Property and Casualty Insurance Flashcards
Insurance Services Office (ISO)
The Insurance Services Office (ISO) is an industry organization that provides standards that help to keep policies consistent among insurers. The ISO homeowner’s insurance program uses six forms that provide coverage based on the type of home and the insured’s interest in the structure (known as the dwelling) and its contents (personal property).
PAP Insurance
Personal and Property Insurance
Declarations
Declarations name the insured and the property covered under the contract, and present facts about coverage, premiums, and the insurer’s limits of liability.
Insuring agreements
Insuring agreements set forth the coverage provided by the insurance contract. It states the insurer’s obligation to provide coverage as stated in the policy in return for the insured’s compliance with all policy provisions and payment of premium payments.
Exclusions
Exclusions limit insurance coverage by identifying the types of losses that are not covered by the policy. Exclusions can apply to perils, hazards, people, property, locations, or time periods that the insured does not wish to cover.
Endorsements
Endorsements and riders change standard insurance contracts by adding or eliminating coverage to meet the insured’s specific insurance needs.
Homeowners Insurance
Homeowners insurance policies (HO) combine property and casualty coverage such as fire, theft, and personal liability insurance into one insurance contract. Homeowners policies provide protection for homes and personal property, and liability coverage for bodily injury or property damage caused by an insured. A standard homeowners policy is an HO3.
three types of homeowner policy forms
Homeowners insurance has three levels of coverage that correspond to the three types of homeowner policy forms.
Basic or standard coverage provides a minimum level of protection restricted to specific perils of fire, lightning, smoke, wind, hail, explosions, theft, vandalism, vehicles and aircraft.
Broad form coverage includes basic coverage plus 16 additional named perils such as ice or snow damage, damage caused by fallen objects, overflow of water or steam, sudden accidental damages or freezing to plumbing, hot water, air conditioning, sprinkler systems, electrical currents or home appliances.
Open or Special coverage provides coverage on an open-peril basis which covers any risk to a home that is not specifically excluded in the policy.
ISO Forms of Insurance
ISO Forms
This flowchart illustrates ISO forms used to insure an owner’s interest in a home and its contents.
HO-1 Basic – Lesser coverage as compared to HO-2 and HO-3. HO-1 has been discontinued in most states.
HO-2 Broad – Better coverage as compared to HO-1. The dwelling and structures of this coverage is named peril coverage. Provide contents coverage up to 50% of the dwelling coverage.
HO-3 Special – HO – 2 coverage is broad coverage, whereas with HO – 3 policies, losses are covered unless specifically excluded. The dwelling and structures under this coverage are considered “open peril”. HO – 3 provides contents coverage up to 50% of the dwelling coverage.
HO-4 Contents Broad – this form covers the contents and personal liabilities of renters. It provides no coverage on a dwelling or on other structures.
HO-6 Unit Owners – this form covers the property interest, contents, and personal liability of people owning a unit in a condominium or a cooperative building.
HO-8 Modified - this form covers houses having a replacement cost greater than market value, typically older homes.
Sections One and Two
Section I of the HO consists of the following five parts:
Coverage A: dwelling
Coverage B: other structures (usually 10% of Coverage A)
Coverage C: personal property (50% of Coverage A)
Coverage D: loss of use (20% of Coverage A)
additional coverages
Section II of the HO consists of the following three parts:
Coverage E: personal liability
Coverage F: medical payments to others
additional coverages
Personal Property Coverage
Personal property inside a dwelling is insured on an actual cash value basis which is the depreciated cost of the item.
The amount of coverage is typically 50% of the dwelling coverage, which can be increased but cannot be reduced below 40%. For forms HO-04 and HO-06, at least $6,000 of minimum coverage is required to insure the contents.
Loss of Use
When a house is so damaged that it is uninhabitable, there is coverage for this loss of use available in Coverage D in all homeowners policies. The increased costs to maintain the family’s normal lifestyle are paid for by the additional living expense coverage.
There are limits to the coverage. The typical dollar amount is 20% of the Coverage A amount. Expenses are covered only during the time it takes to repair the damage or move the family to a new home. Usually the insured will end up paying some of the expenses out of their own pocket.
Payments in Coverage A or Coverage B
Buildings under Coverage A or B are settled at replacement cost without deduction for depreciation, subject to the following:
If at the time of loss the amount of insurance on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, then the ISO will pay the cost to repair or replace the damaged building. The ISO will apply the policy’s deductible before paying the insured the lesser of the following amounts:
the limit of liability under the policy that applies to the building
the replacement cost of that part of the building damaged for like construction and use on the same premises, or
the necessary amount actually spent to repair or replace the damaged building.
Debris removal
HO-03 also covers debris removal. If the cost of replacement equals or exceeds the face amount of coverage, the insurer provides an additional 5% of the limit of liability for the debris removal expense.
For example, assume a homeowner has an HO-03 policy with $300,000 of coverage equal to the home’s current replacement cost. Assume the home had a total loss by a covered peril and the cost to rebuild the home was $300,000. If a contractor charges an additional $4,000 to remove the structure, the insurer would pay $304,000 minus any deductible.
Real Life Example
Mr. Edwards wanted to pay as little as possible for his homeowners policy. He got the minimal coverage of $150,000 with a $100 deductible based on a low estimate of his home’s replacement cost value. He chose not to take the inflation protection option that would have increased his coverage over time with the cost of living.
Ten years later, Mr. Edwards’ home was worth $600,000 based on the value of the land ($350,000) and the dwelling ($250,000). He still maintained the minimum insurance coverage of $150,000 rather than the full replacement cost coverage of 80% of his home’s value, or $200,000.
When his home was recently destroyed by fire, the insurer calculated the replacement cost as follows:
Policy $150,000 / (80% x $250,000 dwelling) x loss of $250,000 - deductible of $100 = replacement cost of $187,400.
However, since the insurer will not pay more than the limit of liability under the policy, Mr. Edwards will only receive $150,000.
Mr. Edwards did not have the extra cash to rebuild an identical structure. Therefore, he now lives in a much smaller home.
