Home and Dwelling Endorsements and Special Coverages

Base policies are written for the ordinary case, and clients rarely stay ordinary. A home grows a business, a basement grows mold, a lot becomes a house, a restaurant loses its power, a farm owns a combine. Each fact either hits an exclusion in the base form or sits outside its limits, and an endorsement or a separate form is the answer. The sections below read the policy language that causes the gap, work a loss through it, and show what the endorsement changes. Where the lesson says “standard forms generally,” the client’s own endorsement controls. All names and figures are invented.

Homeowners Exposures

Fungi, wet rot and bacteria

The standard homeowners 3 form insures the dwelling against all causes of loss that are not excluded, and one exclusion removes loss caused by mold, fungus or wet rot. It carves back one situation: mold hidden within walls, ceilings or beneath floors, if the loss results from the accidental discharge or overflow of water or steam from a plumbing, heating, air conditioning or automatic fire protective sprinkler system or a household appliance on the residence premises, or from a storm drain or water, steam or sewer pipes off the residence premises. Dry rot sits in a separate exclusion with corrosion. A limited fungi, wet or dry rot, or bacteria endorsement, standard forms generally, adds coverage for such loss and the cost to remove the growth, up to a dollar limit shown in the endorsement’s schedule.

Wind tears off shingles, rain enters, and the ceiling below is stained. Three months later mold is found. The ceiling repair is $4,200 and the mold cleanup is $7,500, with a $1,000 deductible.

Policy	Ceiling	Mold cleanup	Paid
Base form only	$4,200 - $1,000 deductible = $3,200	$0, because the hidden-mold carve-back requires an accidental discharge from a plumbing, appliance or similar source	$3,200
With a $10,000 fungi limit and no separate deductible (assumed)	$3,200	$7,500, within the limit	$10,700

Compare a supply line that bursts inside a wall. The water is an accidental discharge and the mold behind the wall is hidden, so the base form pays the mold. Mold on a basement wall from chronic humidity is excluded. The endorsement is for the client in the first example.

Home business

The base form defines “business” as a trade, profession or occupation engaged in full-time, part-time or occasionally, or any other activity for compensation, with exceptions. One exception is activity for which no insured receives more than $2,000 in total compensation for the 12 months before the policy period begins. Three base-form rules then apply to a business at home.

• Property used primarily for business is limited to $2,500 on the residence premises and $1,500 away from it. Business data is not covered, and neither is an other structure from which business is conducted.
• Section II excludes bodily injury and property damage arising out of a business conducted from an insured location.
• The liability exclusion carves out some rentals and a part-time business of an insured under age 21.

Lena sells handmade candles from a spare room and earned $14,000 in the 12 months before her policy period, far beyond $2,000. She has $9,000 of wax, molds and equipment in the room. A fire destroys it. The base form pays no more than the $2,500 limit. A customer who trips on her porch steps while collecting an order is a claim that the business exclusion removes.

A home business insurance coverage endorsement, standard forms generally, raises the property limit, adds liability for the described business and may cover property away from the home. A permitted incidental occupancies endorsement is narrower, aimed at a business that is only incidental to the home.

Recreational vehicles

The base form’s liability coverage excludes motor vehicle liability. A “motor vehicle” is any self-propelled land or amphibious vehicle, so an all-terrain vehicle qualifies. The form restores coverage for a vehicle designed for recreational use off public roads in two cases: the vehicle is not owned by an insured, or it is owned by an insured and the occurrence takes place on an insured location, which is the residence premises and certain other premises, or off an insured location only if the vehicle is a small battery-powered toy for children under seven. The personal property coverage also excludes the vehicle itself.

A client’s son rolls the family’s unregistered four-wheeler in the back field of their residence premises, injuring a friend. Liability applies. If the same crash happens on a public trail, the base form pays nothing for the liability, and the vehicle’s own damage is not covered either. A separate recreational vehicle policy or a miscellaneous vehicle endorsement is the answer, so ask about every off-road vehicle, snowmobile and golf cart in the household.

Dwelling under construction

Neither the homeowners nor the dwelling form is written for a house that is still a pile of lumber. Their theft peril excludes theft in or to a dwelling under construction, and of materials and supplies for use in the construction, until the dwelling is finished and occupied. The homeowners form also says that a dwelling being constructed is not considered vacant. A dwelling under construction endorsement, standard forms generally, extends the dwelling form to the building as it goes up, including materials on the site, and restores theft protection. A builders risk form, the commercial policy for buildings under construction, does the same job for a contractor.

Suppose an owner building a $280,000 house has $6,000 of framing lumber stolen from the site. The standard theft peril pays nothing. With the endorsement it pays the loss subject to the deductible. Ask any client who is building who insures the house until it is occupied.

Condominium Forms

Three forms cover three owners. The residential unit owner uses a homeowners form written for units. The association of owners uses a condominium association form, a commercial form that insures the building and common areas as the association’s governing documents require. A business owner of a commercial unit uses a commercial unit-owners form, which insures the owner’s interest in the unit and contents. Which parts of a loss each policy pays is decided by the governing documents, not by the policy names.

Fire damages unit 4B for $48,000. $30,000 is original walls and fixtures, and $18,000 is the owner’s upgraded cabinets and flooring. If the association must insure the building as originally built, its policy pays the $30,000, less its own deductible, and the owner’s policy pays the $18,000 in improvements and alterations. If the association’s deductible is $10,000 and the governing documents let it charge the deductible to the unit where the loss began, the owner owes $10,000. The homeowners 3 form’s loss assessment additional coverage pays up to $1,000 (HO 00 03 05 11, Section I, Additional Coverages 7), and a unit owner’s form may start low as well, so an owner who carried only that much, and whose policy treats the charge as a covered assessment, would have $9,000 uninsured.

Commercial Endorsements

Utility services

Commercial property forms exclude failure of power, communication, water or other utility service supplied to the premises if the failure starts away from the premises. The homeowners form says the same: a power failure off the residence premises is excluded, but if it results in a loss from an insured peril on the premises, that peril’s loss is paid. Two endorsements buy part of it back. The direct damage endorsement covers property damage the outage causes, such as spoiled stock. The time element endorsement covers lost business income when the outage stops operations.

A utility transformer failure leaves a restaurant without power for five days. Spoiled stock is $14,000, and lost income is $2,100 a day. With both endorsements and a 24-hour waiting period for the time element (assumed), the direct damage endorsement pays $14,000, and the time element pays 4 days x $2,100 = $8,400. Without them the whole loss is excluded.

Protective safeguards

A protective safeguards endorsement makes a sprinkler system, alarm, security service or cooking exhaust system a condition of coverage. The standard endorsement says the insured must maintain the safeguards listed in its schedule, identified by symbols: P-1 sprinkler, P-2 fire alarm, P-3 security service, P-4 private fire department contract, P-5 commercial cooking exhaust and extinguishing system, and P-9 any other system described. The insurer will not pay for loss caused by fire if, before the fire, the insured knew of a suspension or impairment in a listed safeguard and failed to notify the insurer, or failed to maintain a listed safeguard it controlled in complete working order. If part of a sprinkler or cooking system is shut off by breakage, leakage, freezing or the opening of sprinkler heads, notice is not necessary if full protection is restored within 48 hours.

A bakery’s sprinkler system is shut for repairs for five days, and the owner knows and tells no one. A fire during that time is excluded entirely. If the shutoff had been a freeze break repaired in 36 hours, no notice would have been needed. The exclusion reaches fire only.

Equipment breakdown valuation

Equipment breakdown coverage pays for the breakdown of boilers, pressure vessels and machinery that property forms exclude. Valuation matters on old equipment. Replacement cost pays the cost to repair or replace with no deduction for depreciation. An actual cash value endorsement, standard forms generally, deducts depreciation and lowers the premium. A 12-year-old compressor with a 20-year life costs $18,000 to replace, and the deductible is $1,000. Using straight-line depreciation of 12/20 = 60%, the actual cash value is $18,000 x 40% = $7,200. Replacement cost pays $18,000 - $1,000 = $17,000. Actual cash value pays $7,200 - $1,000 = $6,200. Depreciation methods vary.

Interline endorsements

An interline endorsement amends more than one kind of coverage part in a commercial package, such as property, general liability and auto, so a change to a condition or an exclusion applies across the package once. The common policy conditions, which apply to every coverage part in a package, are the best-known example. The producer’s check is the schedule: read which parts each endorsement modifies.

Farm machinery and livestock

A farm coverage part insures the home, the farm buildings and farm personal property in one package. Two additional forms fill gaps. The mobile agricultural machinery and equipment form insures tractors, combines and similar equipment, scheduled item by item or blanket. The livestock form insures animals, scheduled or blanket, against the causes of death its schedule lists. Collision or overturn of farm machinery is a covered cause of loss in the farm causes of loss form for scheduled and unscheduled farm personal property, and its broad level adds livestock perils such as electrocution, drowning, accidental shooting and attacks by dogs or wild animals. Suppose a combine scheduled at $120,000 overturns and repairs cost $38,000. With a $1,000 deductible (assumed) the insurer pays $37,000. A scheduled herd of 40 head at $1,800 per head loses three animals to lightning. The loss is 3 x $1,800 = $5,400, less any deductible.

Flood: Write Your Own and the Government

An individual flood policy has the same terms and rating wherever it is bought. Private insurers in the Write Your Own program sell and service it under their own names and handle and pay claims, while the government keeps the underwriting risk and the companies keep an expense allowance. FEMA also sells and services policies directly through NFIP Direct, which is open to any applicant and is the only seller of group flood policies and of policies on buildings with severe repetitive losses. Rating and rules come from the same manual in either channel. The difference reaches the claim. A claim denial starts a one-year period, from the first written denial, to sue in federal district court where the loss occurred. A policyholder with a Write Your Own insurer sues the insurer, and a policyholder with NFIP Direct sues FEMA. Neither can extend the year.

Alternative Funding

Self-insurance means a person or business keeps the risk instead of transferring it. Deductibles and self-insured retentions are partial forms. Formal self-insurance for auto is regulated. In Michigan, a person with more than 25 registered motor vehicles may qualify as a self-insurer by certificate from the Director (MCL 500.3101d(1)), and a self-insurer takes part in the assigned claims plan.

A risk retention group is an insurer owned by its members, who share a type of liability exposure, and it writes liability coverage only. Under federal law one chartered in a single state may operate in others without their licenses, though they may require it to register. Its members are its owners, so they share its results. Membership in Michigan’s property and casualty guaranty association follows an insurer’s authorization to transact insurance in the state (MCL 500.7911(1)), so a producer verifies a group’s status instead of telling a client that the association stands behind it.

Lesson summary

• The base homeowners form excludes mold except hidden mold that results from an accidental discharge of water from a plumbing or appliance source. A limited fungi endorsement adds a stated limit for other causes.
• A home business exceeds the form’s $2,000 compensation exception, limits business property to $2,500 on premises, and is excluded from liability. A home business endorsement addresses all three.
• An owned off-road vehicle has liability coverage under the homeowners form only on an insured location, and its own damage is not covered.
• Theft in a dwelling under construction is excluded until the house is finished and occupied, so an owner builds with an endorsement or a builders risk form.
• The association’s policy, the unit owner’s policy and the governing documents decide who pays each part of a condominium loss, and the loss assessment limit is often small.
• A utility services endorsement covers direct damage and income loss from an off-premises outage. A protective safeguards condition excludes fire loss when a listed safeguard is known to be impaired and not reported, or not maintained.
• An actual cash value endorsement on equipment breakdown coverage deducts depreciation, and a Write Your Own policyholder sues the insurer while an NFIP Direct policyholder sues FEMA.