CHAPTER 10
Chapter 6
HOMEOWNERS INSURANCE
A. Introduction—development of the homeowners’ policy
1. Most people use a version of the HO contract to provide coverage for their dwelling and personal property and personal liability needs.
2. Although it is a standardized form, this does not mean that all companies use the same form. It varies by company and state.
B. The Homeowners Policy (HO)
1. A package policy developed in the 1950s to provide “complete” property and liability coverage to the “average” homeowner.
2. The group of Insurance Services Office (ISO) HO policies has evolved over the years. The HO forms come in at least six parallel formats. Among the most common are the HO-2 (Broad Form) and the HO-3 (Comprehensive) Homeowner’s policies. The main differences between the forms are 1) whether the dwelling is covered or not and 2) the extent of the perils. The personal liability coverage is the same on all forms.
3. General description of the homeowners’ forms HO 1, 2, 3, 4, 6, and 8
4. The policy layout, declarations page and setting policy limits for the various insuring agreements. Section 1 (property section) versus Section 2 (legal liability section) are explained as well as the various insuring agreements (A–F).
a. declarations page—spells out the particulars to the contract; personalizes this contract to the insured’s situation
b. divided coverage—splits coverage among the various insuring agreements
c. Coverage A—dwelling
d. Coverage B—other structures
e. Coverage C—unscheduled personal property
f. Coverage D—loss of use
g. Coverage E—personal liability
h. Coverage F—medical payments to others
C. Definitions—Persons Insured
1. Named insured versus “insured”
D. Section I—Property Covered and Insured Perils
1. Property insurance policies may be written on a named perils basis, “we will pay for loss caused by any of the following perils,” or on an open perils basis, “we will pay for all losses except those excluded.”
2. HO-2 provides coverage A (dwelling), B (other structures), and C (personal property with dollar limits on certain types of property) on a named perils basis. HO-3 provides coverage A and B on an open perils basis, and coverage C on a named perils basis.
3. The text provides examples and definitions of the perils specified in HO-2.
4. Special limits—Some property is highly mobile, very valuable (coins, furs, jewelry, silverware), and quite prone to loss; hence, HO limits of coverage are small on these kinds of property to keep premiums low. Such property is better covered by an inland marine personal property floater. It would also not be appropriate to charge all insureds for coverage on property many are unlikely to own. Property is excluded for the following reasons: moral or morale hazards, insured on a different form, the insurance company wants an extra premium for it, and/or catastrophe issues.
5. Loss of use (in older forms called additional living expense) (Coverage D)
a. Pays additional amounts needed to maintain a household after a specified peril has caused insured loss.
b. Preloss living expenses = $2,500 per month; post-loss living expenses = $4,500 per month. Insurance coverage = 4,500 – $2,500 = $2,000 per month until policy limit is exhausted, the family has permanently relocated, or the time it takes to repair the property has passed.
6. Additional coverage
a. Debris removal
b. Expenses to protect property from further damage
c. Trees and shrubs
d. Fire department service charges
e. Property removed
f. Credit card and ATM cards for fraud
g. Assessments
h. Collapse
i. Glass breakage or safety glazing material
j. Landlord’s furnishings
7. Collapse—not in the perils section due to the problem of concurrent causation. Also notice that glass breakage is a result, not a peril. Glass can be damaged by many causes.
E. Section I—Perils Insured (HO-2)
1. Some perils are not defined; others have long definitions.
2. Three perils are suspended if the building is vacant for more than 30 consecutive days. These are vandalism and malicious mischief, accidental discharge or overflow of water or steam, and glass and safety glazing material (in exclusions).
F. Section I— Exclusions
1. Catastrophic losses: earthquakes, floods, wars and nuclear disasters can’t be handled by private insurers.
2. Nondefinite losses such as wear-and-tear and losses due to birds and fish are excluded.
3. Moral hazard exclusions: losses must be accidental. Theft by an insured is excluded, for example.
4. Morale hazard exclusions: the insured must try to prevent additional damage by protecting property.
5. Losses not caused by the peril are excluded, e.g.,ordinance or law losses.
6. Mold losses: provides coverage for mold under certain conditions (HO-3).
7. Earth movement
G. Section I—Conditions
1. Loss Settlement: Insurance-to-value—Property insurance policies contain these clauses to achieve fairness in rates. That is, rates are expressed as X dollars per $100 of value, regardless of whether the first or last $100 in value is being insured. Obviously, the chance of loss is greater for the first than the last $100 of value. (See Figure in text.) In order to keep rates fair, the insurer penalizes the insured who only insures the high probability losses. This penalty is determined by the formula: Amount of Insurance Carried/Amount of Insurance Required × Amount of Loss = Amount of Proceeds from Insurance.
a. The HO requirement is a requirement to be met before replacement cost coverage is available. The least amount payable is the ACV of the loss.
b. We usually work several examples in class, one of a partial loss (60/80 × 20,000 = 15,000) showing that if there is a coverage deficiency, the insured bears a part (20,000 – 15,000) of every loss. The second example illustrates the results of a total loss (60/80 × 100,000 = 75,000), but since the policy face is only $60,000, this is the insurer’s maximum limit of liability. Please see handout concerning the settlement clause contained with this manual.
2. Mortgage Clause. If the loss is payable to a mortgagee, the claim is paid to both the mortgagor and mortgagee. If the loss is not payable to the insured but owed to the mortgagee, the insurance company receives the right for reimbursement from the insured after paying the mortgagee.
H. Liability Coverage
1. Coverage E is designed to pay for legal liability claims arising out of most general activities a homeowner might engage in. Coverage F pays relatively small amounts of medical expenses to others, without fault or legal liability being an issue.
2. The Insurer agrees to provide a legal defense and has the right to settle claims as it chooses. (It must act in good faith.)
3. Important Exclusions to Coverage E
a. Injuries that are expected or intended by the insured.
b. Arising out of business pursuits.
c. Arising out of rendering or failure to render professional services.
d. Arising from the ownership, maintenance, or use of motor vehicles, aircraft, or watercraft.
e. Arising from the transmission of communicable diseases, sexual molestation, mental abuse, controlled substances, etc.
f. Arising out of use, sale, manufacture, etc. of controlled substances.
I. Section I and II Conditions
a. This section contains the conditions applicable to both sections I and II of the HO contract.
b. Common provisions include: concealment and fraud, cancellation, waiver provisions, assignment, subrogation, and death of the insured.
J. Endorsements
a. There are many different ways to change or endorse the HO contract in preapproved ways.
K. Reduction of Insurance Due to Previous Losses
a. The HO contract is silent as to whether any amount paid by the insurer reduces the amount of coverage.
b. Property limits are available; however, the value of the property may have diminished if not repaired.
c. Liability limits are available for each occurrence.
L. Appendix: Buying Homeowners Insurance
IV. ANSWERS TO REVIEW QUESTIONS
1. DESCRIBE SOME INDIVIDUALS WHO ARE PROTECTED BY THE HO CONTRACT WHO ARE PARTIES TO THE CONTRACT. DISTINGUISH BETWEEN THE “NAMED INSURED” AND OTHER INSUREDS. DESCRIBE SOME COVERED PEOPLE WHO ARE NOT PARTIES TO THE CONTRACT. THE HO PROTECTS THE FOLLOWING CLASSES OF PEOPLE AS PARTIES TO THE CONTRACT: 1) THE NAMED INSURED; 2) RESIDENTS OF THE NAMED INSURED’S HOUSEHOLD: SPOUSE, RELATIVES OF EITHER, AND ANY OTHER PERSON UNDER THE AGE OF 21 WHO IS IN THE CARE OF ANY OF THE ABOVE; 3) THE LEGAL REPRESENTATIVES OF EITHER THE NAMED INSURED OR SPOUSE (SUCH AS EXECUTORS, GUARDIANS OR TRUSTEES). THE NAMED INSURED IS THE PERSON IDENTIFIED ON THE DECLARATION PAGE AND IS THE PERSON WHO ENTERED THE CONTRACT AND CONTROLS ALL CONTRACT RIGHTS AND PROVISIONS. OTHER INSUREDS ARE PROTECTED BY THE CONTRACT BUT ARE NOT LEGALLY A PARTY TO THE CONTRACT. THE HO PROTECTS THE FOLLOWING CLASSES OF PEOPLE WHO ARE NOT A PARTY TO THE CONTRACT BETWEEN INSURER AND INSURED: 1) ASSIGNEES (ASSUMING A VALID ASSIGNMENT); 2) MORTGAGEES (ASSUMING THE CONDITIONS OF THE MORTGAGE CLAUSES ARE COMPLIED WITH); AND 3) INJURED THIRD PARTIES (SPECIFICALLY THOSE PROTECTED BY THE BANKRUPTCY CLAUSE).
2. List the four coverages found in Section 1 of the HO. Give an example of a loss covered by each section. The four coverages of Section 1 are: 1) Dwelling (loss by fire of the insured dwelling), 2) Other Structures (detached garage struck by lightning), 3) Personal Property (luggage full of clothes stolen on an out-of-town trip), and 4) Loss of Use (alternate housing must be rented due to a fire loss to the dwelling that caused it to be uninhabitable).
3. List the two coverages found in Section 2 of the HO. Give an example of a loss covered by each section. The two coverages found in Section 2 are: 1) Personal Liability and 2) Medical Payments to Others. An example could be that a pedestrian slips and falls on the sidewalk because the children did not put away their skateboard. Medical payments, in this case, would pay for medical expenses up to three years from the date of injury without regard to fault until the coverage limit was paid. If the neighbor decides to sue for additional amounts, the personal liability section would respond.
4. What is the relationship between the ordinance-or-law exclusion and building codes? The ordinance-or-law exclusion eliminates coverage for expenses caused by the operation of building codes. For example if building codes state that when a structure is damaged more than 50 percent of value, the remaining part is deemed unsafe and must be torn down, the following occurs. The cost of tearing down and removing debris is not covered for the undamaged part. The increased cost due to updating to new building codes is not covered, and the cost of rebuilding the undamaged portion is not covered. The HO policy allows 10 percent of the limit of liability on the property to be used for such damage as additional coverage.
5. Why is the mortgage clause of the HO desirable from a lender’s viewpoint? It is established that a lender with a mortgage on property (creating a secured interest in the property) has an insurable interest. If the lender and insured purchased separate coverage, there would be duplication and a waste of premium dollars. If the lender was placed as an additional insured, the policy could be destroyed for the mortgagee by the unknown actions of the insured. The mortgage clause solves these two problems. It protects both the lender and the homeowner “as their interests appear” for a single premium. Furthermore, if the homeowner’s actions invalidate the coverage, the lender’s (mortgagee’s) interest remains protected provided premiums continue to be paid by the mortgagee or mortgagor and the mortgagee reports any relevant information of which it is aware to the insurer.
6. What is the difference between a “named perils” policy and an “open perils” policy? A “named perils” policy creates liability for the insurer only if the proximate cause of the loss is a peril specifically mentioned in the policy, e.g. “The company agrees to pay for loss caused by fire or lightning.” An “open perils” policy provides coverage unless the proximate cause of the loss is an excluded peril, e.g. “To pay for loss caused other than by collision.”
7. Referring to the previous question, is one format always preferable over the other? Both formats are found in property insurance and neither is always better than the other from the insured’s standpoint. A “named perils” policy, such as the HO-2, can provide broad coverage (sixteen perils are listed), whereas an “open perils” policy can have numerous exclusions. “Open perils” policies are, however, considered broader (and more expensive) than “named peril” policies. The burden of proof is also different. If an insured has a named perils contract, the insured must prove that the peril caused the loss if the insured denies the claim on that basis. If the contract is an open perils contract, the insurer must prove that the peril is not covered to deny liability.
8. Why do property insurance policies contain exclusions? Illustrate your answer with examples from the HO. Exclusions are frequently found in property insurance contracts, and the HO provides good examples of these exclusions and the reasons for including them. The text provides four different reasons for exclusions and several examples:
1) Potentially catastrophic losses are excluded since the perils cannot be predicted accurately and the premium would tend to make the insurance unattractive. Lack of geographic spread of exposures would also cause the loss to be viewed as catastrophic, e.g. nuclear explosions, war, floods, and earthquakes.
2) The moral hazard must be controlled; e.g. deliberately inflicted injuries or self-inflicted thefts are excluded.
3) Perils arising from activities unrelated to home ownership are excluded, e.g. liability claims from automobile usage or from rendering professional services.
4) Instances where the loss would be very hard to measure are excluded, e.g. losses to birds, animals, and fish.
9. Will an exclusion result in partial recovery? No. An exclusion means there will be no recovery. The exclusion may eliminate the cause of the loss, the peril or event causing the loss, or the item(s) lost or damaged.
10. Why are limits placed on coin, stamp, and gun collections in the HO? Can this kind of property be insured? Certain property has relatively low sublimits because to include this property on an unlimited basis would result in an increase of the premium for all homeowners. Since the items named here are not typically owned by the majority of homeowners, to include this property on an unlimited basis would mean that the majority of insureds would be paying for coverage where only relatively few have the exposure. The fairer way of handling the loss of such property is to spread the losses among those owning the property. Thus, higher limits on jewelry, furs, and other valuable items can be insured by policies specifically designed to provide that coverage, such as inland marine personal property floaters, at an extra premium.
11. (Questions 11–15 are related.) Assume John Marshall owns a $150,000 home, which covers the replacement cost of the structure. (Ignore the deductible clause and consider just the coinsurance requirement.) If John purchased $120,000 of insurance, how much would he collect for a partial loss of $40,000? For a total loss of $150,000? For a $150,000 replacement cost structure, John would be required to purchase $120,000 (80 percent) of coverage to collect 100 percent for each dollar up to the face amount that he has purchased. He would collect $40,000 for the $40,000 loss. For a $150,000 total, he would only collect $120,000, the face amount. He has run out of coverage and is not being penalized for being underinsured (because he meets the 80 percent figure).
12. If John purchased $100,000 of insurance, how much would he collect for a $40,000 loss? How much would he collect for a total loss? (Again, ignore the deductible clause.) If he purchased $100,000, he will only collect 100/120 of each dollar up to $100,000. He will collect 0.833 × $40,000 = $33,333 for the $40,000 loss. For the total loss he will collect 0.833 × $150,000 = $124,950 but can only collect $100,000 of the $150,000 loss due to the face amount limitation. In this case, he is being penalized for not buying enough coverage. This computation assumes that the ACV computation is smaller and actual replacement occurs. (Insufficient information is included in the question to make the ACV calculation to select the larger of the two.)
13. Next, assume that John Marshall purchased $50,000 of insurance on his $150,000 home. How much would he collect for a partial loss of $40,000? How much would he collect for a total loss? (Again, ignore the deductible clause.) John needs $150,000 × 0.8 = $120,000 to collect 100 percent of each dollar up to the face. Since $50,000 is purchased the recovery ratio is 50/120 = 41.6 percent; 41.6% × $40,000 = $16,666. For the total loss: 41.6% × $150,000 = $62,400 but can only collect $50,000 due to the face amount limitation. This computation assumes that the ACV computation is smaller and actual replacement occurs. (Insufficient information is included in the question to make the ACV calculation to select the larger of the two.)
14. Now assume all the conditions of the loss settlement clause of the HO apply to the case. Assume that John has $100,000 coverage on his $150,000 house, which has been used for only one-eighth of its estimated useful life. How much would John collect for a $40,000 partial loss? How much would be collected for a total loss? The ACV calculation = 40,000 × 7/8 = $35,000. The formula results in 100/120 × 40,000 = $33,333. He gets the larger of the $33,333 and $35,000, or $35,000. For a total loss, he will only collect by the formula $100,000 (100/120 × $150,000 = $125,000, maximum $100,000 face amount, or the ACV calculation $150,000 × 7/8 = $131,250, maximum $100,000 face amount). So, $100,000 would be paid.
15. Finally, given the same amount of coverage in the preceding question, if John’s home had been used for seven-eighths of its estimated useful life, how much would John collect for a $40,000 partial loss? If the home is used for seven-eighths of its useful life, the ACV calculation changes to $40,000 × 1/8 = $5,000. The larger of $5,000 and $33,333 (the formula) would be paid (if replaced) which is $33,333.
16. Under the HO, will a theft loss in April mean less coverage available for a fire in July? Under the HO contract, policy limits are not reduced by prior losses, so a theft loss will not reduce coverage on personal property or other parts of the contract. However, assume a 75 percent loss to a building by fire which has not been repaired. A second unrelated fire occurs that destroys the remaining 25 percent. The insurance company will only cover the part that was undamaged at the time of the loss, so in this sense, coverage has never been reduced but you cannot collect for the 75 percent again.
V. Answers to Objective Questions
OBJECTIVE QUESTIONS
Assume Bill Clanton owns the ISO HO-2 policy described in this chapter and reproduced in Appendix A. The limits are as follows:
A = $ 120,000
B = $ 12,000
C = $ 60,000
D = $ 24,000
E = $ 100,000
F = $ 5,000
A $250 deductible applies to Section I, Coverages A through D. The replacement cost of Bill’s home is $130,000, the contents are valued at $70,000, and the home is 30 percent depreciated.
Your assignment is to compute the amount Bill will collect in each of the following circumstances. (Assume each event occurs separately.)
1. Bill’s house and all its contents are destroyed by a tornado. It takes six months to rebuild the home, and Bill’s additional living expenses amount to $12,000. The first step we recommend is to check the recovery ratio. Bill is required to have Coverage A equal to or greater than 80 percent of $130,000 ($104,000). Because he has $120,000 in Coverage A, he will collect in full on all losses, up to the face amount of his coverage, $120,000. If he has a total loss, he will pay the difference between the $130,000 in damage and the $120,000 limit of liability.
The Coverage A loss is total, so Bill receives the limit of coverage, $120,000, not the replacement cost of the damage, $130,000. The contents, Coverage C, limit is $60,000, so Bill again cannot fully replace the damaged property (of $70,000). Bill can collect the $12,000 in additional living expenses under Coverage D, which has a $24,000 limit. The Section 1 deductible, $250, would come from the $130,000 Coverage A claim (making the claim equal to $129,750). Since the limit of Coverage A is less than the amount claimed, Bill receives $120,000 without reduction for the deductible. Bill’s total recovery is $120,000 + $60,000 + $12,000 = $192,000.
2. A neighbor’s eight-year old child accidentally releases the brakes on his family’s pick-up truck, sending it crashing into Bill’s home. Damage to the home amounts to $15,000. The truck is destroyed. Its actual cash value before the loss was $22,000. The child and Bill both suffer a broken arm. Medical expenses amount to $5,000 for each person. Damage to the home is covered under the peril “vehicles.” After the HO contract pays the claim, subrogation against the neighbor may occur; $15,000 less the deductible of $250 is paid. The truck is not covered under the HO contract. (The neighbor may have first party coverage.) Medical expense under the HO is not paid to the child since injury is arising out of the truck (the child may be covered for Medical Payments under an auto contract). Medical payment to Bill is also not covered under the HO since he is not eligible to receive payment. Bill may sue the neighbor for his medical claims.
3. Bill’s unattached tool shed burns, destroying the shed (damage = $7,000) and the lawn-care equipment inside (damage = $3,000). Assuming that the Replacement Cost Condition is met for Coverage B, the shed will be covered in full, less the deductible, and the personal property will be covered for ACV under Coverage B.
4. Bill negligently starts a fire while cooking. His home and all the contents are a total loss. It costs Bill an additional $14,000 to live in a rental home while his house is being rebuilt. Even though Bill is negligent, he can still collect for the damage to his home (this is not neglect). Bill can collect up to the policy limits for the dwelling ($120,000), other structures ($12,000), contents ($60,000), and loss of use coverage ($24,000). In this case, his loss of use coverage is limited to his additional costs of $14,000.
5. While burning leaves, Bill causes his neighbor’s house to burn (damage = $170,000). The fire caused to neighbor’s home will result in a property damage liability claim of $170,000. Coverage E has a $100,000 limit, and this is the maximum recovery.
6. While playing golf, Bill’s ball hits another golfer in the head. Bill yelled a warning before the victim, Bob, was hit. Bob claims not to have heard the warning, and sues Bill for $60,000 in medical expenses, $6,000 in lost wages (because he couldn’t perform his work for three months), and $100,000 for pain and suffering. Assume Bob wins the case, and it costs an additional $20,000 to provide Bill with a legal defense. Bill has $100,000 of legal liability coverage and $5,000 in medical payments coverage. Under normal circumstances, the $5,000 would respond first without regard to fault. If the suit continues (and it does in this case), $100,000 is available only. Defense costs are paid in addition to the $100,000, so the maximum the insurer pays in this case is $125,000 (medical payments, legal liability and defense costs) out of the total suit of $166,000 and $20,000 defense costs.
7. While his daughter is away at college, her stereo is stolen from her dorm room (damage = $1,500). Assuming dependency, age, and residency of the daughter, recovery under Coverage C = $1,500 – $250 deductible = $1,250.
8. While carrying his television to the basement, Bill drops it. It is a total loss (damage = $850). There is no coverage for dropping a TV set because no insured peril occurred. In order for interior damage to be paid under falling objects, there must be damage to the exterior first causing a breach in the exterior of the covered property.
9. Bill is a certified public accountant working from his office at home. He is sued for negligence in preparing Al’s income tax. The suit is successful and Al wins a $40,000 judgment. The business pursuits exclusion applies to Bill’s accounting activities; thus, there will be no recovery in this instance.
VI. Ideas for Instructors and Teaching Methods
1. GO THROUGH THE HOMEOWNER’S CONTRACT EXPLAINING ITS PARTS, COVERAGES, EXCLUSIONS, AND CONDITIONS. TEST THE STUDENTS’ ABILITY TO FIND THINGS IN AND INTERPRET THE CONTRACT WITH THE FOLLOWING HANDOUTS.
2. The following is a handout that we use in explaining and teaching how the loss settlement clause works in the homeowner’s contract. Students find that it is particularly helpful.
3. The second handout is given to students to test their knowledge of both the homeowners and automobile contracts (previous chapter). Some of the questions are controversial and may lead to extended discussions.
COMPUTING RECOVERY FOR LOSS UNDER HO CONTRACTS[1]
SECTION A (BUILDING) OR B (OTHER STRUCTURES)
RULES:
1. In general, if there is a covered loss and insurance coverage is equal to or greater than 80 percent of replacement cost[2] of the building at the time of the loss, then 100 percent of the replacement cost of the loss is paid, limited by the face amount of insurance.
2. In general, if the amount of insurance equals less than 80 percent of the replacement cost of the building at the time of the loss, then the larger of the following two amounts is paid (but maximum recovery is limited by the face of the policy):
a. Actual cash value of damaged part of building
b. Result of the following formula:
[pic][3]
CASE 1: TOTAL LOSS, REQUIREMENT MET
Replacement Cost of Building = $ 100,000
Insurance-to-Value Requirement = 80%
Amount of Insurance = $ 95,000
Loss (Replacement Cost) = $ 100,000
RECOVERY (Limit = policy face) = $ 95,000
CASE 2: PARTIAL LOSS, REQUIREMENT MET
Replacement Cost = $ 100,000
Insurance-to-Value Requirement = 80%
Amount of Insurance = $ 95,000
Loss (Replacement Cost) = $ 20,000
RECOVERY (full recovery) = $ 20,000
CASE 3: TOTAL LOSS, REQUIREMENT NOT MET
Replacement Cost = $ 100,000
Insurance-to-Value Requirement = 80%
Amount of Insurance = $ 60,000
Loss (Replacement Cost) = $ 100,000
[pic]
Assume the Property is 3/4 depreciated:
Actual Cash Value = $100,000 (replacement cost) × .25 (percent undepreciated)
= $25,000
Higher of formula or ACV is $75,000 but recovery is limited to the face value or $60,000.
CASE 4: PARTIAL LOSS, COINSURANCE REQUIREMENT NOT MET
Replacement cost of bldg. = $ 100,000
Insurance-to-Value Requirement = 80%
Amount of Insurance = $ 60,000
Loss (Replacement Cost) = $ 20,000
[pic]
Assume Property is 3/4 depreciated:
Actual Cash Value = $20,000 (Loss) × 0.25 (percent undepreciated) = $5,000
Higher of formula or ACV is $15,000
CASE 5: DEDUCTIBLES, REQUIREMENT MET
Subtract the deductible from the amount of insured’s loss (RC)
Example a.
$100,000 RC bldg.; $80,000 Ins.; $40,000 RC Loss; $100 ded.
Ans. $40,000 – $100 = $39,900
Example b.
$100,000 RC bldg.; $80,000 Ins.; $90,000 RC Loss; $100 ded.
Ans. $90,000 – $100 = $89,900 but Max. = $80,000
CASE 6: DEDUCTIBLES, REQUIREMENT NOT MET
– Subtract deductible from amount of insured’s loss, after applying penalty
– Compare with (ACV – deductible)
– Pick the larger of the two
EX: 100,000 RC bldg.
80% Requirement
60,000 Insurance
40,000 Loss (RC)
500 deductible
Building is 1/3 depreciated
Ans. (1)
[pic]
Ans. (2) ACV = 40,000 × 2/3 = 26,400
26,400 – $500 = $25,900
Answer: Pay #1 above (Larger of the two)
PROBLEM
THE FINCH FAMILY HOMEOWNERS CONTRACT
ASSUME THE FINCH FAMILY OF CHARLOTTE, NORTH CAROLINA, PURCHASED THEIR HOME IN 1966 FOR $42,000. SINCE THEN, COMPARABLE HOMES IN THEIR NEIGHBORHOOD HAVE MOST RECENTLY SOLD FOR $84,000. THE COST TO REPLACE THE HOME WOULD BE $75,000. IT IS ESTIMATED THAT THE HOUSE IS ONE-THIRD DEPRECIATED. THE FINCHS HAVE A $60,000 (COVERAGE A) HOMEOWNERS POLICY IN FORCE, SIMILAR TO THE POLICY SHOWN IN THE APPENDIX. ANSWER THE FOLLOWING QUESTIONS AS IF EACH QUESTION WERE A SEPARATE EVENT.
1) How much will the Finchs collect for a total covered fire loss under coverage A?
2) How much will be collected for a $20,000 partial loss under coverage A?
3) What would be your answers to questions 1 and 2 above if the Finchs had only $42,000 of insurance of Coverage A?
4) What would be your answers to questions 1, 2, and 3 above if there is a $1,000 deductible on Section I?
POLICY QUESTIONS
HO-2 AND PAP
MR. TIBBS OWNS THE HOMEOWNERS (HO-2) AND THE PERSONAL AUTO POLICY FOUND IN YOUR TEXT’S APPENDICES. THE FOLLOWING LIMITS APPLY.
|HOMEOWNERS LIMITS: |PERSONAL AUTO POLICY LIMITS: |
|A = $65,000 |A = $100,000/$300,000/$50,000 |
|B = $6,500 |B = $1,000 |
|C = $32,500 |C = $100,000/$300,000 |
|D = $13,000 |D = ACV $200 Ded. Collision |
|E = $100,000 |$0 Ded. Other Than Collision |
|F = $500 | |
|$100 flat deductible Section I | |
|Replacement cost of the dwelling is $72,000. Replacement cost of the |One vehicle listed on policy |
|other structure is $10,000 If a loss occurs to real or personal | |
|property, 1/3 depreciation applies, therefore, ACV = 2/3 replacement | |
|cost. | |
Your assignment is to determine if the following situations are covered by the above policies. If there is coverage how much should be paid? The two policies above are the only ones in existence. No other contracts are to be considered. Each event is a separate occurrence.
1. Mr. Tibbs rents out a room to two students. One of the students falls down the stairs. Hospital costs equal $4,500. In addition, all tuition was lost due to the inability to complete the semester. The student sued Mr. Tibbs for $5,500.
2. Mr. Tibbs wakes up one morning and discovers a large tree leaning on the house. Mr. Tibbs knew that the tree was dead and should have removed it two years ago. The cost to repair the dwelling is $3,000; to remove the tree $450; and the cost to plant a new tree $300.
3. The insured is found to be legally obligated to pay $170,000 because of bodily injury to a neighbor (a fishing partner) caused by an accident involving Mr. Tibbs’s 35 horsepower outboard motor boat.
4. In question 3, the boat was rented to Mr. Tibbs, and the owner of the boat sues Mr. Tibbs for $3,000 in property damage because the boat sank due to Mr. Tibbs’s negligence.
5. Mrs. Tibbs leaves a suitcase filled with clothing in a motel room. Twenty miles down the road, she remembers, and returns to collect it. Upon entry, she discovers that the suitcase is missing. Replacement cost of goods and suitcase is $2,300.
6. Mr. Tibbs’s house is 55 percent destroyed by fire. Local building codes have changed since it was originally built, and the codes state that the remaining portion of the structure must be torn down because the 45 percent is deemed unsafe. The mere change in building codes will increase the cost of replacement by 10 percent.
7. In question 6 above, when Mr. Tibbs inventories his damaged property, he discovers that a $6,000 (ACV) gun collection is missing. The adjusters conclude that in the confusion during the fire, someone stole the property.
8. Mr. Tibbs fails to trim his bushes near the street. The bushes obstruct the view of traffic turning the corner. A motorist, when inching out to see around the bushes, is struck by a car. Both cars are “totaled,” and each driver sues Mr. Tibbs for $135,000 in bodily injury and $5,000 in property damage.
9. Dr. Tibbs is a medical doctor who operates out of an office in his house. A patient comes to see Dr. Tibbs. While sitting in a chair in the waiting room, the chair breaks causing back injuries to the patient. The patient sues for medical expenses of $7,000, loss of wages of $16,000, and pain and suffering of $20,000.
10. Mr. Tibbs takes his car to a repair shop. While the mechanic is test driving the car, he negligently rear ends a car stopped at a red light. The mechanic and Mr. Tibbs are both sued separately for $18,000 each.
11. A tornado causes an unattached garage to collapse on the owned car. The shed and the automobile are total losses. How much is covered under the two contracts?
12. Mr. Tibbs has an argument with his wife and goes bar hopping. On the way home, he loses control of the car and injures three people. The police find that Mr. Tibbs is legally intoxicated. Each claim $150,000 in bodily injury. Their car is totaled. Mr. Tibbs’ car requires $1,200 in repairs.
13. In question 12, Mrs. Tibbs is also in the car. She is injured and sues Mr. Tibbs for $350,000.
14. Mr. Tibbs decides to sell cars. One day, while he is demonstrating a new car, an accident occurs and the prospective buyer is injured. Mr. Tibbs and the auto company are each named in the suit claiming $150,000 of bodily injury.
15. Mr. Tibbs decides to move to Nevada, so he rents a large (18-wheel) moving truck. During the trip, he flips the truck on an icy road. The rental company sues Mr. Tibbs for $175,000 of property damage liability.
16. In question 15, instead of moving his own property, Mr. Tibbs decides to move property of others for a business. The damage to the truck equals $175,000.
17. Mrs. Tibbs’s fur coat (worth $700 ACV) is stolen out of the car after it is parked by an attendant at a restaurant.
18. Mr. Tibbs’s car is at a repair shop. For transportation, he uses his son-in-law’s motorcycle. While using it, he runs down a pedestrian in a crosswalk. The pedestrian sues Mr. Tibbs for $7,600.
19. Mr. Tibbs buys a second car. Five days after the car is purchased, he collides into a telephone pole. Damage to the car is $2,000. He had not told his agent about the car.
20. While driving his car under a bridge being spray painted by the Department of Transportation, the car is coated with paint. Because of the chemicals being used in the paint, the auto’s glass is permanently pitted. Cost to repaint the car is $3,200, and the cost to replace the glass is $1,200.
ANSWERS
THE FINCH FAMILY
HOMEOWNERS CONTRACT
1) No coinsurance penalty. Collects RC $60,000 if replaced.
2) No coinsurance penalty. Collects RC, $20,000 if replaced.
3.1) Does not have at least 80 percent of RC on building. $42,000 payable; larger of $50,000 and $52,500 but can’t pay more than face amount.
3.2) Does not have at least 80 percent of RC on building. $14,000 payable; larger of $13,333 and $14,000
4.1) $60,000; $75,000 – $1,000 = $74,000 but can’t pay more than the face amount.
4.2) $19,000; $20,000 – $1,000
4.3 a) Does not have at least 80 percent of RC on building $42,000, larger of $49,000 and $51,800. Can’t pay more than policy limit.
4.3 b) Does not have at least 80 percent of RC on building $13,300; larger of $12,333 and $13,300.
Applies to all answers: Can’t collect replacement cost unless actually repairs or replaces.
POLICY QUESTIONS
1. BI Liability paid $5,500 – hospital costs and tuition; no exclusion applies.
2. House $3,000 – $100 deductible; tree $0; removal $0
3. $0 coverage excluded; size of boat and boat is owned and not declared
4. Care, custody, and control exclusion $0
5. Theft covered; ACV = $2,300 – Dep. – $100 = $1,433
6. 55% × 72,000 = $39,600, $39,600 – $100 ded = 39,500; plus 10% of 65,000 for ordinance or building code changes
7. $6,000 by fire— ded already taken; fire cause of loss, not theft—doctrine of proximate cause
8. BI and PD max. $100,000 on HO
9. Business pursuits exclusion
10. Mechanic $0 (in the automobile business); Tibbs up to 100/300/50 therefore $18,000
11. Shed: larger of $8,043 or $6,566, but can only get $6,500; ACV auto – $0 other than collision ded.
12. 100/300/50 available so 3 × $100,000 paid, up to $50,000 available for PD liability; Tibb’s car. $1,200 – $200 ded collision = $1,000
13. $100,000 but policy limits must be considered; Med Pay pays up to $1,000.
14. No coverage for use in the automobile business.
15. $0 – truck not a “nonowned” vehicle. Look at definition of “nonowned” in Section D.
16. $0 same as question 15 and excludes moving people or property for a fee (public or livery conveyance).
17. $700 ACV – $100 deductible paid. Property covered for theft anywhere in the world.
18. $0, no coverage for using any vehicle with less than four wheels.
19. $2,000 – $200 deductible auto; see definition page “your covered auto.”
20. Other than collision loss $4,400 – $0 deductible.
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[1]Except HO-8
[2]Replacement cost is equal to the amount it would cost to repair or replace with like kind and quality of material—not reproduction cost.
[3]Anytime this formula is used, the amount may be reduced by certain types of property that normally are not destroyed when a loss occurs. Refer to the contract for specifics.
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