Q If a 200-year-old hutch valued at $3,000 were totally destroyed in a house fire, would the homeowners policy pay $3,000?
Q If a 200-year-old hutch valued at $3,000 were totally destroyed in a house fire, would the homeowners policy pay $3,000?
--GEORGE PAGE, Page Insurance, Ltd., Guilford, CT
This question is answered by Bruce Hicks, CPCU, CLU, editor, Technical and Educational Products Division of The Rough Notes Company.
A Your question did not specify any particular forms, so our discussion will make reference to some common forms-- the Insurance Services Office Homeowners 3, HO 00 03 04 91 Policy, the HO 00 15 04 91, Special Personal Property Coverage (Form HO 00 03 only), HO 23 63 05 97, Personal Property Replacement Cost, and the American Association of Insurance Services' IM-175 Ed 1.0, Personal Articles Coverages forms.
The Homeowners 3, Special Form policy covers furniture as personal property under Section 1--Property Coverages, Coverage C--Personal Property. This section protects property that is owned or used by an insured anywhere in the world. We will assume that the antique hutch is owned by an insured and is located in the principal residence. Let's also assume that there is no special exposure in the home such as a large antique collection or an in-home antique business.
Based on these assumptions, we know that the hutch qualifies as covered property, but does it belong to any special category of property? The unendorsed Homeowners 3 has special limits of liability that apply to certain categories, but neither household furniture nor antiques is among them, so there is no worry there.
Our next question may be, is the antique hutch excluded? We need to examine the Property Not Covered section of the Homeowners 3 form. This section specifically excludes nine different situations, but a hutch is not among them. However, if the antique hutch had been scheduled or separately insured, it would have been excluded since no coverage is provided under the HO-3 when other, separate coverage exists. This is to avoid duplicate coverage. The next area we look at, Section 1 Conditions, should be more helpful in determining whether this hutch is covered at its full value of $3,000.
Section 1--Conditions
3. Loss Settlement. Covered property losses are settled as follows:
a. Property of the following types:
(1) Personal property;
(2) Awnings, carpeting, household appliances, outdoor antennas and outdoor equipment, whether or not attached to buildings; and
(3) Structures that are not buildings; at actual cash value at the time of loss but not more than the amount required to repair or replace.
So, loss to furniture is settled on an actual cash value basis. We find that Insurance Words & Their Meanings, published by The Rough Notes Company, Inc., defines actual cash value as "replacement cost new, at the time of loss, less depreciation." The problem with the antique hutch is that its value is tied to its having qualities that create a special status and, presumably, a high market value. The assumption under the homeowners policy is that it is obligated to reimburse for loss to property that has no such special qualities. Therefore, the obligation is to reimburse the loss based on the cost of a "normal" hutch, purchased today, perhaps with mid-range quality of materials, style and construction; along with a deduction for depreciation.
Insurers encourage using store receipts as the starting point for valuation. The value of a new hutch can range from several hundred to several thousand dollars. Given the circumstance of a fire's totally destroying the hutch, the policy doesn't give clear-cut guidance on how to handle the loss. A company's action could fall anywhere between the extremes of denying coverage and a cash settlement for $3,000. Nothing stops an insurance company from using the insured's documentation that establishes the hutch's market value.
But, since the property was not scheduled, any underwriting involving the hutch was incomplete. The documentation may be inadequate for valuation purposes. It is likely that an insurer may get information about the hutch--style, size, materials, etc.--and base the settlement on the cost of a mid-range quality hutch of similar style and materials and deduct for the length of time it was owned.
It is possible that the parties could fail to agree on the value of the hutch and invoke the Appraisal clause of the policy. However, the insurer may be reluctant to do so since an appraisal would likely assign a special status to the hutch. Agreeing to an appraisal could obligate an insurer to recognize some special value which is not recognized by the policy. It is very unlikely that the settlement on the hutch would be anywhere near the $3,000 value.
What would happen if the Homeowners 3 were endorsed with the Special Personal Property Coverage form HO 00 15? Not a lot. Since the hutch was lost in a fire, the broader perils of this form are irrelevant. This form revises the HO 03 form's special limits of liability, but none of the changes affects antique furniture. The situation of the hutch, lost by fire, is the same as if the policy did not have the endorsement.
Now let's see how things are affected if the Personal Property Replacement Cost form HO 23 63 applied. This form settles losses to personal property at their replacement cost. However, let's look at the following section:
1. Property Not Eligible
Property listed below is not eligible for replacement cost settlement. Any loss will be settled at actual cash value at the time of loss but not more than the amount required to repair or replace.
a. Antiques (emphasis added), fine arts, paintings and similar articles of rarity or antiquity which cannot be replaced.
Unfortunately, this exclusion makes it unnecessary to review this form any further. However, since this form, which changes coverage for personal property under the HO-3 from ACV to replacement cost, does not have a provision to collect the necessary additional premium, it is understandable that it excludes antiques.
A couple of the above forms exclude items that are separately scheduled. Let's take a look at the Scheduled Personal Property Endorsement form HO 04 61. This form specifies nine separate classes of property. None of them includes antique furniture specifically, but an antique hutch could be considered under the fine arts category or, should a company not permit this, there is another option. The endorsement has a space in its schedule that permits a company to include antique furniture.
If a company were inclined to use the form, how would coverage apply to our antique hutch? A company might cover it under the fine arts category. The hutch would have to be written with the $3,000 as the agreed value. Of course, it is unlikely that the $3,000 figure would be accepted unless the company had verification from a recent, valid appraisal. If the hutch was scheduled using the "fill-in" portion of the schedule, the $3,000 would not be the basis of settlement. It would be considered as "other property" and would be subject to the form's Conditions section, specifically Condition 2.c.:
2. Loss Settlement: Covered property losses are settled as follows:
c. Other Property--The value of the property insured is not agreed upon but will be ascertained at the time of loss or damage. We will not pay more than the least of the following amounts:
(1) The actual cash value of the property at the time of loss or damage;
(2) The amount for which the property could reasonably be expected to be repaired to its condition immediately prior to loss;
(3) The amount for which the article could reasonably be expected to be replaced with one substantially identical to the article lost or damaged; or
(4) The amount of insurance.
It would appear that any loss settlement still would be subject to a lot of work. A company would have the option of attempting to establish an ACV, replace the hutch with a similar one or pay the listed $3,000, whichever is the least expensive option.
Leaving the world of ISO, there is another option, a personal articles floater. Such a floater is offered by the American Association of Insurance Services (AAIS) and is called the Personal Articles Floater, IM-175 Ed 1.0. Similar to ISO's approach, AAIS would classify the hutch under the fine arts category. The $3,000 value would be used, if an acceptable appraisal were provided which would substantiate the value. Under either an ISO or AAIS personal property schedule, the $3,000 is the basis of the highest amount of coverage that might be paid. Under both forms, a company has the option of finding the least expensive method of indemnifying an insured's loss.
In the absence of securing some specialty coverage for your antique hutch, it appears that either the ISO or the AAIS forms for scheduling coverage are the more realistic options for handling its total destruction by fire. However, there is no guarantee concerning the hutch's valuation, just that the $3,000 caps an insurer's loss. For example, a reputable antique expert examines the hutch and documents that it is worth $5,000. Unfortunately, before the new appraisal can be used to endorse the higher value, the hutch is destroyed by fire. Therefore, the $3,000 acts as a cap on the settlement amount.
If the hutch wasn't scheduled, how could there be an agreement between the insured and the insurer on the $3,000 value? Contractually, absent an appraisal, a company would not have to recognize the value, especially since it did not have the chance to underwrite the exposure. How about the type of property and how it's used? Is it used to display other antique property? If so, wouldn't it be more likely that special coverage would be pursued? Is it used to store everyday or special china? If so, this use would certainly affect the value of the antique and expose it to actual damage or, at the minimum, wear and tear.
Finally, if an agent knew of such property prior to a loss, would the agent support the decision not to get special coverage? In our opinion, the loss of such a valuable hutch could be handled by basic forms, but not without a complicated settlement and not at the $3,000 value.
Q One of our insureds bought a television, stereo, and VCR that she gave to her daughter. These items were recently stolen from the daughter's house and the insured has claimed these items under her homeowners policy.
The daughter presently lives in Arizona and is enrolled in a full-time, correspondence graduate program at a college in North Carolina that does not require her to live in North Carolina. The insured's carrier believes that if the daughter were attending a university in Arizona, it would find no reason not to pay the claim. However, because the daughter is enrolled in a correspondence program, the carrier believes this is a basis to deny payment.
How critical is it that the daughter is enrolled in a correspondence school that allows her to live elsewhere? How do these variables affect the claim so much when the basic facts remain the same: the insured bought items for her daughter that were stolen?
--CARL ARNAL, P.A., Saguaro Public Adjusters, Inc., Phoenix, Arizona
Diana Kowatch, CPCU, AU, AAM, CPIW, with over 20 years' experience in the insurance industry, is editor in chief, Technical/Educational Products for The Rough Notes Company, Inc. She provides the following response.
A A couple of facts are not clear. Are we referring to a standard homeowners policy? Does the daughter reside with the parents?
We will assume that we are looking at a standard homeowners policy and will use ISO language and terms to illustrate. Further, we will start with the assumption that the daughter is not living with the parents since the question was phrased "the items were stolen from the daughter's house."
The issue of who purchased the items, whether or not they were a gift from the parent, does not have significant bearing on ownership. Once given, the items under consideration are the property of the daughter. Thus, the real question here is whether or not the daughter is an insured under the mother's homeowners policy.
Let's look at the ISO wording of who is an insured:
"In this policy, 'you' and 'your' refer to the 'named insured' shown in the Declarations and the spouse if a resident of the same household...
3. 'Insured,' means you and residents of your household who are:
a. Your relatives; or
b. Other persons under the age of 21 and in the care of any person named above."
There are two keys to triggering coverage. First is whether or not the daughter is a resident relative. In your question, you did not say whether or not the daughter lived with the parents. If she were still living in their home, regardless of her age or occupation or what type of school she attended, she would be a resident relative and covered by the insurance policy. To be a resident relative, she has to use the address as a primary residence, not just a mailing address. She must live at the designated location a significant portion of time.
If the daughter does not live with the parents but is under the age of 21 (such as a student off to college,) she is considered covered if she is under the care of the insured. In other words, children under 21 that are off to school but still supported by their parents are covered. As long as the parents pay their child's bills, such as rent, food, and so forth, the child is considered dependent.
A child of any age who has a job, lives at another location, and supports him or herself, but who just also happens to be going to school, is not considered an insured. That child is considered an adult and is not covered by the parent's homeowners policy.
The real test here is not the type of school involved but whether or not the child is a resident relative. If not, what is the age of the child, and is the child primarily supported by the parents? What follows is a recent court case that sheds further light on the issue.
The 19-year-old son of a couple insured with a homeowners policy was riding a skateboard while walking his dog. He accidentally knocked down a woman who was out for a walk with her husband. The woman sustained injury and was hospitalized, resulting in considerable medical expenses. The injured woman made legal demand against the son and his parents, who turned the demand over to their homeowners insurer.
The homeowners insurer denied coverage based upon the fact that the son was an emancipated adult and had his own residence for at least six months. Although the son used his parents' address as his mailing address, stored some of his personal items at their home, and occasionally spent the night, the son was self-supporting as far as rent, food, car, and taxes.
In the meantime, a judgment was awarded to the injured woman, against the son, for over $123,000. The son and his parents filed a state court action against the homeowners insurer.
The court found that the son was not an insured person because he did not physically reside with his parents and a decision was rendered in favor of the homeowners insurer. Freudenberger et vir., Plaintiffs v. Allstate Ins. Co. et al., Defendants. SDCal. No. 96-0452-IEG (LSP). September 19, 1996. CCH 1997 Fire and Casualty Cases, Paragraph 6145.
Editor's note: If a child lives elsewhere and is considered an adult by the definitions given above, a renters policy would eliminate these coverage issue questions.*
©COPYRIGHT: The Rough Notes Magazine, 1997