HOMEOWNERS POLICIES: A REVIEW
Dissecting form types and parts of coverage
By Christopher W. Cook
As someone who has never worked in the industry, I appreciate the opportunity to attend continuing education (CE) courses offered by state and national associations. While I don’t need the CE credit, they do provide me with information that I can pass along to our readers.
Generally, the Independent Insurance Agents (Big “I”) of Indiana host my final event each calendar year. Last year’s virtual event provided a session delivered by Nicole Broch, CIC,CISR, PLCS, a territory sales manager at The Hanover Insurance Group and an instructor with Insurance Education & Professional Development, that digested the homeowners policy, providing a good review for someone new to the industry. This month, we’ll look at the different sections of the homeowners policy, what each one covers, and the various forms available. In the second installment, we’ll take a deeper look into businesses operating out of insureds’ homes.
When it comes to the homeowners policy, there are a number of forms to choose from. While some carriers may use their own forms, the presentation shared the most common ones provided by the Insurance Services Office (ISO).
HO-2. This is a Broad Form for an owner-occupied dwelling. The insured receives coverage for named perils only for dwelling, other structures on the property and personal property.
“The most frequent times that I have seen an HO-2 on an incumbent form was when the property type was actually a mobile home,” Broch said. “Although it may not be available from your carriers, ISO allows mobile homes and manufactured homes to be written on a homeowners form.”
HO-3. The most commonly used form, the Special Form also covers an owner-occupied dwelling and other structures, but unlike the HO-2 it has open perils for the dwelling and named perils for personal property.
“The whole purpose with open perils is that everything is covered, dot dot dot, unless it’s excluded,” Broch said. “So everything that could possibly happen to your dwelling or other structures is covered unless it’s excluded later.”
HO-4. Commonly known as the “renter’s policy,” the Contents Broad Form provides coverage for a tenant of a dwelling, apartment or condominium and will cover named perils for personal property.
“The perils that are associated with your coverage for personal property with this form are indeed broad; it is called the contents broad form for a reason,” Broch said. “If you want to fix it, there may be an endorsement that will allow you to open up the perils for the personal property. And you can do that honestly to both the HO-4 and to the HO-3 if your carrier allows it.”
HO-5. “This is the Comprehensive Form, my preferred form,” Broch said. It covers an owner-occupied dwelling and open perils for both dwelling and personal property.
While it was typically used for higher-value dwellings, “the HO-5 form is for everybody now; it is truly one that everybody should be considering.”
Broch provided a few examples to compare the HO-3 and the HO-5; remember that the HO-3 has named perils for personal property compared to the HO-5’s open perils.
In one scenario, a child accidentally lets go of a Nintendo Wii remote while playing a virtual game of tennis. The remote breaks a brand new 85-inch television. Under an HO-3, this would not be covered, but under the HO-5 it is not excluded.
“In the homeowners world when it comes to our personal property, we are only going to take care of flying or falling objects if it made it through the roof or window first,” Broch said. “That Wii remote didn’t make it through either; it just launched out of a hand.”
In another example, an individual decides to paint their ceiling. While standing on the top rung they begin to lose their balance. While they are able to prevent the ladder from tipping over and them from falling, the paint can is a different story.
“I wouldn’t be worried about the wall because it probably needed paint anyway, but I’m worried about everything else. The leather couches. The marble kitchen table and the upholstered chairs at it,” Broch said. Under the HO-3, this damage would not be covered, but it’s not excluded under the HO-5.
HO-6. The Unit-Owners Form is for individual residential condominium units.
“Condo forms, in general, are broad form perils,” Broch said. “If you want open perils on your condo, it’s no problem; there’s an endorsement through ISO and one through nearly every single carrier that has the special availability.”
Regarding the coverage, “no matter what happens, your basic limit on an ISO condo form is $5,000, and that is never enough,” Broch stressed. “When you have an insured walk in with their ‘air quotes’ to tell you that they need a studs-in policy, now is the time to really have a conversation with them about what studs-in really means, because studs-in very well could mean drywall or insulation. It could mean cabinetry, floor coverings, wall coverings, lighting fixtures; it could mean a lot of things, but it doesn’t really matter because $5,000 still isn’t enough by any stretch of the imagination.”
When looking at the parts of a homeowners policy, “I like to remind people that our homeowners policies are indivisible,” Broch said. “You can parcel out dwelling policies and you can do lots of things with commercial policies, but you can’t do that with home. In a general homeowners policy, these are the things that are included and you cannot delete them.”
Let’s take a look at the individual coverage parts and what they include:
Coverage A—Dwelling. Broch explained that “Coverage A is the actual house and anything attached; it is the dwelling that is on the residence premises shown in the declaration.” She also reminded attendees that some carriers have started to change the definition of “residence premises,” so make sure to read the policy language.
Attached structures can include a garage, deck or patio. “There are some carriers that insert language about ‘same pour’ and actually have conversations about in-ground pools being attached structures as opposed to Coverage B detached structures,” Broch said (more on Coverage B shortly). “If you’re not sure, read your form; that’s going to give you an idea as to whether or not it’s going to be considered attached or detached. When in doubt, make friends with your favorite carrier’s claims adjuster or underwriter to get better information.”
For clients who might be working on massive home improvement projects, materials and supplies that are being used to construct, alter or repair the dwelling or other structures located on the residence premises, e.g., building supplies left behind your house in the yard, are covered under Coverage A.
Coverage B—Other Structures. This includes anything detached and/or set apart by clear space, like detached garages and sheds. It’s important to note that what’s not included is, “any other structure where a business by definition is conducted,” Broch said. We will talk more about this in the follow-up installment next month.
Coverage C—Personal Property. “This is property owned or used by an insured; this is your ‘stuff’ coverage,” Broch said.
But what happens if an insured takes some of their personal property with them on a trip to Europe? “No matter what you bring, it has worldwide coverage,” Broch assured. But there are some limitations.
“One of those limitations is property that’s usually located at another residence of an insured is limited to 10%,” Broch said. “That’s where we realize that when we take it with us, we only bring 10% of our coverage C.
“Note that we are going to exclude theft unless the insured is there, and regarding the theft of jewelry, watches, and furs, it is not a per-piece limit, ”Broch said. “You need to be asking questions and reading the form because their items might be some-thing worth scheduling as opposed to hoping they’re worth less than $2,500 per lot, not piece.
“Theft does not always include ‘mysterious disappearance.’ If you want mysterious disappearance coverage, I would highly recommend selling an HO-5 because mysterious disappearance is not excluded. In an HO-3, theft is defined.”
A few items not covered under Coverage C:
- Articles specifically covered here or elsewhere. If an item, for example, a $10,000 engagement ring, is scheduled elsewhere on the policy with a $5,000 limit, an insured cannot “borrow” the additional money from Coverage C to make up the difference.
- Animals, birds or fish. While some carriers offer pet insurance policies (see the May 2020 issue of Rough Notes), pets are not covered under a homeowners policy as personal property.
- Motor vehicles. This includes accessories, equipment, parts, tapes, discs, etc.
“A problem we run into is that everybody wants their riding lawnmower covered under their homeowners insurance, and everybody assumes that the riding mower is indeed covered under their policy,” Broch said, “but they don’t realize that if they mow anything other than a residence, it’s not covered.”
There are “give backs” in cover-age if the “motor vehicle” is not required to be registered for use on public roads or property and it is used solely to service a residence or designed to assist the handicapped. Broch advised that four-wheeler vehicles can also be placed on a miscellaneous vehicle-type endorsement on the insured’s auto policy or on a stand-alone toy policy.
- Aircrafts and parts. This excludes model or hobby aircraft; however, “in the next few years, and it’s already out there in ISO language, and most carriers haven’t adopted it yet, we are removing—as an industry—drones as hobby aircraft, meaning that the new language will eventually say, except model or hobby aircraft, or including model and hobby aircraft and drones; the drone language will be changing,” Broch informed. “By the way, currently, if your drone has to be registered with the FAA because of a requirement in your area, or you have to get a pilot’s license, or it has a high enough or far enough radius, it’s also no longer model or hobby, so just be aware that we don’t cover aircraft and parts under Coverage C.”
- Water or steam. As an agent, Broch had a claim where an individual broke into an insured’s apartment and smashed a large tropical fish tank with a crowbar. Under Coverage C, the water damage was covered and the aquarium was replaced, but the replacement of the water and the fish in the tank weren’t covered.
Coverage D—Loss of Use. This coverage contains two parts: Additional living expenses, which covers part of the “residence premises” where “you” reside that is not fit to live in due to a covered property loss, and it covers the necessary increase in living expenses to maintain the normal standard of living. For example, if a family suffers a house fire and has to be put up in a hotel while their house is being repaired, the hotel costs are covered under Coverage D.
Broch shared an example of an individual who had a dog, lost her home to a fire, but the nearby hotel didn’t allow pets. Boarding her dog was covered under Coverage D. Going a step further, she eventually ended up renting a house and had a fence built for her dog. The expenses for the fence were covered under Coverage D.
“You can parcel out dwelling policies and you can do lots of things with commercial policies, but you can’t do that with home. In a general homeowners policy, these are the things that are included and you cannot delete them.”
—Nicole Broch, CIC, CISR, PLCS
“Fair Rental Value” is also included under this coverage. Think of a two-family home where the owner lives on one side and rents the other side to a tenant. “Make sure that you’ve got enough Coverage D to cover both sides,” Broch said.
“One other thing to note for anybody who loves commercial lines and not personal lines, in personal lines we do not know what you are talking about if you ask us what percentage of the home we are living in; that is not a requirement in personal lines. I could live in 5% of the building and rent out the other 95%, it is not a problem in personal lines; that is a commercial lines question.”
Coverage E—Personal Liability. “We get $100,000 of coverage and Coverage E requires legal liability,” Broch said. “This also includes bodily injury and property damage.”
Coverage F—Medical Payments to Others. With this coverage, legal liability is not required, and expenses must be incurred or ascertained within three years of the claim; this includes medical, surgical, x-rays and dental.
Broch shared a story of a friend who was a guest in someone’s house when she tripped over a broom that had fallen out of a closet. She proceeded to face plant on the nearby banister, knocking out her two front teeth. Coverage F can have a maximum limit of $10,000 under ISO.
Like other policies, endorsements can be added. Some common homeowners endorsements include:
- Personal Injury Coverage—this includes libel, slander, false imprisonment and wrongful eviction
- Personal Property Replacement Cost Loss Settlement
- Specified Additional Amount of Insurance for Coverage A
- Scheduled Personal Property
- Water Back Up—which is one of the most common claims in the country
- Mine Subsidence
- A few less-common endorsements include:
- Service Line
- Equipment Breakdown
- Green Upgrades Coverage
- Replacement Cost Loss Settlement for Certain Non-Building Structures on the Residence Premises
- Permitted Incidental Occupancies on the Residence Premises
- Structures Rented to Others on the Residence Premises
In our next installment, we’ll look at the homeowners’ definition of “business.” Until then …