Form #1 is called HO-1, Form 1, or the basic form. This coverage is the least expensive to buy.

The basic policy is usually called an HO-1. It generally covers the house and its contents against eleven different perils which range from fire to broken glass. Since there are so many flaws in such limited coverage, many companies have quit offering the HO-1 as a "stand-alone" policy.

The basic form lists four coverages:

Coverage A - the dwelling

Coverage B - all other structures, such as garages

Coverage C - unscheduled personal property

Coverage D - additional living expense.

The basic form also lists four supplementary coverages which includes coverage for debris removal and fire department service charges.

The HO-1 insures against direct loss to the property and interests covered if caused by any of the groups of listed perils.

Covered perils may vary, but the eleven common ones include:

1. Fire and lightning,

2. Removal,

3. Windstorm or hail,

4. Explosion,

5. Riot or civil commotion,

6. Vehicles,

7. Aircraft,

8. Smoke,

9. Vandalism or malicious mischief,

10. Breakage of glass, and

11. Theft.

It is sometimes possible to have as little as eight or nine risks covered (rather than eleven). Generally, such things as vandalism or glass breakage are left out.

The form will also list the exclusions and conditions which apply to Form #1.

Section II of Form #1 consists of:

1. Coverage E which is personal liability and

2. Coverage F which is medical payments to others.

Also, in Section II of Form #1 will be exclusions which apply only to this section along with five supplementary coverages including damage to property of others.

Form #2 (HO-2)

Form #2 is called HO-2, Form 2, or the broad form. This coverage costs a little more than the HO-1 plan because it gives more benefits.

The broad homeowner’s policy is typically called an HO-2. It covers the house and its contents against specific losses. Coverage often included in the HO-2 includes freezing of plumbing, heating and air-conditioning systems and domestic appliances.

Section I of HO-2 contains the basic coverages, supplementary coverages, additional exclusions and conditions that are identical to those found in Section I of HO-1. The difference between HO-1 and HO-2 lies in the perils listed. HO-2 insures against loss resulting from 18 listed perils rather than 11 listed perils as in HO-1. The first 11 of the 18 are the same as in HO-1. The additional perils include:

12. Falling objects;

13. Weight of ice, snow or sleet;

14. Collapse of buildings

15. Damage resulting from steam or hot water heating systems;

16. Accidental discharge or overflow of water or steam;

17. Freezing of plumbing, heating and air-conditioning systems, and domestic appliances; and

18. Accidental injury from electrical currents artificially generated to electrical appliances.

Section II OF HO-2 is identical to Section II of HO-1.

Form #3 (HO-3)

Called the HO-3, Form 3, or the Special Form, this plan offers still more coverage than either the HO-1 or the HO-2.

The special homeowner's policy is called an HO-3. It covers the house for all perils except those explicitly excluded by the policy. On personal property such, as clothing and household furniture, it covers loss or damage from the same risks as listed in HO-2.

On the house itself, however, the policyowner is protected from all risks except, as mentioned, those which are specifically excluded. Some companies do offer similar coverage for specified personal property. The HO-3 is identical to the HO-2 except that coverages A, B and D are insured against all risks or perils. Coverage C, which is unscheduled personal property, is insured against all 18 listed perils in HO-2 with the exception of breakage of glass.

Under HO-2, in order to receive compensation for loss under coverages A, B and D, the insured (policyholder) must prove that the loss was the result of a listed peril. Under HO-3, the insurer (insurance company) must prove that a certain peril is specifically excluded in order to deny payment.

HO-3 also provides the insured with coverage against a wider variety of perils than does HO-2. In other words, if something causes damage, the policy will cover unless the peril is specifically excluded. If a homeowner spills paint in their house, the HO-3 would cover the loss (if not specifically excluded), but the loss would not be covered under the HO-2 because it is not one of the listed perils. Of course, the HO-3 is more expensive than the HO-2. A person pays more if more benefits are received.

Different insurance companies may have different conditions, so it is always important for the insurance agent to fully understand the policy he or she is writing. It is equally important for the consumer to do so. Some points for both the consumer and the agent to look for include:

1. Detached buildings, including garages, tool sheds or guest houses, are often covered only up to a specified limit, such as ten percent of the policy's face value. If the buildings would cost more than that to replace, it may be necessary to increase that portion of the policy.

2. If the home is left empty for 30 or more consecutive days before the loss occurs, one's protection against vandalism and broken glass may not apply. This becomes an important point for retired individuals who winter elsewhere.

3. Due diligence is required in some areas. Damages resulting from freezing pipes, heating systems and air-conditioning systems which occur while the homeowner is away may not be covered if due diligence was not exercised in the maintenance of heating sources or the draining of unused pipes.

4. Income loss from a home business during a disaster is not likely to be covered.

5. Should the homeowner rent out his or her home to another person, the insurance company may refuse to renew the policy.

6. While the homeowner's home is being repaired, there may be coverage for motel bills and restaurants for amounts that exceed normal living expenses. Of course, the policy will pay only up to the limits within the contract.

7. Depending upon the contract, there may be coverage for debris removal. Usually the policy will cover up to 5 percent of the total coverage.

8. There is usually a limit on coverage for plants, trees and other landscaping. The homeowner will need to check her particular policy, but a limit $250 to $500 is common. Many policies offer no coverage at all; especially if they were run over by anyone who lives in the home.

9. Seldom is there any coverage for TV antennas, gutters, fences or awnings unless the house collapses.

Rates for fire insurance within the policy will vary depending upon the amount of fireproof materials in the home and the efficiency rating of the local fire department. Such things as sprinklers, fire alarms and fire extinguishers often help lower the cost of coverage.

As is true with so many types of insurance, rates are often lower if the premiums are paid annually rather than quarterly. Some insurance companies offer an additional savings if the premiums are paid for three years at a time.

Water damage caused by sewer backups, rain, ground water, or flood is typically excluded. Rain damage may be covered if the house was first damaged by wind or hail, which allowed the rain to enter. The water damage caused by firemen fighting a blaze is generally covered. For those homes located in areas where floods are a danger, flood insurance is available through the government as long as the community has met the conditions for coverage. Earthquake insurance is available as a rider through the company that insures the home.

People are finding homes in high-risk urban areas have been made available to them at very low interest rates, in an attempt to upgrade some communities. This can sometimes pose an insurance problem if companies are not willing to insure homes in those areas. There is help through the federally backed Fair Access to Insurance Requirements (FAIR) plan. An inspector will visit the house or apartment to see if it meets minimal safety standards and is structurally sound. If the structure meets the requirements, coverage is provided from an insurance pool. Coverage may also be available if repairs are in progress to bring the building up to required levels.

Form #4 (HO-4)

Called HO-4, Form 4, or renters insurance, this type generally covers around 17 or 18 risks for personal property.

The HO-4 is often called renters or tenant’s coverage. It may also be called the Contents Broad Form. It applies only to the contents of the house. It is identical to the HO-2 except that losses to the structure itself are not covered. The perils would include fire and lightning, windstorm or hail, explosion, riot or civil commotion, vehicles, aircraft, smoke, vandalism or malicious mischief, glass breakage that is part of a building, storm doors or windows and theft.

Form #5 (HO-5)

Form #5 is The Comprehensive Form or the HO-5. The HO-5 is identical to the HO-3 except that all risk protection is extended to coverage C (unscheduled personal property). This form provides broader coverage than does the HO-3 and, therefore, is more expensive than the HO-3.

Form #6 (HO-6)

Form #6 is usually referred to simply as The Condominium Unit Owners Form.

The HO-6 was introduced in 1974 expressly for the unique needs of condominium unit owners who were exposed to risks similar to those of renters. HO-6 is a reproduction of HO-4 except for two changes which were necessary for the policies to be appropriate for condominium owners.

1. One change allows $1,000 of coverage for damage to additions and alterations made by the unit owners within the unit.

2. The other change provides that the addition and alterations coverage will be excess insurance over any insurance owned by the condominium association that covers the same property.

The HO-6 may also have coverage for additional losses by use of endorsements.

Various endorsements are generally available (for an added cost, of course) that will extend the coverage of homeowner’s policies. For example, the Inflation Guard Endorsement increases on a quarterly basis the limits of liability of Section I of HO-1, HO-2, HO-3 and HO-5 by a fixed percentage amount. The idea is to guard against inflation.

Many companies offer an inflation guard. This automatically increases the homeowner's coverage (generally by 1 percent or more) every three months. Of course, the premium rate will be higher, but it is often worthwhile since it guards against inflation. Agents often prefer adding inflation guards because it takes away some of the trouble of constantly rechecking policies that are already in effect. It is important to understand, however, that inflation guards may not always reflect the actual increases in building costs, allowing the amount insured to drop below the 80 percent mark. Even with an inflation guard, the wise agent will still check back with his or her clients at least every two years and preferably every year.

Endorsements are also used to cover valuable personal property for higher amounts than provided for in the basic policy. An endorsement may be used to increase limits of recovery for money and securities. There is a credit card endorsement which protects the insured from losses resulting from stolen or lost credit cards. Such endorsements give flexibility to the homeowner forms and as stated, may also be attached to the HO-6.

Form #8 (HO-8)

Coverage designed for older homes is called HO-8. It is identical to the HO-1 except losses under the 10 perils (fire and lightning, windstorm or hail, explosion, riot or civil commotion, vehicles, aircraft, smoke, vandalism or malicious mischief, breakage of glass) are settled on an ACV (Actual Cash Value) basis in contrast to a replacement cost basis.

Form #14 (HO-14)

The Insurance Services Office (ISO) introduced HO-14 (Contents Comprehensive Form) which is a new form for renters. Coverage is not available with the traditional HO-4 form (Contents Broad Form) and the new HO-14 (Contents Comprehensive Form). There are two major differences between the HO-4 and HO-14 form:

1. The HO-4 form provides property coverage on a named peril basis while the HO-14 form extends coverage on an open peril basis.

2. The HO-4 form provides coverage on an actual cash value basis while the HO-14 form extends coverage at replacement cost. The HO-4 form can be endorsed to provide replacement cost coverage.

The HO-14 form offers coverages unique to itself. These coverages include:

1. Automatic coverage for home-sharing hose activities.

2. Additional coverage for bed bug remediation.

3. Hard drive data recovery.

The HO-14 form extends 10 percent of the Coverage C limit to the listed property types unlike other HO forms which list a specific dollar amounts for certain property.

The HO-14 will be a better choice for some policyholders and for other, sticking with the HO-4 form will still be better. It all depends on what the policyholder wants protected.

Exceptions

There are exceptions in the homeowner policy. Policies will vary from company to company and from state to state. However, there do tend to be similar types of non-covered or limited coverage clauses:

1. A separate structure on the property that is used for business purposes or that is rented out.

2. Losses due to a power failure from a source outside of the home.

3. Water damage, including floods, tides, sewer back-ups and seepage from ground water. However, water damage from firefighter's hoses or due to a leaking roof (which allows rain in) would generally be covered.

4. Losses due to neglect.

5. Damage deliberately caused by the owner(s).

6. Earthquake, except by special rider.

7. Ice or snow damage to such things as awnings, fences, patios and swimming pools.

8. Vandalism to houses left empty more than 30 days.

9. Frozen or burst pipes in a house left unoccupied without maintaining the heat or draining the pipes.

10. Damage from settling or cracking structures.

11. War.

12. Normal wear and tear.

13. Damage done by birds, rodents, insects or the owner's pets. However, some types of damage may be covered to porches or other minor collapses.

14. Smoke damage from nearby factories or agricultural smudging.

15. Claims containing fraud or misrepresentation of the facts are never covered.

16. A continuous leak from plumbing, heating or air conditioning systems. Only sudden leaks would be covered.

17. Nuclear explosions are not generally covered. It is hard to imagine anyone trying to put in a homeowner's claim following a nuclear explosion.

Every professional recommends liability insurance. In today’s sue-happy society any person, regardless of how careful they may be, can be sued. Liability insurance does not cover everything, however. Items not covered may include:

1. Employees and clients if the homeowner is running a home-based business. This is true for childcare services also. Any type of a business ran out of the home needs separate business insurance to be fully protected.

2. Aircraft.

3. Injuries from boats and motor vehicles. Some types of small boats, golf carts or dirt bikes might be covered. The homeowner should specifically check their individual policy to be sure.

4. Claims by one family member against another.

5. Damage against the policyowner's own property.

6. Any disease that someone catches from the policyowner or covered members.

7. Damage done by a leaking waterbed to rented property (unless a special rider was obtained to specifically cover it).

Homeowner's insurance insures against the loss of the home. It is important to buy coverage that will replace at least 80 percent of the home's current replacement cost. Realize that the policy will only pay up to the limits imposed within the contract. If the cost of repairs or replacement is less than the limits imposed by the policy, the homeowner will receive only up to the costs incurred; no more. If the cost of repairs or replacement is more than the limits imposed by the policy, the homeowner will be responsible for the balance.

Natural Disasters

There are many forms of water damage exclusions under flood insurance. Generally, it applies to tidal waves as well as such things as sewer water back-ups outside of the home. Water damage inside the home would be covered if it were due to a burst pipe or water tank.

Since most people do not need flood damage, it would be unnecessary to include the premiums for it in the standard policy. Since most people do not need such coverage, it stands to reason that only those who live in a high-risk area will choose to buy the benefits. The result is what is called adverse selection. In other words, only a small number of policyholders will be sharing a large risk. Both the private and government insurance coverages are part of the National Flood Insurance Program that is administered by the Federal Emergency Management Agency (FEMA).

When a disaster occurs, typical behavior follows: insurance adjusters are usually en route almost immediately. They come equipped with cellular phones (since often lines are damaged and therefore not operating), electronic tablets, laptop computers and blank checks. Mobile homes and recreational vehicles are often used as makeshift claims processing centers. Checks are issued to policyholders on the spot in many cases to cover immediate necessities such as food, shelter and clothing. Of course, additional checks are written later on as damages are assessed.

Insurance companies that sell earthquake coverage have specialized teams with years of claims experience for responding to disasters. They take great pride in bringing immediate assistance to their policyholders.

Some types of risks must be individually insured. For example, in California earthquake insurance is bought in addition to the standard homeowner policy. Generally, it is in the form of an endorsement. As stated, an endorsement is an addition to the regular policy.

In California, each company located there must offer to sell earthquake insurance to its homeowner policyholders. The key word here is "offer." It is up to the individual whether or not to purchase it.

Immediately following some types of disasters, such as earthquakes and floods, citizens cannot buy that type of insurance. Generally, there is a moratorium on selling such coverage (ranging from 48 hours to 60 days) following the last aftershock in the case of earthquakes that measure 5 points or more on the Richter scale, which is the standard measure of an earthquake's severity. A moratorium is the legal permission to delay action; in this case, the selling of a specific type of insurance.

There are a couple of reasons for this moratorium:

1. To allow insurance companies time to determine their exact losses before assuming new risks; and

2. To acknowledge the possibility of damaging aftershocks.

In addition, it is felt that by delaying the availability of earthquake insurance following an earthquake, panic buying may be avoided. Usually disaster-type policies (bought in panic) do not stay on the books well. Panic buying is costly for insurance companies if the policies are dropped soon after purchase. Premium refunds generally do not cover the cost of underwriting and issuing the policy as well as the costs associated in processing a cancellation.

Earthquake insurance tends to be expensive. There are variables involved. Frame houses withstand an earthquake better than brick structures do. As a result, frame houses are much cheaper to insure. The location of the homeowner also has a great deal to do with the cost of the policy. In California, where risk is relatively high, premium costs are much greater than in New York where risk is relatively low.

Deductibles for earthquake insurance are often expressed as a percentage rather than a dollar amount. For instance, instead of a $250 deductible, such a policy may have a deductible of 10 percent on the total policy value.

The high premium costs and deductible amounts simply reflect the risk involved. Consumers must realize that a major earthquake could bankrupt some insurance companies. It has been estimated by industry experts that a major earthquake in a populated area could run up to $60-billion or more in damages. The cost is high because, even though only a small number of people carry earthquake insurance, the disaster affects nearly all types of insurances. Claims affect auto, fire, business interruption, worker's compensation, life, health and disability.

For insurance companies to meet all the claims that would occur, they would need to sell hundreds of millions of dollars worth of stocks, bonds, real estate and a multitude of other investments immediately. As a result, the financial markets would also be heavily affected. It would also leave the insurance industry without the capital necessary to meet future claims.

Another reason that earthquake insurance is high will not surprise you: relatively few people buy it. Since a low number of policyholders are sharing the risk, the cost is high. If the cost were to be shared by many, then premiums would be lower. One of the underlying principles of insurance is the spreading out of risk among many.

Volcanoes

May 18, 1980 saw a new insurance event: an erupting volcano in the continental United States. Mt. St. Helens erupted with a series of explosions in Washington State. Previously, neither insurance companies nor consumers thought much about volcano insurance. Because nobody considered such coverage to be necessary in the United States, there was much confusion as to whether or not the disaster was covered in resident's policies.

Traditional homeowner policies had specifically excluded "volcanic eruptions," but simplified versions of the homeowner policies did not list that exclusion. In the end, about $27-million was paid in claims for damage caused by the eruption of Mt. St. Helen. The claims were covered under "explosions" in most cases. Generally, standard policies now list volcanic eruptions as a covered peril.

Hurricanes and Tornadoes

Windstorms are covered in standard insurance contracts, which is the only peril likely to hit the majority of homeowners. If, however, one lives in an area of the United States that is vulnerable to hurricanes or tornadoes, extra protection may be necessary.

Standard coverage is mostly unavailable to homeowners who live in high-risk areas. There are special coverages for people who are at risk for such hazards as floods and hurricanes. There are beach and windstorm insurance plans in seven states along the Atlantic and Gulf Coasts.

Unfortunately, many of the heavy losses occur to structures that are built in known hurricane and tornado areas. Due to such occurrences, the insurance industry has pushed for stringent federal standards to protect property against hazards. The model is usually the National Flood Insurance Program.

Personal Property

Homeowners are generally aware that their belongings are covered under most homeowner policies. What they often do not understand is just how they are covered. Usually belongings are insured for up to 50 percent of the coverage of the house. In other words, if the house is insured for $100,000, the contents would be covered for up to $50,000. For additional premium, it is usually possible to increase the coverage on personal property to 75 percent of the amount covering the home.

Belongings (called personal property) may be insured for either their actual cash value or for their replacement value. As you know, actual cash value is the replacement cost of an item less depreciation for its age or use. Replacement value covers the current cost of replacing the item or items.

Policies which pay replacement value do cost more. Usually, they run about 10 to 15 percent more than those which pay only actual cash value. Should claims occur, however, replacement value more than pays for itself. Even when replacement value is in the policy, most insurers (insurance companies) usually have the option of repairing the item or replacing it, rather than paying the insured the money (for the insured to replace it themselves).

When a home's contents are destroyed or stolen, one of the most difficult jobs can be making an inventory of what is missing or destroyed. Most insurance companies provide, upon request, inventory forms to their policyholders. It is not really necessary to use specific forms. Any type of list will be useful when claims occur. The list or inventory should be listed by rooms (of the house) and include each article and its description, when it was purchased and what the purchase price was. Certainly, it is wise to also keep receipts of the purchase. Most insurers are going to request some type of proof that the item was owned in order to settle the claim. This list or inventory would also be helpful to the police should a burglary occur.

It is important to realize that such an inventory will be of little use should it be burned up in the fire that also destroyed the house. Therefore, once the list is made, a copy should be given to the insurance agent to be placed in the policyholder's files. Another copy should be placed in the insured's safety deposit box. A third copy may be kept at home for reference. When changes are made, it is important to update all copies.

This type of inventory is an ongoing affair. As items are replaced, sold or added to, changes in the list must be made. Many people make an initial list, but never think to update it as changes occur.

Many professionals recommend that pictures or a video be used rather than making a list. Actually, both are useful. Pictures are certainly better proof of ownership, but do not give price and date information. A combination of the two works well.

The recommended procedures include:

1. Photograph each room,

2. Take separate pictures of important items within the room,

3. List the items within the room remembering such things as drapes, rugs and wall decorations,

4. List the contents of closets and drawers (12 pairs of slacks, etc.) Clothing can be very expensive to replace. Any item that is unusually expensive should probably be photographed. This might include such things as matched luggage or a designer dress.

5. The serial numbers on appliances should be listed along with the purchase date and price paid.

6. On large items, such as major appliances and pieces of furniture, include any necessary details. A sofa that is an 1800's antique has much more value than a sofa made of pine last year.

7. As stated, when each item was purchased and how much was paid for it is very important. Obviously, this is not necessary for every single item, but certainly for all major items.

8. Keeping the list updated is simply a matter of adding in the receipts for new purchases and removing items no longer owned.

Umbrella Insurance

Umbrella policies are often needed by individuals with relatively large asset bases. An umbrella policy covers liability judgments that exceed the limits of the auto and homeowner's policies (usually $300,000). Umbrella policies are generally priced according to the number of covered possessions owned. Costs might range from $75 to $200 or more per year.

Even for the homeowner, it is necessary to insure personal property (just as renters do). In basic, broad and comprehensive policies, personal property is typically covered at 50 percent of the coverage carried on the home. In other words, if the home is insured for $100,000, personal property would then be insured for $50,000. It is important to understand, however, that the belongings in the home are not normally insured at full replacement cost. Rather, most policies take the current retail costs and deduct value according to how old the item is. Only a policy that insures at replacement value would actually replace the item at current rates. Not all insurance companies offer replacement value on a structure's contents.

When personal property is removed from the home, insured values are affected. Usually, it is covered for up to 10 percent of the total policy amount on basic and broad form coverage; comprehensive form and some basic and broad policies will continue to insure up to the 50 percent level. There are a few policies that will cover the property up to 100 percent anywhere in the world, but the average person is unlikely to purchase this. The property of a house-guest or resident employee, such as a baby-sitter, is covered only up to 10 percent even though the property is on the premises.

Theft insurance sections have some special aspects, which can vary from company to company. Each policy should be checked for the following:

1. If an individual has basic form insurance, he or she is usually not covered for "mysterious disappearance." This means that an item or items are missing, but the homeowner is not able to prove theft was responsible for the disappearance (maybe a child loaned the article out to a friend). Under broad or comprehensive forms the loss would generally be covered.

2. Checks and credit cards which are stolen are generally not covered by a homeowner's policy.

3. Homeowner policies will generally pay for property stolen from a safe deposit box or a storage warehouse.

4. If an addition is being added to one's home, theft of the building materials is not covered.

5. Basic and broad form policies will not pay for gems which disappeared from their settings, unless theft can specifically be proven. Usually such a loss is considered not to be theft since it is more likely that the stone simply fell out of the ring.

6. Unless forced entry can be proven, homeowner policies will not normally cover theft from unattended automobiles, boats or trailers.

7. Property lost in the mail is not covered by a homeowner's policy.

Many personal items are either not covered at all by a homeowner’s policy or, if they are covered, the loss would generally only be covered up to specified policy limits. Such things as motorbikes, golf carts, pets, aircrafts, paintings, sculptures and business samples are not covered (unless specifically covered within the policy). Most policies will only cover up to $100 for lost cash, coin collections, and bullion. Only up to $500 is generally covered for securities, deeds, stamp collections, jewelry, watches, furs and gems. Some policies put a $1,000 limit on silverware and guns. If a person has specific items they would like covered by their homeowner's policy, they would want to purchase a floater in the amount of coverage needed. Floaters traditionally insure against all risks, not just those listed in the homeowner's policy.

There can be additional clauses besides the ones we just listed that would exclude coverage for personal belongings.

Every person should keep a list of all household and personal belongings. When each item was purchased should be listed as well as the price paid. Claims adjusters are not likely to simply take the policyholder's word when it comes to replacing items. Any item of special value should be appraised. In addition, it is wise to take pictures of household items to verify the article's existence and quality. The inventory, appraisals and pictures should be kept in a safe deposit box or a fire-proof safe. When the insurance policy is purchased, many experts recommend that copies of inventories, appraisals and pictures be given to the insurance agent for his or her files.

Homeowner's Liability Insurance

We live in an age where liability insurance is absolutely necessary. Liability insurance protects the policyowner in case he or she is sued for property damage or personal injury. Few policies contain less than $25,000 in liability coverage, and amounts may be written as high as desired. The more financial assets one owns, the higher the liability insurance carried should be (there is more to gain in a lawsuit from someone who has a lot versus someone who has little).

Liability insurance never pays if the property or personal loss was caused by an intentional act, unless the person who did the damage was under the age of thirteen. The loss must be the result of unintentional actions or conditions. Some state laws do hold parents to be responsible for the malicious acts of their children. Therefore, if a child burns down a public building, such as a school, the parents may be financially responsible. Insurance policies often state a dollar limit, and it is important to know what that dollar limit is.

Liability insurance provides protection for the actions of one's family and pets, whether on the insured's property or a neighbor's. Without a rider to cover additional members, policies generally only cover people under the age of twenty-one who live in the policyowner's home; the actions of domestic employees while working for the insured; ant the actions of people using the insured's property for non-business purposes. More recently, polices are also covering injuries committed by one family member upon another. Not all policies will do so, so again it is important to know what is and is not covered.

The insurance company will handle all negotiations for an out-of-court settlement; defend the insured in court; pay for any bail bonds or interest on judgments which the insured wants to contest and might reimburse (depending upon the policy) the insured for any loss of income due to court appearances. Claims for bodily injury and property damage will only be paid up to policy limits. The insured is responsible for paying claims that go above their policy limits, so it is very important to purchase adequate liability coverage.

For the insurance agent, it is very important to realize that most business activities are not covered under the standard liability policy. Therefore, if your insurance office is in your home and one of your clients falls on your property, receiving an injury, your homeowner's policy will not pay. It is possible to have business activities covered, but your policy must specifically do so through a rider. Let's look at what a standard liability policy will not cover:

1. Business activities, unless a rider has been purchased that specifically does so.

2. Boats larger than a specified size, when off premises.

3. Vehicles licensed to operate on public highways, racing cars and aircraft.

Some items will be covered, although they may cause premiums to rise. Included in this would be any additional property purchased that would normally be covered. Your homeowner's liability would also cover the actions of a building contractor and his workers while working on the insured property. Unattached campers, boats and trailers are covered as are dune buggies and lawnmowers, as long as they are on the premises.

A common claim on liability policies are dog bites. The liability policy will cover the insured's dog should he or she bite someone. However, if it happens more than once, the policy may be canceled by the insurance company. Some breeds of dogs will not be accepted at all by insurance companies. The breeds often include German Shepherds, Pit Bulls and Doberman Pinschers, but may also include other large dog breeds. If the policyowner has one of the excluded breeds, either the policy will be totally denied or the policy will state that losses caused by the dog are excluded. In some states, a second bite by the dog may be cause for punitive damages, which is an extra sum that must be paid to the injured party. If one owns a dog that has bitten someone once, it is important to check with the insurance agent or the insurance company to find out what laws apply in that particular state.

Some policyowners chose to pay a little more for their liability insurance and include coverage for medical bills for minor injuries caused to visitors while on the insured's property. The basic protection usually pays a benefit of only $500 per person, but it is possible to purchase higher limits. This protection pays regardless of who was at fault for the injury, but only to non-related people who do not live on the premises.

If one has major assets, most experts recommend that an umbrella policy be purchased. An umbrella policy insures all liability losses above the limits of one's regular insurance policies. These polices are not terribly expensive and are usually written for amounts up to $1 million.

When a new policy of any type is received, the policyholder is wise to check it for errors. As the agent, you should mention this to your clients. If the policy goes to the agent first, that agent would certainly want to do the same. When an agent delivers a policy which contains errors, it makes the agent look as bad as the insurance company.

Insurance products of all kinds have developed a reputation (not always deserved) of being easily misunderstood. There are several factors involved in this concept. Certainly, it is a field with a variety of products, each often having their own methods or ways of laying out a policy. Some insurance fields, such as Medicare supplements, have attempted to standardize the product brochures. Other types of policies allow great variations. Often confusion arises from a lack of understanding or knowledge of insurance terms. However, many analysts feel a major problem is simply the preconceived idea held by the consumer that an insurance contract is unreadable. It is unfortunate that so many consumers believe, without ever trying, that they will not be able to read and understand their insurance policies.

The producer (the insurance agent selling the product) is in an ideal position to dispel some of those outdated beliefs. The producer is usually the first, and perhaps the only person, who can act as an educator. Of course, to do so require the agent to be educated himself or herself. To be a successful educator, the agent must have a grasp of the basics of insurance principles and guidelines.

An insurance policy is the document containing the contract between the insured and the insurer (the policyowner and the insurance company). The length and complexity will vary with the type of contract and the complexity of coverage. Regardless of the length or complexity of the document, the policy will define the rights and duties of the contracting parties.

Insurance policies generally follow the same basic format, including:

1. Declarations,

2. Insuring agreements,

3. Exclusions,

4. Conditions and miscellaneous provisions and

5. Definitions.

Some types of policies will follow this format precisely while others may consist of multiple parts which must be combined to make a complete contract.

An automobile policy will tend to follow this format with easily recognizable parts. On the other hand, a homeowner’s policy will consist of two parts which must be combined to make the complete contract.

DECLARATIONS are descriptive phrases which describe the subjects covered, persons insured, premiums to be paid, period of coverage, policy limits and warranties made by the insured (the policyholder) regarding the nature of a hazard. The declarations usually appear as a separate form or as the first page of the policy. This section personalizes the policy to the specific policyholder.

INSURING AGREEMENTS are the coverages in an insurance policy which are broadly defined in the insuring agreements. Insuring agreements may sometimes also define important terms in the contract. In most policies, the insuring agreements appear immediately after the declarations.

EXCLUSIONS eliminate specific coverages. Exclusions may also be referred to as limitations in some types of policies. There may be many reasons why the insurer (insurance company) may use exclusions in a contract. They may wish to:

1. Maintain management of physical and/or moral hazards,

2. Eliminate duplicate coverages,

3. Eliminate coverages not generally needed,

4. Eliminate or minimize uninsurable perils, and

5. Eliminate specialized coverages that the insurer is not qualified, for whatever reason, to offer.

CONDITIONS AND MISCELLANEOUS PROVISIONS may be seen as the ground rules under which the contract operates. From a legal standpoint Conditions and Miscellaneous Provisions are distinct from one another. Even so, they usually appear together. Since insurance policies are conditional contracts, the conditions with which the insured must comply are listed here. They control the insurer’s liability for covered losses by imposing obligations on both the insured and the insurer (the policyowner and the insurance company respectively). They may include such things as time limits for paying claims, alterations of the policy, assignment, cancellation, fraud or optional settlements, to name just a few of the possible conditions.

DEFINITIONS are simply a list of terms and phrases with their fully defined meanings stated. Wherever those words or phrases appear in the policy, they are printed in boldface type to remind the reader that a specifically listed definition applies. Often endorsements and riders will appear in the same section as definitions. Any endorsements or riders or other forms supersede those of the preprinted policy to which they are attached.

Since endorsements and riders have been mentioned, it should be noted how they are used: endorsements and riders are used when standards or preprinted policies do not entirely meet a specific situation. Modification of the standard or mass-printed policy is obtained by adding special provisions to the basic contract. The term endorsement is used in property and liability insurance. The term rider is used in life insurance contracts.

Endorsements and riders are used to complete a contract, alter coverage or change a policy that is in effect. For example, a standard fire policy is not considered complete until the endorsement is added which describes the property which is to be covered.

A peril is defined as a cause of a potential loss. That loss may be due to a multiple of causes such as an accident, fire, explosion, flood, negligence or theft.

A peril is different than a hazard. A hazard is anything that increases the seriousness of a loss or increases the chances that a loss may occur. There are four types of recognized hazards:

1. Physical Hazards that come from material, structural, or operational features. A physical hazard is, as the name implies, something that exists physically.

2. Moral Hazards involve people and their actions. Arson is a moral hazard because it involves the actions of a person or persons.

3. Morale Hazards are different than moral hazards (note the difference in the spelling of #2 and #3. Morale (with an "e" on the end) involves human carelessness or irresponsibility rather than an intentional act.

4. Legal Hazards come as a result of court actions which increase the likelihood of a loss or increase the size of the loss itself. We live in an age of increasing lawsuits, and this is a legal hazard.

We recognize that authorities do not always use the same definitions for any given term. The terms perils and hazards, for example, are often interchanged from one policy to another and from one text to another. Even with these variations, most authorities consider:

1. Perils to be the things that cause losses, and

2. Hazards to be the catalysts that bring about or increase perils.

The Insurance Policy Layout

Reading a policy is a difficult thing for the average consumer. Terms, such as "replacement value" and "actual cash value" may not be understood. What is not covered may not be fully explained or not fully understood, when explained.

Many homeowners, for example, do not realize the limits within their policies even though it may have been explained to them by their agents. While policies certainly do vary, most companies have set limits on certain types of property, including:

1. Money, gold, silver, platinum, coins, bank notes and medals.

2. Securities, deeds, manuscripts, tickets, stamps and valuable financial papers (like letters of credit or evidence of debt).

3. Watercraft including their trailers, furnishings, equipment and outboard motors.

4. Trailers not used with watercraft.

5. Grave markers.

6. Jewelry, watches, furs and precious or semiprecious stones.

7. Silverware, gold ware, silver-plated or gold-plated ware and pewter ware.

8. Firearms.

The limits listed apply to each category of items, not to each item within a category.

This list is not necessarily comprehensive. Many policies offer limited coverage for art, antiques and collectibles. Also, one must consider the general limits of the homeowner’s policy. The limits set on the total contents of the house may be much too low for the value of those contents if not properly assessed.

Many homeowner policies do carry endorsements to cover the additional value of the insureds possessions. An endorsement is a form attached to an insurance policy to add to or change its normal provisions. Floaters may also be used. Whereas an endorsement is an addition to a policy, a floater is a separate policy that will provide more insurance and can cover possessions against perils not listed in the homeowner's policy. Generally, floaters are all-risk policies. They will cover against all perils, except those specifically excluded in the policy.

Negligence Laws

All human activities can lead to situations where negligence is alleged against one party by another.

Negligence is the lack of proper care or attention to the matter at hand. It is the standard of the reasonable and prudent man rule, which was established as a criterion against which human activities are measured. This application applies equally to many things including the operation and/or ownership of a motor vehicle.

In some state’s laws, statutes and ordinances have been enacted which may alter and/or modify some of the common law concepts of the application of negligence. It is necessary for each agent to be specifically familiar with his or her state's provisions since they do vary from state to state.

There are basically three types of negligence laws:

1. Pure comparative negligence,

2. Modified comparative negligence, and

3. Contributory negligence.

With pure comparative negligence, the policyowner can collect damages based upon the percentage of fault: what percentage was their fault and what percentage was the fault of the other driver.

States that have modified comparative negligence laws allow the driver to collect from the other driver's insurance only if the policyholder's percentage of fault was less than a specified percentage (often under 50 percent). In other words, a driver who was 40 percent at fault could collect damages from the other driver, but a driver who was 55 percent at fault could not. As you can see, the percentage of fault must be proven. It is often stated that those who prefer this method most are attorneys.

States that have contributory negligence allows a policyholder to collect damages only if they had no fault at all in the accident. Of course, their own insurance company would pay for the losses, but the other driver's company would not pay.

In such a situation, the type of coverage carried becomes very important. If no medical coverage is carried (some states do not require it) there will not be any coverage for the physical injuries of the driver or passengers. Even in a no-fault state, the driver could find themselves in court as a defendant. In most cases, no-fault laws cover only personal injuries.

Loss-Adjustment Provisions

Everyone would prefer that losses not occur. Safety should always be the aim of every business and individual. Some precautions may actually lower a person's insurance premiums. As you might guess, insurance companies strongly advocate safety measures.

There is no way to prevent all insurance claims, but some types of losses certainly can be reduced. Every homeowner should inspect their home from the viewpoint of a thief, for example. The more time consuming it is to break into a home, the more likely the thief is to pass up the house for an easier target.

Notice of Loss

Unfortunately, no matter how careful an insured is, a loss may still occur. When any loss is reported to an insurance company, it is important that well-organized records be kept. Only copies should be mailed to an insurance company; few insurers require originals. Original copies should be kept by the insured or policyowner.

Most liability insurance policies provide legal defense for their policyholders. That means the company will represent the policyholder if a claim is brought against them. To adequately defend a policyholder, it is important that the insurance company be given all information pertaining to the case including copies of any communications received from the opposing side.

Property and liability insurance claims are usually settled in branch offices or by independent adjusters. Home-office claim departments are usually responsible for claims administration. They operate as a personnel and records office, responsible for selection and supervision of adjusters and maintenance of adequate claims records. By keeping detailed records of the causes of each loss, underwriters and insurance engineers are able to develop loss prevention measures. Claims departments routinely work with police forces, detective agencies, special investigators and physicians to recover losses or reduce their severity.

Losses of any kind should be reported immediately. This is true regardless of the type of policy.

Although it may seem that we constantly hear of homes destroyed by fire or vandalized there are actually few claims when compared to the number of homes insured. One might wonder, therefore, if it is really necessary to carry coverage on our homes. While there are few claims compared to the number of buildings insured, a single loss can be financially catastrophic. For most people, their home is their largest single financial investment and one that they cannot afford to lose.

End of Chapter 7