Chapter 13

Multirisk Management
Contracts: Homeowners
Ch13 Learning Objectives and
Agenda
1. Definition of homeowners insurance
2. Types of homeowners insurance policies
3. Structure of the homeowners insurance policy
4. The Homeowners Special Form (HO-3)
5. Endorsements that supplement coverage in
the HO-3
6. umbrella liability policy
Ch13 Part I agenda

1. Homeowners insurance definition

2. Seven forms of standard HO policy
3. Named peril policy vs. open peril policy
4. The structure of HO policy
5. Introduction to the major coverages of
HO3
6. Explanation of the policy provisions:
“insureds” and “insured location”
What is homeowners insurance?
• a package policy (multi-lines)
– 1st party property
• insures the home itself and other structures
• the things you keep in it.
– 3rd party liability
• your and your family members’ liability or legal
responsibility to others.
– 3rd party medical expense
 What is homeowners insurance?
• Multiple-perils
– E.g., Fire, windstorms, theft, etc.
– Named peril policy
• Only listed perils are covered
– Open peril (all risk) policies
• all perils are covered except those specifically
excluded
• Exceptions: e.g., flood, earthquake, mold,
poor maintenance
 Standard HO policy forms

• HO8 • HO4
Modified Coverage Form Contents Broad Form
• HO1 Basic Form
• HO2 Broad Form • HO6
• HO3 Special Form Condominium unit Form
• HO5
Comprehensive Form
Named peril versus open peril
• Named peril policy: only named perils are cover.
– Basic list of perils covered: fire, lighting, windstorm,
hail, explosion, riot, civil commotion, vehicles, aircraft,
smoke, vandalism, malicious mischief, theft, and volcanic
eruption
– Expanded list (broad list): basic list+ glass breakage,
falling objects, weight of ice, snow, or sleet, collapse,
accidental discharge of overflow of water or steam,
rupture of hot water and air conditioning systems, freezing
of plumbing, and artificially generated electricity

• Open peril policy: all perils are covered except

those explicitly excluded.
Figure 13.2 - Homeowners Policy
Structure
Policy form
Major Coverages of HO3 (special form)

Section I

Section II
Some definitions
• “You”
– "named insured“ and the spouse if a resident of the same
household
• “We”
– Company providing this insurance
• “Insured”
1. You and residents of your household
2. A student enrolled in school full time
3. Party legally responsible for your animals/watercrafts (Sec II)
4. Party who use a “motor vehicle” on an “insured location” with
permission (Sec II)
5. others
“insured location”
1. the “residence premises” shown in the declaration;
2. any part of a premises that is not owned by an insured and
where an insured is temporarily residing;
3. individual or family cemetery plots or burial vaults of an
insured;
4. any part of a premises occasionally rented to an insured for
other than business use
5. Some other locations
Ch13 Part I summary

1. Homeowners insurance definition

2. Seven forms of standard HO policy
3. Named peril vs. open peril
4. The structure of HO policy
5. Major coverage of HO3
6. The” insureds” in HO policy
7. The “insured location” in HO policy
Ch13 Part II Agenda (continue the HO3
policy explanation)

1. Section I coverage A: Dwelling

2. Section I Coverage B: detached private
structures
3. Section I Coverage C: personal property
4. Section I Coverage D: additional living
expense and loss of use
5. Section I extension of property coverage
Section I—Coverages
• Coverage A—Dwelling
– Covers:
• The dwelling on the residence premises plus
• structures attached to the dwelling, e.g., attached
structure, indoor swimming pool.
• Including materials and supplies located or next to the
dwelling used to construct, alter or repair the dwelling.
– Based on open peril basis and replacement
cost valuation basis.
– Limit liability for coverage A:
• chosen by P/H
Coverage A: Dwelling Building &
Attached Structures (example)
Section I—Coverages
• Coverage B: Detached Private Structures
– Covers:
• structure that is not attached to residence.
• For example, outdoor swimming pool, garden shed,
fences, detached garage
– Based on open peril basis and replacement
cost valuation basis.
– Coverage limit for B:
• 10% of the coverage limit for A
• Aggregate limit
Coverage B: Detached Private
Structures (example)
 Section I—Coverages
• Coverage C: Personal Property
– Covers your personal property anywhere in the
world.
• Property lost or damaged at your home
• Your property temporarily away from your
premises
– Can include personal property of others while in your
possession either at home or away from home.
– Includes the personal property of any student insured
by this policy who is temporarily living away from home.
Exercise
Which of the following losses is most unlikely
to be covered by Tom’s homeowner insurance?
1. A borrowed computer stolen from Tom’s home
2. Loss of wedding ring during Tom’s trip to
Canada
3. Tom’s son lost his i-pod in his university dorm
4. Tom’s daughter, studying in SCSU and living in
an off-campus apartment, lost her TV and
computer in a break-in.
Answer: 4
 Section I—Coverages
• Coverage C: Personal Property
– Coverage limit for C: 50% of A
– Special Limits on some items (sublimits under
Coverage C), e.g.,
• For loss by theft of Jewelry, gems, fur: $1500 in all.
– Based on a broad peril list, and actual cash
value valuation basis.

– Personal Articles Endorsement/personal articles

floater
• All risk coverage, no deductible, property covered
everywhere
Coverage C: Personal Property (example)
Coverage C: Personal Property (example)
 Section I—Coverages

• Coverage D: Additional Living Expense &

Loss of Use
– covers
• Additional living expense
• Loss of fair rental value
– Because of prohibited access caused by
– damage to premises by an insured peril.
– civil authorities prevent its use
Coverage D: Additional
Living Expense & Loss of Use
 Section I—Coverages
• Extensions of Property Coverage
– Not included in the limit of Coverage A - D
– Examples include, for example:
1. Debris removal
2. fire department charges
3. lock replacement
4. inflation protection
5. freezer food, fallen trees
6. reasonable repair, etc
7. Loss under the credit card, fund transfer card, forgery, and
counterfeit money coverage
– Provided at no additional cost in the policy.
Ch13 Part II: Summary

1. Section I-Coverage A: Dwelling

2. Section I-Coverage B: detached private
structures
3. Section I-Coverage C: personal property
4. Section I-Coverage D: additional living
expense and loss of use
5. Section I-extension of property coverage
Ch13 Part III Agenda (continue the
HO3 policy explanation)

1. Section I-perils insured against

2. Section I-exclusions
3. Section I-conditions
4. Determining coverage
Section I—Perils Insured Against
• Coverages A and B—Dwelling and
Other Structures:
Section I—Perils Insured Against
• Coverages A and B—Dwelling and Other
Structures:
– C) caused by: (exclusion continue, for example)
• Freezing of a plumbing, heating, air conditioning,
automatic fire protective sprinkler system, etc
• theft in a dwelling under construction
• Vandalism and malicious mischief, if the dwelling
has been vacant for >=60 consecutive days
• Mold, fungus or wet rot
Section I—Perils Insured Against
– Coverage C—Personal Property
1. Fire or lightning
2. Windstorm or hail
3. Explosion
4. Riot or civil commotion
5. Aircraft
6. Vehicles
7. Smoke, means sudden and accidental damage from smoke;
doesn’t include loss caused by smoke from agricultural
smudging or industrial operation.
8. Vandalism or malicious mischief
9. Theft
Section I—Perils Insured Against
– Coverage C—Personal Property (continue)
10. Falling objects
11. Weight of ice, snow, or sleet
12. Accidental discharge or overflow of water or
steam
13. Sudden and accidental tearing apart, cracking,
burning, or bulging
14. Freezing
15. Sudden and accidental damage from artificially
generated electrical current
16. Volcanic eruption
Exclusions

• anti-concurrent causation clause (Quoted

from HO3 policy)
– “We do not insure for loss caused directly or
indirectly by any of the following. Such loss is
excluded regardless of any other cause or
event contributing concurrently or in any
sequence to the loss.”
Section I—Exclusions

• Concurrent causation clause

– Doctrine that states when a loss is caused
simultaneously (concurrently) by two or more
perils, and at least one peril is covered, the
loss is covered.
 Section I—Exclusions (A~D)
• Coverage usually is not provided for the following
1. Buildings used for business purposes
2. Normal wear and tear of dwelling
3. Motor vehicles
4. animals, birds or fish
• Excluded perils, for example
1. flood
2. Earthquake
3. Power Failure
4. Freezing of a plumbing, heating appliance
5. Neglect (not the same as negligence)
6. War
7. Nuclear Hazard
8. Intentional Loss
Exclusion exercise 1
Which of the following losses is most likely
to be excluded from coverage in a
homeowners’ insurance policy?
1.theft of personal property
2.damage from lightning strike
3.property loss due to insured’s intentional
act
4.fire loss
Answer: situation 3.
Exclusion exercise 2
Which of the following losses is normally
included in homeowners’ insurance coverage?
1. normal wear and tear on the dwelling
2. property loss caused by a flood
3. damage to motor vehicles
4. loss or damage to the homeowners’ personal
property while staying at a hotel in Las Vegas.
Answer: situation 4.
Section I—Conditions
• Duties After Loss
1. Give immediate notice to ER or its agent.
2. Notify the police in case of theft.
3. Notify credit card companies, if applicable.
4. Protect the property from further damage (reasonable
and necessary repair and keep an accurate record)
5. Cooperate with the Er’s investigations of the claim.
6. Prepare an inventory of damaged personal property
(quantity, description, and amount of loss)
7. Exhibit the damaged property as often as required and
submit to examination under oath.
8. Submit to the ER, within sixty days of its request, a
signed, sworn statement of loss.
Section I—Conditions
• Loss Settlement condition
– Personal property losses
• paid on the basis of actual cash value at the time
of loss, not exceeding the cost to repair or replace
the property.
– For buildings, if the coverage equals at least
80% of the current replacement cost of your
home
• You are paid the full cost of replacing or repairing
the damage up to the policy limits.
Section I—Conditions
• Loss Settlement condition (continue)
– For buildings, If the amount of coverage is <
80% percent of the replacement cost, the ER
will pay the larger of
• The actual cash value, which is replacement cost
minus depreciation, or
• That proportion of the cost to repair or replace,
without deduction for depreciation
– “that proportion”= “total amount of insurance on the
building bears” to “80% of its replacement cost”
Section I Conditions
Other Insurance And Service Agreement condition:
• If a loss covered by this policy is also covered by:
1. Other insurance, we will pay only the proportion
of the loss that “the limit of liability that applies
under this policy bears” to “the total amount of
insurance covering the loss”; or
2. A service agreement, this insurance is excess
over any amounts payable under any such
agreement.
Figure 13.3 - Determining Coverages
Ch13 Part III Summary

1. Section I-perils insured against

2. Section I-exclusions
3. Section I-conditions
4. The steps of determining coverage
Ch13 Part IV Agenda

Continue the HO3 policy explanation:

1. Section II-coverage E: liability coverage
2. Section II-coverage F: Medical payment coverage
3. Section II-exclusions
4. Section II-additional coverages
5. Section II-conditions.
6. Section I and II-conditions
7. Endorsements
•Personal umbrella policy
 Section II—Liability Coverages
Coverage E: Liability Coverage
• pay for damages and provide a defense for
insured occurrence caused by:
– Your personal actions anywhere in the
world;
– Your ownership, use, or occupancy of the
premises defined in the policy.
Coverage E: Liability Coverage
(example)
Section II—Liability Coverages

Coverage F: Medical payment Coverage

– Pays medical expenses of nonresidents who
are injured while on the insured premises.
(off, under some circumstances)
– Regardless of fault or negligence of the
insured.
– Limit: typically $1000~$3000 per person
Coverage F: Medical payment Coverage
 Section II—Exclusions (E and F)
1. loss or damage to the insureds’ own property.
① Damage to property owned, used, or occupied by
insured
② Damage to property in your care, custody or
control.
2. bodily injury to you or to any person residing
in your household other than a residence
employee.
3. Intended injury
4. motor vehicle liability, watercraft liability, war
exercise
• Assuming the following loss is covered, how much
would be paid for the following losses under a standard
HO3 policy with dwelling coverage of $50,000? Assume
the third party liability limit is $100,000 and medical
payment coverage limit is $1000. and assume no
endorsements have been purchased. (for simplicity,
assume full coverage, and no deductible)
1. the H/O’s dog bites a child and $5000 of medical
expenses are needed.
2. A fire in the yard causes the following damage: $2000 to
a fence, $10,000 to an out-door in-ground swimming
pool, and $2,500 to a tool shed.
3. A social guest trips over a tricycle, smashes his head,
and obtains a judgment of $75,000.
Exercise answer

1. $1000 if owner is not liable for the accident

(intentionally provoke the dog); if is held
liable for the accident, then $5000.
2. limit=50,000*0.1=5000, Since all of these
items would be covered up to $5,000 under
the other structures coverage, the insurer
would pay $5000
3. The insurer would pay the entire damage of
$75,000
Section II—Additional Coverages

1. Claim expenses
2. First-aid expenses
3. Damage to property of others
4. Loss assessment
Section II Conditions (example)

Other Insurance
• This insurance is excess over other valid and
collectible insurance except insurance written
specifically to cover as excess over the limits
of liability that apply in this policy.
Sections I and II—Conditions
Cancellation condition
•You may cancel by giving the insurer written
notice.
•insurer may cancel:
1. Nonpayment of premium
2. A new policy in effect less than sixty days may be
canceled for any reason with thirty days written
notice.
3. a material misrepresentation or substantial change
(increase) in risk
Sections I and II—Conditions
Assignment condition
– assignment means transferring the policy to
others.
– Assignment of this policy will not be valid unless
insurer gives written consent.
Subrogation condition
– insurer may require an transfer of rights of
recovery for a loss to the extent that payment is
made.
Endorsements

1. Earthquake endorsement
2. Personal property replacement cost
endorsement
3. Scheduled personal property
endorsement
4. Business pursuits endorsement
5. Personal injury endorsement
6. Mold endorsement
Personal Umbrella Policy

• Excess liability coverage

– Requires Ed has other liability coverage,
such as homeowner liability and auto liability
– Applies coverage once losses exceed limits
on other policies
• auto liability
• Homeowners
– Limits > $1 million
Umbrella policy Exercise
Suppose that Mr. King, a multimillionaire, has the
following liability coverages:
– Auto $300,000
– Homeowners $200,000
– Umbrella $1,000,000
If he loses a $750,000 lawsuit resulting from a neighbor
falling into his pool and drowning, which insurer(s) will
pay and in what amounts?

Answer: Homeowners’ insurer $200,000; Umbrella

$550,000
Exercise (section 13.1 review question 8 )
• Diane has her home and personal property insured under an
HO-3 policy and is covering the actual value of the home. She
has no endorsements. Indicate whether each of the following
losses is covered and indicate what section of the HO-3 policy
supports your answer.
A. A fire damaged the home, destroying two of the end tables in
the living room.
B. The fire also destroyed Diane’s fur coat, which was valued at
$100,000, and her three computers, valued at $1,500 each.
C. The house sustained smoke damage from a nearby industrial
plant.
D. A windstorm destroyed five trees in the large yard.
E. A windstorm caused a tree to fall on the roof. The roof is a
total loss.
Exercise (section 13.1 review question 8 )
F. Diane’s dog bit a neighbor’s daughter.
G. Diane hurt her teammate while playing soccer. The
teammate was in the hospital for three days.
H. During a skiing trip, Diane left the fireplace burning in her
cabin when she went out. The cabin was destroyed in the
fire.
I. Diane rented a snowmobile on the same trip and collided
with a skier. He sued her for $50,000.
J. Diane is a self-employed dietician who works at home. A
client sued her for $30,000.
K. Diane entertained members of her bridge club and served
a wonderful buffet lunch. Three guests became ill and
sued Diane for damages. The court awarded each
$15,000.
Exercise (section 13.1 review question 8 )
Answer:
a)Yes. Coverage A and Coverage C.
b)limited. Subject to sublimit in coverage C.
c)No. caused by smoke from agricultural smudging or industrial
operations is not covered.
d)limited, by the additional coverage
e)Yes. Coverage A.
f)Yes. Coverage E or coverage F.
g)Yes. Coverage E or coverage F.
h)Probably, yes, Coverage A, If she only left for a short period of
time. No, if left for a long period of time.
i)Yes. Coverage E.
j)No. needs a business purpose endorsement.
k)Yes. Coverage E.
Ch13 Part IV Summary

1. Section II-coverage E: liability coverage

2. Section II-coverage F: Medical payment
coverage
3. Section II-exclusions
4. Section II-additional coverages
5. Section II-conditions.
6. Section I and II-conditions
7. Endorsements
8. Personal umbrella policy
Ch13 Summary

1.The definition of Homeowners insurance.

2.Seven forms of homeowners insurance
policies
3.The Structure of the HO3
4.policy provisions of the HO3
5.HO3 Endorsements
6.Umbrella liability policy.
Reminder

• Please complete Ch13 quiz before the

due date.