Homeowners insurance

Dwelling policies were a precursor to the homeowners policy. A homeowners policy provides much of the same property coverage as dwelling policies, but it has evolved to address two needs at the same time:

• Property insurance for the home and personal property
• The insured’s legal responsibility for bodily injury or property damage to others

Because it combines property and liability coverages, a homeowners policy is considered multi-line coverage.

Sidenote

Know this...

While homeowners insurance is primarily intended for owner-occupied dwellings, some policy forms may insure limited non-owner-occupied one-to-four family dwellings (e.g., HO-2, HO-3, and HO-8). HO-4 covers tenants and HO-6 covers condominium unit owners.

Section I of a homeowners policy provides property coverage. The personal liability coverage of the homeowners policy is referred to as Section II.

If a home is financed, the mortgage company (mortgagee) will almost always require the structure to be insured. Most policies include a Mortgagee Clause that:

• Requires the insurer to notify the mortgagee if the policy will lapse for nonpayment of premium
• Gives the mortgagee the option to pay the premium (within 10 days) to keep coverage in force

Section I coverage

There are several homeowners policy forms, and they differ based on the protection provided. Section I is comprised of four coverage sections that insure the insured’s residence and personal property.

Coverage A

Coverage A provides property insurance on the owner-occupied dwelling used for residential purposes. The location of the residence premises is identified in the declarations.

Coverage A protects against loss to:

• The dwelling
• Any structure attached to the dwelling
• Materials and supplies located on or next to the described premises that are used to construct, alter, or repair the dwelling or other structures on the residence premises

Coverage A appears in an HO-2, HO-3, HO-5, HO-6, and HO-8 policy, which will be reviewed later.

Coverage B

Coverage B provides a specific limit of insurance for detached structures on the residence premises.

• Under all standard homeowners forms (HO-2, HO-3, HO-5, and HO-8), the automatic limit for other structures is 10% of the Coverage A amount.
• HO-6 does not automatically provide Coverage B for other structures, since common property is generally insured by the condominium association’s master policy.

This coverage functions in a similar fashion to Coverage B under a DP form.

Coverage C

Coverage C protects the insured’s unscheduled personal property while it is located anywhere in the world.

• Under HO-2, HO-3, and HO-5, Coverage C is typically 50% of Coverage A.
• Coverage C includes special limits for certain types of property.

This differs from Dwelling (DP) policies, where off-premises personal property is typically limited to 10% of Coverage C.

Several property exclusions apply to Coverage C. For example, the policy does not cover loss to autos, itemized articles insured separately, or property belonging to a tenant not related to an insured.

Coverage D

Coverage D is referred to as loss of use or additional living expense. It functions in the same manner as the corresponding coverage in a dwelling property policy and is considered an indirect loss coverage.

Coverage D applies when:

• The residence premises are unlivable due to a covered peril, and
• The insured incurs additional expenses while living elsewhere

Only expenses above the insured’s normal monthly living expenses are paid.

Coverage D limits vary by policy form:

• Under HO-2, HO-3, and HO-5, a common default limit is 20% of Coverage A.
• Under HO-4 (renters) and HO-6 (condominium unit owners), the limit is typically a percentage of Coverage C (often around 20%-40%, depending on the carrier).

Additional coverages

All homeowners forms include supplementary coverages under Section I, similar to those provided under DP forms. These additional coverages are paid in addition to the other applicable coverage limits provided under each coverage area and include:

• Debris removal
• Reasonable repairs
• Trees, shrubs, and plants (5% of Coverage A, not to exceed $500 per item)
• Fire department service charges
• Removal
• Credit card forgery
• Loss assessment
• Collapse
• Glass or safety glazing material (no coverage if property is vacant for over 60 days)
• Landlord’s furnishings

The exclusions found in a homeowners form include:

• Ordinance or law (i.e. ordered destruction)
• Earth movement (if an earthquake causes fire, explosion, or glass breakage, this damage is covered)
• Water damage, including flood, sewer, or sump pump backup
• Neglect
• War
• Nuclear hazard
• Intentional destruction

Sidenote

Boat coverage

Note: For the purpose of the exam, a boat may be insured as personal property under HO coverage C, and Section II liability coverage will extend to the use of the boat if it has low or no power and is less than 26 feet long and has motors totaling 25 horsepower or less. Sailboats under 26 feet are also covered.

Limit of liability

Each coverage area of Section I in a homeowners policy has its own limit of liability. Losses are paid under each coverage area up to its limit (per occurrence).

Additional coverages (for example, debris removal) may increase the claim payment when applicable because they are paid in addition to the base coverage limits.

There are 5 primary policy forms. These policy forms vary based on the perils insured against and the exposure being insured. These policy forms are:

HO2 (Broad Form)

The homeowners insurance equivalent of the Dwelling Property Broad form is the HO2 form, and it is available for owner-occupied homes.

It is a broad-form peril policy protecting an insured against all the perils previously reviewed in a Dwelling Broad Form, plus theft, damage caused by bursting pipes, volcanic eruption, etc.

Example:

• If the insured covers the home for $100,000, Coverage B automatically provides $10,000 of coverage.
• Coverage C would provide $50,000 of coverage.

Section II functions the same as all HO policy forms.

HO3 Open Perils Dwelling Coverage (Special Form)

This policy form provides open-peril coverage on Coverages A and B. Coverage C, however, is protected on a named peril basis.

The HO3 policy provides the broadest scope of coverage since it provides all-risk insurance protection.

This homeowners form includes the four coverage areas of Section I. The percentage limitations allocated to Coverages B, C, and D are the same as the HO2.

HO4 Renter Insurance (Tenant Form)

This policy form is known as an HO4. It provides coverage for:

• A renter’s unscheduled personal property (Coverage C)
• Loss of use (Coverage D)

It is a broad form peril policy.

Example:

• If the insured tenant carries $10,000 of coverage on personal property, the policy will provide up to $3,000 of coverage for loss of use under Coverage D.

HO6 (Condominium Form)

This policy is also a broad form peril plan. It is designed for condominium unit owners and protects against loss to personal property arising from a covered peril.

Example:

• If the insured carries $20,000 on Coverage C, 50% (or $10,000) of coverage would be provided for loss of use coverage.

This form also provides coverage up to $5,000 for unit additions or alterations (building property). This amount may be increased for an additional premium.

Sidenote

Know this...

Condominium association policy covers exterior wall and interior framing, while insured policy covers interior walls and content. The association policy is primary, and the insured is secondary

HO8 Historic Homes (Modified Coverage Form)

The HO8 insures against basic perils. It insures older homes where replacement costs may exceed market value.

Losses are settled on a functional replacement cost or actual cash value basis rather than full replacement cost.

Section II coverage

Section II of a homeowners policy provides:

• Personal liability protection
• Medical payments to others

Section II of all homeowners forms is identical in the scope of coverage provided.

Coverage E Personal Liability

Coverage E protects the insured if a legal suit is brought against the insured due to legal responsibility for bodily injury BI or PD property damage to others.

• The initial coverage limit available is$100,000, but it can be increased.
• This coverage protects an insured if another person is injured on any insured location as defined in the policy.

An “insured location” is any real estate owned or rented by the insured and used for non business activities.

The exam may test unusual examples. Cemetery plots are covered locations, and real estate rented under the insured’s name for even 1 day (hotel rooms) is covered.

Liability coverage extends to all “insureds” under the policy, including the named insured. Their spouse and family members living on premise are called “named insured” and they are all covered if they become legally responsible for BI or PD to others arising out of personal, nonbusiness activities.

Supplementary payments for legal defense costs are also provided.

Coverage E Exclusions:

• Any loss assessment charged against the insured as a member of an association, corporation, or community of property owners
• Any loss assumed under a contract or agreement except contracts that relate directly to the insured location or contracts where the liability of others is assumed prior to an occurrence
• Property damage to property owned by, used by, or in the care of the insured.
• Intentional injury or damage as defined by the policy
• BI and PD arising out of business pursuits or the rendering or a failure to render professional services, with some exceptions
• BI and PD arising out of the rental of any part of the premises except for rental of part of the insured’s premises as a residence
• Liability arising out of ownership, maintenance, use, loading, or unloading of aircraft, watercraft, and motor vehicles beyond the limits allowed by the policy (e.g., small boats or vehicles used to service the premises may be covered).
• Communicable diseases
• Sexual molestation, corporal punishment, physical or mental abuse
• War or nuclear hazard is also excluded under standard policy language.

Coverage F Medical Payments to Others

Also known as guest medical, Coverage F pays when someone is injured in the insured’s home or due to activities of the insured or the insured’s family.

Negligence does not have to be established for medical expenses to be paid.

If an accident occurs during the policy period, necessary medical expenses will be paid up to three years following the accident as supplementary payments.

• The limit provided by the policy is $1,000 per person and may be increased with additional premiums.
• Medical expenses are defined in the policy.
• Claim expenses and first aid expenses are also covered under this policy section.

Coverage Applies to the Following Injuries:

• Sustained while at the insured location with the insured’s permission
• Sustained off the insured location and arising out of a condition on the insured’s location
• On a location immediately adjoining the insured location caused by the activities of an insured
• Caused by any resident employee in the course of their employment
• Caused by any animal owned by or in the care of the insured

Sidenote

Know this...

This is coverage to OTHERS…It does not cover anyone who qualifies as an insured.

Exclusions applying only to Coverage F

• Bodily injury to a resident employee that occurs off the insured location and does not arise out of or in the course of work the employee performs for the insured
• Anything covered by Workers’ Compensation
• Bodily injury due to nuclear reaction, radiation, or radioactive contamination, including any consequential injuries
• Injuries sustained by insureds themselves or by regular residents of the household (other than residence employees)

Any payments under Section II may also include the supplementary cost of legal defense.

Lesson Summary

Homeowners insurance policies offer both property insurance and personal liability coverage for homeowners. Here are the key points regarding homeowners insurance:

• Homeowners insurance originated from Dwelling policies, covering property insurance and personal liability.
• Policy includes Sections I (property coverage) and II (personal liability coverage).
• Section I consists of coverage areas for dwelling (A), detached structures (B), personal property (C), and loss of use (D).
• Additional coverages are available under Section I, such as debris removal and fire department charges.
• Exclusions in homeowners policies include neglect, war, earth movement, water damage (flood or sewer backup), and intentional destruction.
• There are five primary policy forms under homeowners insurance: HO2, HO3, HO4, HO6, and HO8, each with varying coverage options.

Section II of homeowners policies offers personal liability and medical payments coverage:

• Coverage E (Personal Liability) protects against legal responsibility for injury or property damage to others. It includes defense costs.
• Coverage F (Medical Payments to Others) covers medical expenses for injuries occurring on the insured premises or due to insured activities.
• Coverage F applies to injuries caused by the insured, family, employees, or animals but not to the insured or other residents of the household.
• Exclusions under Coverage E include losses covered by contracts, property damage to insured property, or injuries from business pursuits.
• Exclusions for Coverage F include injury to resident employees and injuries covered by Workers’ Compensation.

Chapter Vocabulary

Definitions

Condo Form

Homeowners insurance sold to condominium owners occupying the described property.

Homeowners Insurance

A package policy combining real and personal property coverage with personal liability coverage. Coverage applicable to the dwelling, appurtenant structures, unscheduled personal property, and additional living expenses are typical. Includes mobile homes at a fixed location.

Mortgagee Clause

Grants to a mortgagee under a Property contract issued to a mortgager by virtue of the mortgagee’s financial interest in the property.

Owner Occupied

Homeowners insurance sold to owners occupying the described property.

Renters Insurance

Also called an HO-4 policy, liability coverage for contents within a renter’s residence. Coverage does not include the structure but does include any affixed items provided or changed by the renter.

Residence

The domicile location of a member as shown by his or her determination as a resident.

Tenants

Homeowners insurance sold to tenants occupying the described property.