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Homeowners Insurance: Useful
information for the consumer
(What the Consumer Needs to Know Before Making a Purchase)
There are two types of contracts when it comes to property
insurance: homeowner’s and
commercial. For the purposes
of this article, homeowner’s
insurance will be explained
in some detail. This
information is provided in
order that the consumer may
gain a better understanding
of the benefits of a
homeowner’s policy.
Homeowner’s Insurance, in tangible form, is basically a contract
and is comprised of three or
four parts. The divisions of
this contract
include: insuring
agreements; identification
of covered property;
conditions and stipulations;
and exclusions.
Homeowner’s Insurance originated as the “standard fire
policy.” The “standard fire
policy” was the prior method
in providing protection of
individual property. In
1958, the “standard fire
policy” evolved to what we
know today as “homeowner’s
insurance.”
There are several types of homeowner’s insurance. Coverage may be
defined as “all risk” or
“named peril.” All-risk
policies are designed to
offer coverage on any peril
except the perils
(specifically) excluded
within the policy. The
benefit of this type of
policy is that if property
is destroyed by a peril not
shown to be excluded, the
coverage is good. In
named-peril insurance, the
property damaged must be
listed in the policy;
otherwise, no coverage can
be provided.
Homeowner’s policies protect the insured against property loss
resulting from (perils such
as): fire, lightning,
explosion, theft, and
windstorms. In addition, the
policy protects the insured
against other types of
losses not related to
destruction of
property. These risks
include: legal liability to
others for injuries (while
on the insured’s premises);
medical payments to others
as a result of injury (while
on the owner’s property);
and associated expenses when
the insured is forced to
vacate his/her property as
the result of an insured
peril. The very nature of
the homeowner’s policy is
multi-peril wherein a wide
variety of risks are
covered.
The property covered within a homeowner’s policy not only covers
the owner’s main dwelling,
but also covers other
structures and
property. Other structures
and property (the
homeowner’s policy may
cover) include: garages,
fences, trees, shrubs,
personal property with the
exclusion of certain listed
items, property away from
the premises (such as
boats), money and securities
(subject to certain dollar
limits), and losses due to
forgery. Other items of
coverage may include the
removal of debris and trash
after the event of a covered
peril or loss; and expenses
incurred in order to protect
the property from further or
greater loss.
Recovery of loss under a homeowner’s policy is specifically
limited to loss as a result
of an insured peril. This
means losses incurred by an
intervening source and not
insured under the policy
will not be covered. For
example, flood, which
typically is an excluded
peril, causes major damage
to a home and then shortly
thereafter, the house is
destroyed by a fire. The
homeowner’s recovery from
the fire is limited to the
value of the house after the
flood.
Recovery under homeowner’s policies may be on the basis of either
full replacement value or
actual cash value. Under
actual cash value or ACV,
the insured suffers no
reduction in loss recovery
due to depreciation of the
property from its original
value. The basis is
applicable if the owner took
out coverage that is equal
to a (predetermined)
percentage, in example 80%
(percent), of the
replacement value of the
property.
If the insurance amount is less than the named percentage then a
coinsurance clause becomes
effective. The clause
reduces the (recovery)
amount to the value of the
loss times the (ratio of
the) amount of insurance
actually carried to the
amount equal to the
predetermined percentage (in
our example: 80%) of the
value of the
property. However, the
recovery will not be less
than the actual cash value
of the property. The actual
cash value of the property
is defined in the following
manner: Full replacement
cost minus an allowance for
depreciation up to the
amount stated on the
policy. To clarify further
consider the following
scenario: Let’s say the
homeowner’s property is
valued at $100,000.00 when
new. The property, to date,
has depreciated twenty
percent in value. The
insured carries a policy
worth $60,000.00 and a
$10,000.00 loss has
occurred. In simplest form
the following scenario
breaks down this way:
Value of homeowner’s property new: $100,000.00
Depreciation taken on property to date: 20% (percent)
Amount of coverage: $ 60,000.00
Amount of loss: $ 10,000.00
The actual cash value of the loss is determined by taking the
amount of the loss which in
our illustration is
$10,000.00 (ten-thousand
dollars) and subtracting the
amount of depreciation taken
on the property or as
indicated above which is 20%
(twenty percent). Twenty
percent (amount of
depreciation) of $10,000.00
(amount of loss) is equal to
$2,000.00 (two-thousand
dollars). Therefore, the
math would be as follows:
$10,000.00 minus $2,000.00 =
$8,000.00.
The coinsurance clause would limit recovery to 6/8 of the loss
(or) the value of the loss
times the ratio of the
amount of insurance carried
to the amount which is equal
to eighty percent (80%) of
the value of the
property. Therefore, 6/8
(reduces to ¾) or is
equivalent percentage wise
to seventy five percent
(75%). Ten-thousand dollars
($10,000.00) is the amount
of the loss and seventy-five
percent (75%) is the
percentage to be used when
determining recovery under
the coinsurance
clause. Therefore, the math
would be as
follows: $10,000.00 (loss)
times 75% =
$7,500.00. However, the
insured took out insurance
equal to a named percentage
of the value of the
property. In the above
example, the percentage was
eighty percent (80%). The
insured, again, is not
subject to a reduction in
loss recovery due to
depreciation taken on the
property from its value as
new. The eight-thousand
dollar ($8,000.00) actual
cash value of the property
is replacement cost and
overrides the $7,500.00
determined by the math
instituted when the
coinsurance clause is put
into effect.
Recovery under a homeowner’s policy may also be limited if more
than one policy is
applicable to the loss. Two
policies of exact same value
limits will contribute one
half each of any loss
incurred by the insured. In
addition, loss payments are
also limited to the
insured’s insurable interest
in the
property. Accordingly, if
the insured owns a one half
interest in a property,
his/her recovery is only
limited to one half or fifty
percent (50%) of the insured
loss. The co-owner would
need to make arrangements
for his/her insurable
interest.
The following are excluded perils within homeowner’s policies: A
loss due to freezing should
the dwelling become vacant
or unoccupied (unless
specified precautions have
been taken); a loss
resulting from the weight of
ice or snow to a property,
examples being fences,
swimming pools, docks, and
retaining walls; theft loss
for a building under
construction; vandalism when
the building is vacant over
a thirty (30) day period;
damage from a gradual water
leakage; damage resulting
from termites; a loss from
rust, mold, dry rot,
contamination, smog and
settling; loss from either
animals or insects; loss
from the earth’s movement
(earthquakes); flood, war,
deterioration from chemicals
(spoilage); loss as the
result of the insured not
making arrangements to
protect the property after a
loss; and, losses arising
out of business pursuits.
Under named-peril policies only those losses named in the policy
are covered.
Earthquake and flood loss, although not perils covered under
homeowner’s policies, may
typically be covered by way
of endorsement.
Homeowner’s policies may include the following conditions: 1)
Owners are to give immediate
written notice of a loss to
the insurer; 2) The insured
must provide proof of the
amount of the loss; 3) The
insured must be cooperative
with the insurer in settling
the claim; 4) The insured
must have his/her premiums
paid timely and in advance
of the loss; 5) The insurer
has the right to subrogation
or pursuing liable third
parties to the loss. (This
stipulation keeps the owner
from collecting twice: once
from the insurer and once
from the third party); 6) A
mortgagee’s interest in
his/her property can be
protected; 7) A policy may
be cancelled by the insurer
with notice (typically ten
(10) days). If the insurer
does decide to cancel, a
refund of the premium must
be returned to the original
insured, and if the insured
decides to cancel a less
than proportionate refund
may be recovered; 8) Fraud
by the insured, including
misrepresentation of
pertinent facts concerning
the risk is grounds for
denial of benefits.
In conclusion, understanding
insurance basics as it
relates to homeowner’s
insurance is necessary in
attaining the best possible
coverage and avoiding
financial woes down the
road. Additionally, using
the services of a
professional insurance
professional/advisor is
always the only way to
determine appropriate types
of policies and coverage
relative to the homeowner’s
circumstances.
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