What most people think of as homeowners insurance really is composed of several categories that include policies intended for:
owners of single-family residences, including duplexes and triplexes where the property owner occupies one or more dwelling unit (i.e.,homeowners policies);
owners of homes that are not single-family residences, but rather where there are multiple units in a given building, where the building is jointly owned by the owners of individual living units (i.e.,condominiums, townhouses, and cooperatives); and,
Each of these categories of policies is structured and organized in the same overall fashion. That basic structure follows, with detailed information regarding specific parts discussed later in detail. First, the policy’s declarationsappear, where the subject matter of the coverages afforded are stated. This material includes:
the name of the insurer;
the policy number;
the inception and expiration dates of the policy (i.e.,the policy period);
the named insured;
the named insured’s mailing address, and if different, the address of the premises insured;
the policy limits applicable to:
the property coverages;
the liability coverage; and,
the medical payments coverage;
the forms and endorsements comprising the policy; and,
in states requiring that the agent countersign the policy, the agent’s countersignature.
In addition, most states require that the declarations of the policy issued by nonadmitted insurers (that is, excess or surplus lines insurers) must inform the insured that he or she will not be protected by that state’s insurance guaranty fund in the event of insolvency of the insurer.
The policy’s definitionssection often follows, although some insurers’ policies reserve the definitions for the last section of the policy. Personal lines policies more commonly place the definitions at or near the beginning of the policy, with commercial lines policies placing the definitions at or near the end of the policy.
The policy’s property coverage provisions appear next, which
are usually presented in the following order. The insuring agreements(or coverage grants) appear first. There are typically separate insuring agreements applicable to:
the dwelling and separate structures;
personal property; and,
additional living expense.
The exclusionsapplicable to each of these subsets of coverages appear next. In most cases the need for a separate listing of exclusions applicable to the building and contents coverages is pretty obvious. Exclusions fall into two primary categories: perils (i.e.,risks of loss) not covered and types or items of property that are not covered. The policy’s conditionsspecifically applicable to the property coverages appear next. Policy conditions generally state acts that must be done or that the insured must refrain from doing in the event of a claim in order for coverage to exist. Policy conditions can also set forth items such as the manner in which claims will be valued, dispute resolution mechanisms, or may provide procedural mechanisms for how losses will be paid in the event of death or incapacity of the insured.
There is usually a separate list of conditions that apply only to the liability coverages and another list of policy conditions that apply to both the property and the liability coverages. The most important typical conditions are highlighted later.
The policy’s liabilityand medical payments coverageprovisions appear next, and are usually presented in the same order as just outlined for the property coverages. First, the liability and medical payments insuring agreements (also known as coverage grants) are stated.
The statement of these insuring agreements often includes the description of so-called additional coverages.In some circumstances, the statements of these additional coverages follows, rather than precedes, the exclusions.
The exclusionsapplicable to the liability and medical payments coverages are stated. These exclusions are often broken down into several categories or groups, such as:
the exclusions applicable only to the liability coverages;
the exclusions applicable to both the liability and the medical payments coverages; and,
the exclusions applicable only to the medical payments coverages.
The conditionsapplicable to the policy’s liability and medical payments coverages are next stated. One of the most important groups of conditions applicable to the liability coverages is the one stating the insured’s duties in the event a third party sues or makes a claim against the insured. It is key if someone makes a claim against you or sues you to notify your insurer immediately. Keep copies of all demand letters you receive and all legal papers that are served on you. Give copies of these documents to your insurer promptly when it asks for them. Do not discuss the claim or the law suit with the person who is making the claim or suing you, nor with that person’s attorney. Do not admit liability. Do not make any payments to the person who is suing you without the advance knowledge and consent of your insurance company. Such payments might later be characterized as an admission of liability. Your insurer should hire a lawyer to defend you.
If you hire your own lawyer before the insurer hires a lawyer to defend you, the fees charged by your lawyer may not be covered.
Most policies’ basic coverage forms conclude with a section that contains the conditionsthat apply to both the property and to the liability coverages.
Finally, your policy probably will contain a number of endorsementsthat add to, delete, or modify provisions contained in the basic policy form. Endorsements are usually one, two, or three pages long each. Insurers use endorsements in order to reduce the administrative costs of reprinting their entire policy form in order to incorporate these new or changed provisions. Often, endorsements are used to restate a policy provision after a court decision interprets the provision in question in a manner different from how the insurer believed it should have been interpreted.
Commonly, endorsements add exclusions not stated in the basic policy form. These often include exclusions for such things as sexual molestation, physical abuse, or mental abuse of minors; home daycare services performed for a profit; and dog bites.
The following chapters discuss the principal coverages of the standard HO 2 and HO 3 homeowners policy forms published by the Insurance ServicesOffice(ISO). ISO is an insurance industry support organization that develops rates and policies. Most insurers’ policies rely heavily on ISO policy language, even if they do not actually use ISO policy forms.
PROPERTY COVERAGESUNDER HOMEOWNERS POLICIES
First-party property coverages provide for indemnification to the insured, for damage to or destruction of covered propertyby an insured peril. There are several concepts set forth in the previous sentence. First, there is the concept of insured capacity.In order to be entitled to payment under the first-party property coverages of a homeowners, condominium owners, townhouse owners, or tenants’ policy, the person seeking payment must qualify as an insured.
Second, there is the concept of insurable interest.In order to be entitled to payment under the property coverages of a homeowners policy, the person seeking payment must not only qualify as an insured but also have an ownership or other insurable interest in the damaged or destroyed item of property. Although people commonly speak of property insurance as insuring property, it actually does not. Rather, property insurance policies are personal contracts between the insured and the insurer. The insurer is actually insuring the insured’s pecuniary interest in property. This pecuniary interest in property of an insured person is the concept of insurable interest. Third, the item of damaged or destroyed property for which a loss payment is sought under the property coverages of a homeowners policy must qualify as covered property.
Fourth, in order for payment to be made for damage to or destruction of an item of covered property, the loss to the property must be the result of coveredperil. Perilsare active physical forces, fortuitous (that is, unexpected or unintended) in nature, that damage or destroy property.
INSURED CAPACITY: NAMED INSUREDS
Commonly, more than one person qualifies as an insured under a policy. The person named in a policy’s declarations is the named insured. The named insured under the policy has greater rights and responsibilities than other persons who may also qualify as insureds.
Insured Capacity: Other Persons Insured
The policy’s definitions sections will define who, other than the named insured, may qualify as persons insured under a homeowners policy.
For example, your mortgage lender is added to coverage as an additional insured to the extent of its security interest in your house, condominium, or townhouse. This is generally the outstanding loan balance. A mortgage lender is usually added to coverage under an insurance industry standard endorsement or provision known as a standard mortgage clause. Sometimes the language of the standard mortgage clause is included directly within the policy form,
as opposed to being added as an endorsement to the policy.
The definition of insuredunder the ISO standard HO 3 homeowners policy includes such persons as:
the named insured and his or her relatives who are residents of the named insured’s household;
nonrelatives of the named insured under the age of 21 who are residents of the household and are in the care of the named insured; and,
full-time students who were (a) residents of the named insured’s household before moving out to attend school, and (b) relatives of the named insured, and (c) under the age of 24, or (d) in the care of a named insured or a relative resident of a named insured and under the age of 21.
The persons insured provisions of homeowners policies issued by insurers that use their own forms may differ. Depending on your particular circumstances, the definition of who does and does not qualify as an insuredunder different insurers’ policies may be of importance to you. For example, some insurers’ homeowners coverage persons insured definitions do not extend insured capacity to students off premises. Thus, if you have a child away at school or college, his or her personal property may not be covered if your policy does not include your child as an insured person while away at school or college.
What is most important to note is that residents of a household who are not relatives of the named insured and who are (a) over 21 and (b) not in the care of a named insured do notqualify as insureds. An example of this would be if the named insured is renting a room to a boarder or is letting a nonrel-ative live on the insured premises without charge. In this situation, that person’s property (i.e.,his or her clothing and other possessions) is notcovered by the named insured’s homeowners policy, because such persons do not qualify as persons insured.
In order to qualify for coverage under the first-party property coverages of the homeowners policy, a person cannot simply qualify as an insured. He or she also must also have an insurable interestin the damaged or destroyed property for which payment of a loss is sought.
This principle is perhaps best illustrated by considering the situation of a mortgage lender that is an insured under a homeowners policy issued to the borrower on the home loan. The mortgage lender has a security interest in the residence to the extent of the outstanding balance owed by the borrower. By virtue of the mortgage clause in the homeowners policy, the mortgage lender has an insurable interest in the residence and is entitled under the policy to be named as a payee on any check issued by the insurer for damage to or destruction of the home. The mortgage lender does not, however, have an insurable interest in the home as to any sums payable for damage to or destruction of the residence that exceed the outstanding loan balance. Nor does the mortgage lender have any insurable interest in the homeowner/borrower’s personal property and is not entitled to payment for damage to or destruction of the borrower’s personal possessions.
Answering what is covered propertyis generally easy. It will be set forth in your policy. As to the dwellingand other structures(some policies use the term separatestructures) portion of the ISO HO 3 policy, the policy does not cover land—including the land on which the dwelling or other structures are located. Under the other structurescoverage, other structures that are rented or held for rental to any person who is not a tenant of the dwelling are not covered. There is an exception to this provision for other structures rented for use solely as a private garage.
Nor does the other structures coverage apply to structures from which any businessis conducted. The clear import of this limitation, which corresponds with several other policy provisions discussed later, is that homeowners policies are intended to cover risks of loss incidental to the personal use and occupancy of a dwelling and associated other structures—not an insured’s businessactivities. If an insured has business-related loss exposures, the insured needs to buy a separate business or commercial policy to cover those nonpersonal, business loss exposures.
What constitutes covered propertyunder the personal property provisions of a standard ISO HO 3 homeowners policy is defined by three separate categories. These are:
- covered property;
- property which is covered, but for which the policy establishes strict limits on the dollar amount of coverage; and,
- property that is not covered.
The concept of covered property is stated broadly initially and is then limited by the two sections of the policy that follow. In other words, the boundaries of coverage are defined more by exclusions than they are by the grant of coverage itself.
Covered property is personal property owned or used by an insured anywhere in the world. In addition, after a loss (and at the insured’s request), coverage extends to personal property owned by others (including a guest or residence employee) while that personal property is located on the residence premisesoccupied by an insured.
There are limits on claims made for property not located on the residence premises. Exceptions are made to these limits for personal property that is moved from the residence premises because the residence premises is being repaired, renovated, or rebuilt and for personal property in a newly acquired personal residence. The exception for a newly acquired personal residence is only good for thirty days from the time the insured begins to move the personal property from the current residence to the new residence.
Low Limit Covered Property
There are several categories of covered propertythat are made subject to rather low limits. Most homeowners insurers will insure these categories of property for higher limits at a higher premium. These categories of personal property for which coverage is afforded subject to sublimits are:
a $200 sublimit on cash, bank notes, bullion, gold, silver, platinum, coins, metal, scrip, stored value cards (i.e.,electronic gift cards), and smart cards;
a $1,500 sublimit on securities, accounts, deeds, evidences of debt (i.e.,promissory notes), letters of credit, manuscripts, personal records, passports, tickets, and stamps, regardless of the medium (paper or computer software) on which this type of material exists;
a $1,500 sublimit on watercraft, including their trailers, furnishings, equipment and outboard engines or motors;
a $1,500 sublimit on trailers or semitrailers used for items other than watercraft;
a $1,500 sublimit for loss by theft of jewelry, watches, furs, or precious or semi-precious stones;
a $2,500 sublimit for a loss by theft of firearms and related equipment;
a $2,500 sublimit for loss by theft of silverware, silver plate, gold ware, gold plate, platinum ware, platinum plate, and pewter, including flatware, hollowware, tea sets, trays, and trophies;
a $2,500 sublimit on property located on residence premisesthat are used primarily for businesspurposes;
a $500 sublimit on businessproperty away from residence premisesexcept as described in the following two categories;
a $1,500 sublimit on electronic apparatus and accessories while in or on a motor vehicle, but only if the apparatus is equipped to be operated by power from the motor vehicle’s electrical system even though capable of being operated by other power sources; and,
a $1,500 sublimit on similar items as described in the preceding paragraph while away from residence premisesbut while not in or on a motor vehicle, with the same operating power limiting language.
This is an area in which comparison of the coverages offered by insurers using the ISO HO 3 homeowners policy, as opposed to proprietary policy forms, may make a difference to you. There is a great deal of variation from insurer to insurer, both in the magnitude of the sublimits their policies provide and the categories of property that are subject to such sublimits.
The policies offered by some insurers provide broader coverage than that of the ISO HO 3 policy. Other companies’ policies provide lesser or narrower coverage. This is one of the areas in which comparison shopping and research may be of value to you. The more coverage you can get without the need to schedule certain categories of property, potentially the better for you. On the other hand, scheduling property that may be difficult to value in the event of loss provides the protection of an agreed amount of coverage in the event of loss. The ultimate decision depends on the extent and value of your personal property possessions that may fall into the categories of property subject to these sublimits.
Under the standard ISO HO 3 homeowners policy, certain categories of personal property receive no coverage. These are:
articles separately described and specifically insured, regardless of the limit for which they are insured under any other insurance (to avoid double recovery);
animals, birds, or fish;
motor vehicles and accessories, equipment, or parts while they are in or on the motor vehicle;
aircraft (not including model or hobby aircraft not intended to carry people or cargo);
hovercraft, flare-craft, and air-cushion vehicles;
property of roomers, boarders, or other tenants, excepting property of roomers or boarders who are related to an insured;
property located in an apartment regularly rented or held for rental to others by an insured;
property rented to or held for rental to others off the residencepremises;
business data, regardless of whether stored as paper, electronic, or computer records;
credit cards and electronic fund transfer cards, except as otherwise covered. (See the discussion of Additional Property Coverages.
Although it is something of a misnomer, the realproperty coverages of all the homeowners policies discussed (as opposed to personalproperty coverages) is so-called all-riskcoverage. Under all-risk policies, coverage is defined by the policy’s exclusions. The typical all-risk property insuring agreement provides that the insurer insures against risk of direct physical loss to property…. This means the risk of loss to dwellings and separate structures.
Most homeowners insurers also sell named perilspolicies, in which covered property is only covered if loss results from a specifically listed peril. Such named perils policies are usually less expensive than the all-risk policies sold by the same insurer. This is true both of insurers that use standard ISO policy forms, as well as insurers that use proprietary policy forms.
As noted at the beginning of this section, the term all-riskpolicy really is a misnomer. This is because the all-risk coverage of such policies only applies to dwellings and separate structures. The property coverage applicable to personal property is named perilscoverage in most cases.
There are really two functional differences between all-risk coverage and named perils coverage. First, as noted, under all-risk coverage, direct physical loss to covered property is covered unless the cause of loss is excluded. Under named perils coverage, covered property is only covered if loss is caused by a peril that is specifically listed in the policy. The real difference here is that, in a practical sense, the list of covered perils under an all-risk policy is more inclusive than under a named perils policy.
Second, whether a policy is an all-risk or named perils policy affects the burden of proof in the event there is a coverage dispute after a loss that results in a lawsuit between the insured and the insurer. Under the laws of most states, the insured of an all-risk policy need show no more than that damage to or destruction of covered property occurred. The burden of proof then shifts to the insurer to prove that an exclusion precludes coverage.
In the world of property insurance, the terms peril, risk, and risk of lossrefer to fortuitous, active, physical forces, such as fire, lightning, windstorm, theft, and vandalism (just to give a few examples). The concept of risk or peril as an active physical force is pretty self-apparent. The condition of fortuity requires a bit more explaining: fortuitousmeans occurring by chanceor accidentally.For example, damage to property caused by wear and tear or failure to maintain is not loss that occurs by chance. Loss due to normal wear and tear is deterioration through use—a certainty, not a fortuity.
The fortuity requirement precludes coverage for intentional damage or destruction of property. This is why, for example, arson is not covered. There is another reason why intentional damage to or destruction of property is not covered. If such damage was covered, it would create an undesirable incentive for insureds to destroy property for the purposes of generating cash when they found themselves in financial difficulty.