Homeowner's Insurance (HO-3 Policy)
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There are various types of homeowners' insurance policies, but the one most commonly sold is based on the HO-3 policy by the Insurance Services Office (ISO), which is the minimum coverage required by most mortgage lenders. This policy is discussed in more detail below to give you an idea of what a homeowners' policy covers, but it does not cover all the details, and since policies differ widely, always read any policy considered for purchase.
The 1st part of the policy consists of the declarations, insuring agreement, and definitions. Two major sections follow:
- Section 1 covers the property and other items related to it.
- Section 2 covers personal liability.
This policy provides divided coverage, meaning that each section has its own policy limits, independent of the other sections.
Section 1 — Property Coverage
The Declarations section specifies who is insured and the location of the property, and deductibles.
The persons insured include the owner of the policy and spouse, any relatives living at home, anyone living in the residence under age 21 and any relative who is a full-time student under age 24 or, if under the care of the insured, under age 21, who lived at the residence prior to moving away for school.
Also covered for liability are animals, watercraft and employees providing personal service for the insured. For instance, a housecleaner that falls and hurts himself while cleaning your home, or a dog that roams around and bites someone is covered.
This short part stipulates that the insurer will provide you with insurance only if you pay premiums and follow all provisions of the policy.
This section provides definitions of important terms in the contract, which removes possible ambiguities, which not only helps the insured to understand the contract better, but it protects the insurer, since any ambiguity in an insurance contract is construed against the insurer by the courts.
Coverage A: Dwelling
This specifies coverage of the main residence and any attached structures, such as a garage. Materials and supplies for repair or new construction to the main residence is also covered. Land is specifically excluded.
The amount of coverage on the dwelling determines the amount of coverage for other structures, personal property, and loss of use.
Coverage B: Other Structures
This covers any structure not attached to the main dwelling such as a garage or tool shed. The amount of coverage is limited to 10% of the main dwelling.
Specifically excluded are structures rented out to others, structures to conduct a business, or to store business property, although there are some exceptions.
Coverage C: Personal Property
Generally, all unscheduled personal property of the insured where the loss is verifiable and that is not normally covered by other policies is covered, regardless of where it is located. Thus, if a covered college student's computer is stolen at school, then the loss will be covered. The amount of coverage is limited to 50% of Coverage A, although this amount can be increased, if desired, by an endorsement.
There are certain types of property with specified maximum amounts for any loss, if they are covered at all, because it would be difficult to verify the amount lost — such as a stolen wallet. A policy that didn't require verification of the loss would create a moral hazard that would tempt some insureds to inflate the amount of the loss. Hence, such losses are either not covered or only a token payment is made. For instance, there is a $200 limit on cash and a $1,500 limit for securities, tickets, etc.
Other property excluded because of indeterminable value includes pets, business records, and various electronic cards, including credit and debit cards. Property that should be covered by other insurance policies includes the property of renters, and various types of transportation, such as motor vehicles, watercraft, and aircraft.
Scheduled Personal Property Endorsement
Coverage for property that should be insured under a separate policy specifically for that item — such as a stamp collection or jewelry — is also minimal or excluded. However, such items can be covered under the scheduled personal property endorsement, which is an endorsement specifically for valuable property, especially property that may vary widely in value. Such property includes:
- art and antiques
- cameras and musical instruments
- jewelry and furs
- stamp and coin collections
Most scheduled personal property endorsements have an agreed value loss settlement, where the property and its value are agreed to when the endorsement is purchased. The scheduled property is insured against all risks unless specifically excluded. If there is a loss, then the insurer simply pays the amount listed in the schedule, which is independent of the amount of any other coverage.
Coverage D: Loss of Use
If the main dwelling is unfit because of a covered loss, then this policy will cover loss of use expenses and income up to 30% of Coverage A.
Additional living expenses are provided for renting a temporary residence while the main dwelling is being repaired. These expenses will also be paid if the insured is prohibited from living in their residence by the legal authorities, because of a fire next door, for instance.
In addition, if part of the covered residence was rented out, then this policy will pay the fair rental value minus any expenses that would not continue because it is not being occupied.
Section 1 Additional Coverage
Miscellaneous coverages are listed in this section. This section also lists the deductible, which is usually $250 for each covered loss, although this can be increased to reduce the premium. For instance, increasing the deductible to $1,000 may decrease the premium by as much as 25%.
Debris removal from a covered peril is covered as well as property temporarily moved to another location for safekeeping until the main residence is repaired. Reasonable costs to protect the property from further damage are also covered. Trees, shrubs, and other plants are covered up to a limit of 5% of the main dwelling, but no more than $500 for any single plant. Other covered items include collapse of a building due to specified causes, glass, and grave markers. Furnishings owned by the insured in an apartment or room located on the insured's premises that is rented out is also covered for Coverage C perils except theft.
Perils Insured Against
Dwelling and Other Structures
This policy is an open perils policy— thus, everything is covered except that which is specifically excluded, which is listed here: collapse of a building; freezing of water, unless adequate heat is maintained; fences, pavements, patios; theft of materials used for construction, or parts of a dwelling under construction; vandalism, if the property was vacant for the previous 60 days; mold, fungus, or dry rot; and many other exclusions not insurable, such as wear and tear.
This section provides a named-perils coverage — only those perils listed are covered.
Fire is a covered peril, even if it is a proximate cause of the destruction, rather than a direct cause. For instance, if firefighters have to break down a door to fight a fire, then the door is covered. However, the fire must possess 2 qualities before it would be considered a covered fire. There must be a flame or a glow. Scorching, for instance, wouldn't be covered. It must also be a hostile or unfriendly fire, which the courts have defined as a fire that burns outside of where it is expected. For instance, if some of your personal property somehow gets into the fireplace and burns, then it wouldn't be covered, because the fire in the fireplace is considered a friendly fire, since it is burning where it is expected. Smoke damage is covered, even from a friendly fire, as is any kind of explosion.
Windstorm, hail, and lightning are generally covered. Damage from or within vehicles is covered, so if your personal property is damaged in an auto accident, then it will be covered.
Other covered perils include, with some exclusions and conditions, theft, vandalism, riot, aircraft, falling objects, weight of snow, ice, or sleet, accidental discharge or overflow of water or steam, freezing, and volcanic eruptions.
Section 1 Exclusions
This section lists more general exclusions, which are generally not insurable risks:
- ordinance or law;
- earth movement;
- water damage from external sources of water, such as floods, sewers, or underground water;
- power failure;
- losses caused because the insured failed to protect property after a loss;
- war or nuclear hazard;
- intentional loss;
- weather conditions;
- defective planning and design.
Section 1 Conditions
This section lists the conditions that the insured must abide by, and also explains various details of the policy.
Duties After a Loss
To receive insurance coverage, certain duties must be performed after a loss:
- Promptly notify your insurer about the loss;
- protect the property from further losses;
- itemize the damaged personal property;
- keep the damaged property for possible inspection by the insurer;
- file a proof of loss within 60 days of the insurer's request for it. The proof of loss will include all information that the insurer will need to ascertain that a loss has occurred and the value of the loss:
- date and time of loss;
- ownership interest in the property, including property liens, if any;
- any other insurance on the property.
Only the actual cash value, which cannot exceed the cost of replacing or repairing the item, of personal property losses is paid minus the deductible. This also includes structures that are not buildings, and such items as carpets and appliances. However, a replacement cost endorsement can be purchased, which covers the cost of replacing the item without any deduction for depreciation.
For the dwelling and other buildings, the replacement cost is paid, with no deduction for depreciation, but only if at least 80% of the value is insured; otherwise, a coinsurance penalty is applied.
Because some disasters can destroy a home beyond repair, or where many homes are destroyed in the same area, rebuilding or repairing a home could cost significantly more than usual. For these cases, an extended replacement cost endorsement can be purchased that will pay 20% or more above the policy limits. However, the insured must insure the property for full replacement cost, and notify the insurer if there are significant alterations to the property that might change its value.
Some insurers offer a guaranteed replacement cost policy, where the policy will pay 100% of the cost of restoring the property to its previous condition, even if it is more than the policy limits. However, the insured must insure the property for 100% of its value at the time of purchase. Because of the risks for insurers due to fraud and inflated appraisals, and higher costs in a major disaster, this type of policy is becoming rarer, and, in any case, much more expensive.
The appraisal clause provides for a method of appraisal that is agreeably to both insurer and insured when there is disagreement of the value of a loss. In this procedure, both the insurer and the insured select an appraiser, then the 2 appraisers select an umpire. If the 2 appraisers agree on the value of the loss, then that is the value that is binding on both parties. If there is a disagreement, then the umpire decides which value accurately represents the loss.
The mortgage clause protects the lender for the property. Most people borrow money to buy property, but the property must be insured before the loan is approved, with the mortgagee (lender) named in the policy. In the event of a loss, the mortgagee will be compensated to the extent of its insurable interest, even if the policy is violated by the mortgagor (borrower).
There are several other provisions in this section; many are common to all insurance contracts, such as nullifying coverage because of fraud or concealment, who is paid in the event of a loss, and a stipulation that any legal action commence within 2 years of the loss, and after all requirements of the policy have been complied with. Other common provisions include allowing the insurer to repair or replace property at its option, which it will often do for personal property because its bargaining power allows it to buy many things for a lower price than most consumers could get it for.
Also, the insured does not have the option to abandon the property by leaving it to the insurer for the full value of the loss. In cases of total destruction, the insurer can pay the insured for his loss, or it can pay for the full value of the property and take possession of it, but the choice is the insurer's, not the insured's.
Section 2 — Liability Coverage
Section 2 details the personal liability coverage provided by the HO-3 policy.
Coverage E: Personal Liability
In cases that lead to litigation for personal liability of the insured, the insurer will pay for the defense of the insured and any claim imposed by the court on the insured, up to the policy limit. This coverage, does not cover business liability or liability arising from the use of a motor vehicle, which should be covered by separate insurance policies specific for that coverage.
The minimum liability coverage is $100,000 per occurrence, defined as a single accident, or damage resulting from a prolonged exposure to the same set of conditions. Note that personal liability is covered regardless of where it occurs. For instance, if you break an antique at a shop, your homeowner's insurance will cover you.
Coverage F: Medical Payments to Others
Coverage F covers people other than the insured, and regardless of whether the insured is legally liable for the injury. The insurer will pay reasonable medical expenses for other people who are on the insured's location, or by the activities of the insured, resident employees of the insured, or animals owned or in the care of the insured. For instance, if your dog runs away and bites someone, then you would be covered. In fact, dog bites account for 1/3 of the claims. Another example under Coverage F: If your child and a neighbor's child are playing in your yard, and they are both injured, the neighbor's child would be covered, but not your child.
Section 2 Exclusions
Most of the exclusions under Section 2 are commonsensical. The 1st section applies to both Coverage E and Coverage F.
There is no coverage for activities that should be covered by other, more specific policies. For instance, motor vehicles are generally not covered, nor is watercraft, aircraft, and hovercraft liability covered, except under specific conditions. Intentional torts are not covered.
Liability for business activities and professional services are generally not covered.
Other specific exclusions include war; communicable diseases; sexual molestation, corporal punishment, or physical or mental abuse; and liability arising from controlled substances.
Exclusions specific to Coverage E include:
- contractual liability where the insured agrees to assume a legal liability;
- property owned by the insured, or property in the care of the insured that is damaged by an insured;
- bodily injury to an insured by an insured;
- nuclear energy;
- and any injury covered by workers compensation insurance.
Exclusions for Coverage F include injuries to resident employees outside of insured locations, and injuries to people who regularly reside at the residence but who are not resident employees.
Section 2 Additional Coverage
Most expenses related to litigation for personal liability are covered, and is over and above the policy limits for personal liability damages, including:
- attorney's fees and court costs;
- premiums for appeal bonds;
- interest on judgments that accrue before payment of the claim;
- reasonable expenses and up to $250 per day for lost income to compensate the insured for helping the insurer to prepare and defend the case.
Damage to Property of Others
Any accidental property damage caused by the insured will be paid by the insurer for replacement cost, up to $1,000 per occurrence, even if the insured is not legally liable for the damage — to preserve good neighborly relationships. Thus, if you break something at a neighbor's party, you'll be covered. However, the damage will not be covered if the cost exceeds $1,000 unless the insured is legally liable for the damage. There are many exclusions to this section, which can be classified as damage that should be covered by other insurance, such as business liability, or damage that is covered by another part of this policy. Any intentional damage caused by an insured who is older than 12 is not covered under this section.
Other expenses that are covered are first-aid expenses for a covered injury, and special loss assessments, such as what may be imposed on the insured by the insured's homeowners association.
Sections 1 and 2 Conditions
This section contains many conditions that are common to most insurance contracts: waiver or change-of-policy provisions, cancellation, nonrenewal of the policy, assignment of the policy, assigning subrogation rights to the insurer, liberalization clause, and what happens if the named insured or spouse dies.
How to File a Homeowners Insurance Claim
- Assess and document the property damage. If you’re unable to access the property, which may be the case in a hurricane or flood, your insurer may use drones to survey the property damage.
- Contact the insurer or agent who sold you the policy, since the claim must be filed within a certain time after the loss.
- You may have to make some repairs quickly and you may initially have to pay for it, since it may take some time to receive reimbursement from your insurer. Keep all receipts for any payments you make.
- When contacting your insurer or its agent, check what is actually covered and to what extent. You could also probably do this on the insurer’s website since most insurance companies have account management services through their website.
Prepare for the Adjuster
- Prepare for the adjuster, the person who will actually survey the damage and determine the insurance company’s payment. Many times, the adjustment may be done virtually, where the adjuster will ask you to communicate through smart phone apps like FaceTime, Google Duo, or Skype, and using videos and photos taken by your phone. However, you can ask for the adjuster to come to your house if that is what you prefer. If the damage is extensive, then the adjuster may come anyway.
- Make a list of items that were destroyed or need repair. Gather any receipts to verify what you paid for the items.
- You may not be able to assess all of the damage right away, since some damage may be hidden, but most insurance policies do give you additional time to report any additional damage. The time that the claim can stay open depends on the policy.
Document All Your Transactions
- Keep copies of every email or text message that you sent to the insurer or its agent or the adjuster and copies of all documents given to the adjuster, including your list of damaged or lost property. If the adjuster advises certain repairs, get that in writing.
- Note any missed appointments, unreturned phone calls, and what you discussed when you did contact them. Include the date and time of each event. You may want to either record the conversation but get permission from the other party 1st.
- Ask your adjuster what is covered, the coverage limits, and what is not being covered.
- Ask for a detailed explanation of the estimate in writing.
- An adjuster may not know how to estimate the value of any custom work in your home, in which case, get an outside estimate from someone who specializes in that type of work, if you do not have a record of what it cost originally or if the original cost is no longer relevant.
- If the insurance policy has misleading or ambiguous statements, then inform the insurance company of the ambiguity and ask that the ambiguity or misleading statement be reinterpreted in your favor. Courts generally rule in favor of the policyholder because courts generally construe ambiguities in contracts against the maker of the contracts, which, in this case, is the insurance company.
- For a large claim, you may want to use a public adjuster, someone who works in your behalf instead of the insurance company. The public adjuster will charge a fee. In some states, the fee is capped at 10% to 12% of the insurance payout. Other states have no limits. Some adjusters may charge a flat fee.
- You can find a public adjuster by checking the website of Consumer Federation of America. Check to ensure that the adjuster has at least several years of experience and that they have a state license if it is required. Ask for references.
- Alabama, Alaska, Arkansas, and South Dakota do not require a license for an adjuster, which means that just about anybody can claim to be an adjuster in these states. So definitely check references, the Consumer Federation of America, and maybe even contact an attorney who specializes in victims of catastrophes.