As comprehensive as it is, HO-3 does not cover everything. The exclusions include:
• property, losses and perils not covered due to limitations of the insuring agreement and the general exclusions;
• loss involving collapse, other than those described above;
• freezing of a plumbing, heating or air conditioning system, or an automatic fire protective sprinkler system, or a household appliance—or discharge, leakage or overflow due to freezing while the dwelling is vacant, unoccupied or being constructed, unless reasonable care was taken to maintain heat in the building, or to shut off the water supply and drain the systems and appliances (such damage by freezing of an occupied premises is covered);
• damage caused by freezing, thawing, pressure or weight of water or ice to a fence, pavement, patio, swimming pool, foundation, retaining wall, bulkhead, pier, wharf or dock;
• theft in or to a dwelling or structure under construction, or theft of any property that is not actually part of a covered building or structure (theft of part of a finished building is covered);
• vandalism and malicious mischief if the home has been vacant for more than 30 consecutive days at the time of loss;
• wear and tear, deterioration, latent defect, rust, mold, wet or dry rot, contamination, smog, smoke from agricultural smudging or industrial operations, birds, vermin, insects, domestic animals or the settling, cracking, shrinking, bulging or expansion of pavements, foundations, walls, floors, roofs or ceilings;
• losses caused by weather conditions to the extent that weather contributes to causes found in the general exclusions (i.e., power failure, flood, earth movement, etc.);
• losses caused by faulty, inadequate or defective planning, zoning, surveying, siting, design, specifications, workmanship, repair, construction, renovation, remodeling, grading, repair or construction materials, or maintenance; and
• losses caused by acts, decisions or the failure to act or decide by any person, group, organization or government body
For the home and other structures, if any excluded loss is followed by a loss that is not excluded, the additional loss is covered by HO-3.
Many insurance policies have a valuation clause, which describes how the value of different types of property will be determined in the event of a claim. The valuation clause may use such terms as actual cash value and replacement cost.
The producer is responsible for accurately documenting a dwelling’s replacement cost at the time of the original application. It is important to note that unlicensed persons are prohibited from estimating dwelling replacement cost or explaining insurance coverages.
Actual cash value (ACV) is the basis for recovery under many property and liability contracts, regardless of the policy amount. ACV generally means “the replacement cost of damaged or destroyed property at the time of loss, less depreciation.”
For example, if the insured’s bedroom set was completely destroyed by a covered peril, the insurance company will look first at the current replacement cost, then account for the length of time the insured has had it. So, if a new set is $10,000, but the insurance company figures that the one which was destroyed had depreciated 30 percent due to age and use, a policy providing ACV recovery would pay $7,000.
It is better to purchase a policy that will give the insured the full replacement cost for the insured’s personal property, without deducting for depreciation. This can be done, for an additional premium, by adding an endorsement to guarantee payment of the replacement cost.
Homeowners policies also will pay the insured the full replacement cost for the insured’s house and other insured buildings only if the insured maintains a minimum amount of insurance—usually 80 percent. In other words, if it will cost $200,000 to rebuild the insured’s home and the insured only has $100,000 worth of insurance, no insurance company is going to pay the insured the full replacement cost.
For this reason, most insurers require that the insured’s insurance be equal to at least 80 percent of the replacement cost at the time of loss.
An important note: Insurance companies don’t want to encourage policyholders to file claims and pocket the money. So, for both building and contents losses, most policies state that full replacement costs will be paid only if the property is actually repaired or replaced. If it is not, claims will be paid on an ACV basis.
An important issue in many property insurance policies is the pair and set clause. This is written in because a set can be worth more than the sum of its pieces. For instance, an antique pair of candelabras might be worth $1,000. But if one is lost or destroyed, the remaining candelabra might be worth only $200. In this situation, the value of the loss of one part of a pair is not equal to 50 percent of the value of the complete pair.
For this reason, many property insurance policies give the insurer the option of repairing or replacing any part of a pair or set to restore its value, or of paying the difference between the ACV of the property before and after the loss. In the above example, the insurance company might be able to replace the lost item—or obtain a complete pair of equal value to exchange for the remaining item—at a lesser cost than making a cash settlement. Or the insurer might pay the difference in ACV before and after the loss ($800), if replacement was not possible at a lesser cost.
An important part of any policy—and something you should always check—is how disputes are handled. If the insured and the insurance company cannot agree on the value of something—like the insured’s house—the insured may be able to take advantage of an appraisal condition in the insured’s policy, if there is one. Either the insured or the insurance company may make a written demand for an appraisal. No matter who makes the request, each side is allowed to bring in an impartial appraiser (at its own expense), and the two appraisers select an umpire. The appraisers separately state the value of the property or amount of loss. If they don’t agree, the differences are submitted to the umpire. The insured and the insurer then must abide by the valuation set either by the two appraisers—if they agree—or by the umpire.
The Homeowners Policy Program provides liability coverage automatically, in addition to property coverage. By combining property and liability coverages, the insurance company is able to reduce processing costs, determine losses more accurately and pass these savings on to insureds in the form of lower premiums.
Personal Liability Loss Exposures
The liability portion of the homeowners policy is designed to protect a homeowner’s assets if that person is sued by someone who is injured—physically—while on the insured property.
Most homeowners policies offer liability protection for bodily injury and property damage. It covers not only the cost of the claim, but also the cost of defense if the insured is sued, and a limited amount of coverage for bail bonds and other bonds related to a claim.
The standard policy’s liability protection covers injuries or damage caused by the insured, a member of the insured’s family or a pet. It applies to injuries that occur on the insured’s property—or anywhere in the world from civil—not criminal—law. If the insured or a family member are indicted in a criminal lawsuit, homeowners insurance won’t cover any resulting financial losses.
What is covered is just as important as who is covered.
When it comes to liability, bodily injury means harm, sickness or disease, and includes the cost of required care, loss of services or death resulting from the injury. This is one of the main kinds of loss that constitutes a civil liability.
Property damage means injury to or destruction of tangible property—and includes loss of use of the property. Loss of use is another of the key kinds of loss that constitutes a civil liability.
Occurrence means an accident, including continuous or repeated exposure to conditions, that results in bodily injury or property damage, neither expected nor intended by an insured person. A situation must be deemed an occurrence before insurance will apply.
Once again, who is insured under the insured’s homeowners policy becomes an important issue. When the policy says an insured, it means the named insured (the insured), a spouse and any relatives resident in the household, as defined on the definitions page of the insured’s policy.
But when it comes to liability, the coverage is broader than for property. In this case, an insured also includes any person or organization legally responsible for animals or watercraft owned by a household member. For example: The insured boards his dog at a kennel while he is away; when one of the employees takes Fido for a walk, he or she is insured if Fido bites another dog.
If the insured or the insured’s spouse dies, all household members who are insured at the time of the insured’s death will continue to be covered while they continue to live at the insured’s home. But only property coverage continues for legal representatives—liability coverage is not extended to lawyers or temporary custodians.
There are two kinds of coverage provided under the liability section of a homeowners policy.
The first liability coverage is personal liability. This pays an injured person—usually a third party—for losses that are due to the negligence of an insured and for which an insured is liable.
Example: Mack takes his dog out for a walk without a leash. For no apparent reason, Mack’s dog attacks Ethelbert, who is jogging nearby. Ethelbert’s injuries cost him $10,000 in lost income during recovery. Mack is personally liable to Ethelbert for this $10,000.
The second liability coverage is medical payments to others. This covers necessary medical expenses incurred within three years of an accident that causes bodily injury. (An accident is covered only if it occurs during the policy period.) Medical expenses include reasonable charges for medical, surgical and dental care, X-rays, ambulance service, hospital bills, professional nursing, prosthetic devices and funeral services.
In the example above, after Mack’s dog bites Ethelbert, Mack also will be liable for the stitches, shots and other medical treatment Ethelbert might need.
Medical payments coverage applies only to people who are on the premises with the permission of an insured person. Someone who comes onto the insured’s property to rob the insured’s house and is attacked by the insured’s dog cannot collect damages under the insured’s homeowners policy. This coverage does not apply to medical expenses related to the insured’s injuries or those of anyone who lives with the insured, except residence employees.
Away from the insured’s home, coverage applies only to people who suffer bodily injury caused by:
• the insured;
• an animal owned by the insured or an animal in the insured’s care (if the insured happen to be pet-sitting);
• a residence employee in the course of employment by the insured; or
• a condition in the insured location or the ways immediately adjoining.
The insurance company has plenty of incentive to avoid lawsuits. Under the standard homeowners policy, it is obligated to provide a legal defense against claims—even if the claims are groundless, false or fraudulent. The company also may make any investigation or settlement deemed appropriate.
All obligations of the insurance company end when it pays damages equal to the policy limit for any one occurrence. Both personal liability and medical payments coverage have limits—medical payments is usually much lower than personal liability. Unless the insured requests something else, the insured will get the basic limits of these coverages, which are the minimum amounts written. But higher limits of liability can usually be purchased for a higher premium.
Personal liability insurance applies separately to each insured person, but total liability coverage resulting from any one occurrence may not exceed the limit stated in the policy.