You remember them ... Hugo, Andrew, Bob, Fran, Floyd, Northridge, to mention a few.
You remember them ... Hugo, Andrew, Bob, Fran, Floyd, Northridge, to mention a few.
Mother Nature has not been kind to the insurance industry these past 10 years. A host of catastrophic events has plagued the business since Hurricane Hugo hammered Charleston, South Carolina, in the fall of 1989. Earthquakes, hurricanes, conflagrations, tornadoes, and severe winter storms have cost the industry billions of dollars. This has caused several companies to become insolvent, and others to overhaul their underwriting strategies in an effort to avoid that fate.
The period from the late 1960s through the mid-1980s can be viewed now as the "calm before the storm" as far as hurricane activity goes. During that period of relative inactivity, insurers began offering coverage enhancements such as guaranteed replacement cost, sewer backup, higher sub-limits on certain classes of property, and a medley of other coverages that previously were unavailable, or available only by endorsement. Intense competition during that period undoubtedly fueled the momentum to offer expanded coverage. Although competition is still a factor and may intensify as banks enter the insurance arena, the times are changing.
According to a recent issue of Best's Review, homeowners insurers actually began tightening underwriting and limiting coverage options shortly after Hurricane Andrew battered the southern tip of Florida in 1992.
In search of solutions
With rising homeowners loss ratios, resulting premium increases and coverage restrictions, and ominous predictions of future weather-related catastrophes, insurers and state and federal regulatory agencies are looking for ways to turn things around. Among the solutions being considered to fund future catastrophe losses are establishing a federal reinsurance program, using the capital markets to sell securitized blocks of risk, and allowing insurers to set aside reserves in tax-deferred accounts.
Aside from these measures, there is another solution that would complement them but take a different approach: restructuring the insurance coverages offered to homeowners. Perhaps it is time for insurers and agents to look more seriously at alternatives to standard homeowners insurance. In this process, insurers need to strike a balance between maintaining their financial soundness and giving their insureds the essential protection they need at a reasonably affordable price.
With that in mind--What options are available today in the event a company does not wish to insure a dwelling under a standard homeowners policy because of either eligibility or economic considerations? The latter refers to situations in which companies aspiring to build profitable results in the homeowners line believe the coverages provided in standard forms are too broad and the exposures too great to favorably affect the bottom line.
Several alternatives exist, but they generally offer substantially less protection than the popular standard homeowners policy:
1. Standard dwelling policies developed by AAIS and ISO
2. Independently filed dwelling forms
3. FAIR Plans
Dwelling programs
Dwelling insurance programs ordinarily offer a choice of policies that vary somewhat in the coverages and perils provided. Dwelling policies, however, provide narrower coverage than homeowners policies, and personal liability coverage must be added by endorsement or specific coverage part.
Although the dwelling policy is in a package format, it is not a true package policy because the insured can make choices in selecting and deleting coverages. Incidental or additional coverages such as ordinance or law, credit card/forgery, or trees, plants, or shrubs may be limited or simply not covered in dwelling policies. The special limits on certain property (money, stamps, silverware, etc.) ordinarily are more generous in the homeowners policy. In addition, most dwelling forms do not include coverage for theft, although it may be added by endorsement in some cases. Another factor to consider is that most dwelling policies provide limited off-premises coverage for loss to personal property when compared to the worldwide personal property coverage provided in standard homeowners forms.
Independently filed programs
With independently filed dwelling programs, coverage and perils can vary significantly. These ordinarily are basic policies that offer limited coverage when compared with standard homeowners forms and typically are directed at older, lower-value homes or those in poorer physical condition.
FAIR Plan
The FAIR (Fair Access to Insurance Requirements) Plan is basically an assigned risk property program that increases the availability of insurance through a combined effort of private insurers and the state and federal governments. Through the FAIR Plan, insurance is made available to property owners who cannot obtain insurance through normal channels. Eligibility hinges on the insured's willingness to have the property inspected and make necessary improvements.
In most states, only fire and a limited number of additional perils are covered by the FAIR Plan policy. In a few states, however, a homeowners policy is available.
Given a choice among the foregoing options, homeowners coverage offered through the standard market, provided it is available and the insured qualifies, is clearly the superior program.
An alternative homeowners policy
Over time, several companies have offered homeowners policies that differ somewhat from standard programs. Certain companies, for example, focus on a particular niche market rather than trying to compete with larger companies. Others simply look at the market more conservatively and believe the current standard program gives away a considerable amount of coverage without charging for it. For these companies, the alternative policy has become their "standard" program. Still other companies have developed an alternative policy to complement their standard program and give them another option. With an alternative policy, these companies can offer coverage to accounts that may not qualify for, or be able to afford, the standard policy.
The remainder of this article examines one such alternative homeowners program: the Alternate Homeowners Program developed by AAIS.
AAIS offers two separate programs: the Primary (standard) and Alternate Programs. (The comparison of the two programs follows.)
BUILDING AND PERSONAL PROPERTY COVERAGE
| Type of property | Primary Program (Form 3) | Alternate Program (ML0003) |
| Dwelling | Coverage A (Residence) | Coverage A (Residence) |
| Other structures (garages, sheds, etc.) |
Coverage B (Related Private Structures) for structures used for personal purposes, no matter how designed; no coverage for business use | Coverage B (Related Private Structures) for structures designed and used for personal purposes; no coverage for structures designed for business (e.g., barns), no matter how used |
| Detachable items (awnings, screens, air conditioners, etc.) |
Cov. A, B, or C as applicable | Coverage C (Personal Property) |
| Carpets, window coverings | Cov. A, B, or C as applicable | " " |
| Building materials/supplies | Cov. A, B, or C as applicable | Cov. C; no coverage away from insured premises |
| Outdoor antennas and related equipment |
Cov. A, B, or C as applicable | Incidental Property Coverage; $500 limit |
Personal property
| Property away from insured premises | Cov. C limit except 10%/$2,500 limit if usually at another residence (e.g., vacation home) |
Covered up to the greater of 10% of Cov. C limit or $2,500 |
| Property of guests and domestic employees | Covered in any residential premises occupied by insured | Covered while in part of insured premises occupied by insured |
| Property at newly acquired dwellings | Cov. C applies pro rata for 30 days; 10%/$2,500 limit after that | Cov. C applies pro rata for 30 days; 10%/$2,500 limit after that only if insured maintains primary residence at initial location |
SPECIAL LIMITS AND INCIDENTAL COVERAGES
Special limits
| Business property on premises | $2,500 | $500 |
| Business property off premises | $250 | No coverage |
| Money, bank notes, bullion, gold | $250 | $100 |
| Securities, stamps, etc. | $1,500 | $500 |
| Electronic devices with dual-power capabilities | $1,500 | No coverage |
| Watercraft | $1,500 | $500 |
| Trailers (not used with watercraft) | $1,500 | $500 (at insured premises only) |
| Jewelry and furs | $2,500 (theft only limit) | $500 (all perils limit) |
| Silverware | $2,500 (theft only limit) | $1,000 (all perils limit) |
| Guns | $2,500 (theft only limit) | $500 (all perils limit) |
| Motorized vehicles | Cov. C limit on vehicles used to service premises |
$1,000 on vehicles used to service premises |
| Comic books and trading cards | Up to Cov. C limit | $500 |
| Computer hardware and software | Up to Cov. C limit | $1,500 |
| Parts, equipment, and accessories of motorized vehicles (while not in or on a motorized vehicle) | Up to Cov. C limit | $500 |
Incidental coverages
| Emergency removal | Open perils coverage for 30 days | Open perils coverage for first 5 days; Cov. C perils for next 25 |
| Debris removal | Up to 25% of applicable limit plus additional 5% when damage and debris removal exceed limit; includes tree removal provisions | Up to 25% of applicable limit, without increasing the limit; no tree removal |
| Increased cost - ordinance/law | Up to 25% of applicable limit plus additional 10% when damage and increased cost exceed limit | No coverage |
| Fire department service charge | $500 | $500 |
| Credit card, forgery, etc. | $1,500 | $1,000 |
| Trees, plants, shrubs, etc. | Up to 10% of Cov. C limit; no more than $500 per tree |
Up to 10% of Cov. C limit; no more than $500 per tree |
| Glass breakage | Up to applicable limit | Up to applicable limit |
| Spoilage of refrigerated food | $500 | No coverage |
| Grave markers | $1,500 | No coverage |
| Loss assessments | $1,500 | No coverage |
Having access to two programs creates more strategic options for companies by giving them coverage and pricing flexibility. Although the coverage provided in the Alternate Program is more limited than its standard counterpart, the Alternate policy also is less costly for the same risk.
The Alternate Program is a complete homeowners package policy, and this is what makes it superior to the options mentioned previously. It includes versions of all the coverage forms found in a standard homeowners policy (Basic, Broad, Special, Contents, Condominium Unit-Owners, and Limited Perils) except Form 5, Special Building and Contents. It covers virtually all the property intended to be covered by standard homeowners forms, with the exception of certain incidental coverages.
It also offers all the liability coverages found in a typical homeowners policy, including bodily injury, property damage, first aid, and medical payments, with an option for personal injury (libel, slander, invasion of privacy, etc.).
Property coverage
The property coverage is structured, however, to limit the overall loss exposure in several ways. Some examples:
* Permanent but removable features of a residence, such as awnings, screens, storm windows, drapes, and other items, plus building materials and supplies, are covered as personal property rather than as part of the building. As a result, they are subject to a lower limit and, depending on the form, possibly different perils. Also, there is no coverage for damage caused by falling objects to awnings, canopies, and outdoor equipment not permanently installed.
* There is no coverage for related private structures designed for any type of business use, including barns, whether they are used for business purposes or not. (By excluding structures "designed" for business, companies can insure risks that used to be farms without worrying about covering older farm buildings that may not be well maintained.) For such structures to be insured, they must be scheduled or otherwise insured separately.
* Dollar amounts for internal limits and incidental coverages are lower than in the Primary forms. For example, coverage for business property on premises is subject to a $500 limit, compared to $2,500 in the Primary forms. Also, the Alternate Program offers no built-in coverage for business property off premises.
* Other restrictions apply to specific coverages. For example, the special limits on jewelry, furs, silverware, and guns apply to all perils, not just theft.
AAIS affiliates use the Alternate Program for a variety of purposes. Some use it as their standard program, whereas others find it ideal for insuring second homes, mobile homes, homes in coastal areas or seasonal communities, or any other home that, for one reason or another, does not qualify for the standard program.
Neither AAIS nor the companies currently using the Alternate Program claim that those forms will take a significant share of the homeowners market away from the standard programs. But the fact that an alternative program is available, one that provides coverage and pricing flexibility, can have a positive impact on a company's experience. It also gives consumers who, for eligibility or economic reasons, cannot buy a standard homeowners policy an opportunity to obtain fairly comparable coverage at an affordable price.
For more information about AAIS programs, contact Robert Schnoll, AAIS Marketing Manager, at (800) 564-AAIS (2247), extension 222; or connect with our Web site at www.aais.org. *
The author
Robert J. Prahl, CPCU, is director of education for the American Association of Insurance Services.
©COPYRIGHT: The Rough Notes Magazine, 2000