Are they an overlooked piece of the homeowners underinsurance puzzle?
[E]veryone involved has an incentive to explore every opportunity to establish sufficient limits for each insured structure… .
By Joseph S. Harrington, CPCU
When insurance makes the headlines, it’s usually not good news.
In the wake of widespread disaster losses, consumers and regulators have been quite vocal in protesting that “replacement cost” coverage does not necessarily cover the full cost of repairing or replacing a damaged structure.
Personal lines agents, brokers, and carriers are under intensified scrutiny to either ensure that replacement cost limits will actually replace insured structures or make it very clear that there may be a shortfall after a loss.
Under these conditions, it seems that everyone involved has an incentive to explore every opportunity to establish sufficient limits for each insured structure, and not to rely on a benchmark developed for general application, especially a benchmark developed at least 70 years ago and unchanged since.
What’s new is old, quite old
Most risk professionals are aware that the Insurance Services Office (ISO)—the advisory organization engaged in standardized property and liability insurance policy forms used by most property/casualty insurers in the United States—issued a comprehensive revision to its standard Homeowners forms in 2022.
In ISO’s 2022 forms for insuring stand-alone, owner-occupied dwellings, the Coverage B limit for “other structures” (detached garages, sheds, fences, etc.) remains at 10% of the Coverage A limit for the principal dwelling. That’s the same level that limit has been since at least 1952, when the Multiple Peril Insurance Rating Organization determined that its new “comprehensive” homeowner’s policy would include a limit for “appurtenant private structures” at 10% of the dwelling limit. (For an interesting look at the early days of homeowners insurance, check out “Homeowners—The First Decade,” an article by Frederic J. Hunt, found on page 20 of the 1962 Proceedings of the Casualty Actuarial Society, at bit.ly/EarlyHomeowners.
Other percentage limits in the 2022 ISO owner-occupied forms also remain unchanged from the previous edition: the Coverage C-Personal Property limit remains at 50% of the Coverage A-Dwelling limit and the Coverage D-Loss of Use limit remains at 30% of the Coverage A limit.
Two things set the Coverage B limit apart from the personal property and loss of use limits, however:
- Although they are unchanged in the latest revision, the default limits for personal property and loss of use were increased as a percentage of the dwelling limit in previous revisions; and
- While a different personal property of loss of use limit can be established simply by an entry in the declarations, the limit for other structures is written into the policy and can only be changed by an endorsement amending the policy language.
Unchanged and unchanging
So why is the “other structures” limit unchanged in general and harder to change for particular risks?
One reason may be that the cost of repairing or replacing garages, sheds, and the like tracks the cost of residential construction in general, thus allowing for a stable percentage limit over time. In contrast, the value of personal property and costs of living, the objects of Coverage C and Coverage D, have expanded greatly in relation to residential construction costs.
A more important reason, perhaps, is that the size and number of other structures are much easier and practical to schedule and insure separately than personal property, living expenses, or lost rental income. In effect, if not by design, the standard Coverage B limit ensures that there is some coverage in place for other structures, but that the overall building property exposure cannot expand greatly without the insurer being notified of additional structures.
That explains why ISO’s owner-occupied policies include this explicit and longstanding limitation within the policy: “The limit of liability for this [Coverage B] will not be more than 10% of the limit of liability that applies to Coverage A.”
All this would be old news were it not for the recent concern about underinsurance and a new endorsement introduced with the 2022 ISO Homeowners revision.
The new endorsement allows insurers to exclude coverage for scheduled “other structures,” meaning there would be no recovery under the Coverage B limit for damage to a structure the insurer does not want to insure. Insurers have an additional tool for restricting homeowners building property coverage, however marginally.
Make the effort
Over the 70-plus-year history of the homeowners package policy, there has been a profound shift in the source of losses.
Where individual house fires were once the principal cause of damage, today it is windstorms, wildfires, and other natural disasters. Unlike house fires, natural perils are as devastating to appurtenant structures as they are to dwellings, yet homeowners can be underinsured for such losses even when a dwelling limit is adequate to replace the principal residence.
Keep in mind that detached garages and other structures come in a much wider variety than residences. Some are “bare-bones” enclosures; others are much more elaborately constructed to include heat, electrical power, and plumbing.
Relying on the default Coverage B limit can easily be insufficient for the more elaborate structures, yet provide useless levels of coverage for bare-bones structures that can be repaired or replaced for less than 10% of the dwelling limit.
Anyone concerned about adequate levels of homeowners property coverage has all the more reason to take the time and effort to identify all structures at risk and schedule appropriate amounts of coverage for them.
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.