CHAPTER OBJECTIVES

When you have finished this chapter, you should be able to

• Interpret loss-settlement provisions
• Recognize significant exclusions and limitations in the homeowners Section I coverage
• List and describe the optional coverages available to broaden the homeowners forms

In this chapter, we continue our review of home-owners forms, turning to a discussion of the perils against which coverage is provided under the forms. As we noted in the last chapter, there are differences in the perils for which the forms provide coverage. In this chapter, we will examine those differences more closely.

DIFFERENCES AMONG HOMEOWNERS FORMS

The differences in the homeowners policies are designed to accommodate the insurance needs of different property owners. Thus, there are separate forms of dwelling owners, tenants, and condominium unit-owners. In addition to the differences traceable to the different status of insureds, some forms differ with respect to the scope of their coverage, as determined by the perils against which protection is provided.

In reviewing the differences among the homeowners forms, we will focus on a single form, homeowners form HO-3. It includes the broad named-peril coverage applicable under forms HO-2, HO-4, and HO-6 and includes the open-peril coverage applicable to the dwelling and other structures under forms HO-3 and HO-5. Therefore, it is a convenient way of reviewing the named-peril and open-peril approaches to coverage.

Homeowners 2 Broad Form

Homeowners 2 Broad Form covers damage to buildings and personal property and loss of use arising out of damage to such property against loss by 16 named perils. We will defer the detailed discussion of these perils until we reencounter them in Homeowners 3 Special Form, discussed next. The only difference between homeowners forms HO-2 and HO-3 is in the coverage on the Dwelling, Other Structures, and Loss of Use coverages. These are covered on a named-peril basis under HO-2 and on an open-peril basis under HO-3. The personal property coverage is on a named-peril basis under both forms, with identical coverage for the 16 broad named perils that apply in forms HO-4 and HO-6.

Homeowners 3 Special Form

The essential difference between the homeowners form HO-3 and most other forms is the open-peril coverage on the dwelling and other structures. We will begin our review of this form with this feature, the dwelling coverage.

Open-Peril Coverage: Dwellings and Other Structures Coverage on the dwelling and other structures under homeowners form HO-3 is on an open-peril basis, with coverage provided against all physical loss except by those causes specifically excluded. In addition, the Loss of Use coverage applies on an open-peril basis. The open-peril insuring agreement of form HO-3 is simple and straightforward:

A list of excluded losses for which coverage is not provided then follows. Any loss that does not fall within one of the exclusions is covered. The number of exclusions required in an open-peril form is usually extensive since all uninsurable perils must be excluded. The exclusions that follow the open-peril Dwelling and Other Structures insuring agreement include the general Section I exclusions (designated exclusion a), losses involving collapse, except as covered under the Collapse additional coverage (designated exclusion b), and a group of 14 exclusions—combined as exclusions c(1) through c(6)— more or less standard exclusions in all open-peril contracts.

General Section I Exclusions The General Section I exclusions are divided into two groups designated A.1. through A.9. and B.1. through B.3. These exclusions are included in all homeowners forms.

A.1. Ordinance or Law. With the exception of the 10 percent extension for Ordinance or Laws provided under the additional coverage previously discussed (and any increase in this extension added by endorsement), the form excludes loss caused by any ordinance or law enforcement regulating building construction, repair, or demolition.

A.2. Earth Movement. The Earth Movement exclusion eliminates coverage for loss caused by earth movement except direct loss by fire, explosion, or theft. The policy defines Earth movement to include earthquake, including land shock waves or tremors before, during, or after a volcanic eruption; landslide; and mine subsidence, mudflow, and other types of earth movement such as earth sinking, rising, or shifting. Coverage for earthquake and other types of earth movement is available by endorsement for an additional premium.

A.3. Water. The Water exclusion eliminates coverage for certain types of enumerated water, including flood in all its forms, water or waterborne material that backs up through sewers or drains or overflows from a sump, and water or waterborne material below the surface of the ground that seeps through basement walls, foundation floors, and similar structural components.

The Water exclusion was revised in the 2011 Homeowners form in response to litigation in the aftermath of 2005's Hurricane Katrina. This hurricane destroyed approximately 275,000 homes and damaged hundreds of thousands of others. Although much of the damage was caused by flood, fewer than 10 percent of property owners in some coastal counties had purchased flood insurance. Various attempts were made to find coverage under Homeowners policies. Much of the litigation related to the Water damage exclusion, whether damage was caused by wind (a covered peril) or water/flood (not covered), and the concurrent causation exclusion (discussed later). As a result of the litigation, the revised exclusion explicitly eliminates coverage for storm surge (water that is pushed toward shore by the force of winds) and discharge or overflow from a dam, levee, or other containment system.

An exception to the Water exclusion provides coverage for loss by fire, explosion, or theft caused by any of the excluded forms of water. In most jurisdictions the exclusion of water and waterborne material that backs up through sewers or drains can be deleted by endorsement for the payment of an additional premium. The Water Back Up and Sump Discharge or Overflow endorsement provides coverage up to $5000 for loss resulting from such backup.

A.4. Power Failure. The Power Failure exclusion denies coverage for losses resulting directly from interruption of power or other utility service if the interruption takes place away from the residence premises. The exclusion contemplates a special form of consequential loss damage that may result from power interruption. The best example as it applies to the dwelling risk is food in a deep freezer. If lightning strikes the dwelling, and burns out the motor on the freezer, the food in the freezer may spoil as a result. The damage to the food in the freezer results from the “interruption of power.” The net effect of the Power Interruption exclusion is to provide coverage for such consequential losses when equipment on the premises is damaged by an insured peril and to deny coverage for such losses when the damage takes place away from the premises.

A.5. Neglect. The policy excludes loss resulting directly or indirectly from neglect of the insured to use reasonable means at or after a loss to save the property. The insured cannot collect for damage that he or she has a reasonable chance to prevent. However, the neglect of the insured before a loss does not affect coverage. The exclusion relieves the insurer from liability for that part of the loss attributable to the insured's neglect at or after a loss (i.e., when a loss occurs).

A.6. War. As do most forms of property insurance, the homeowners forms exclude loss caused by war in all its forms, including undeclared war, insurrections, rebellion, or revolution. Any discharge of a nuclear weapon, even if accidental, is excluded under this provision. Following the terrorist attack on the World Trade Center on September 11, 2001, questions arose concerning the application of this exclusion to such acts of terrorism. The consensus is the war exclusion does not apply to acts of terrorism.¹ Since the attack on the World Trade Center, some insurers have inserted a separate terrorism exclusion in their policies where permitted, although the practice has generally been limited to commercial rather than personal policies.

A.7. Nuclear Hazard. The nuclear hazard exclusion refers to loss defined in the Section I conditions and provides that losses from such hazards are not covered. The nuclear hazard includes nuclear reactions, radiation, or radioactive contamination. The one exception is direct loss by fire, which is covered even if it results from the nuclear hazard.

A.8. Intentional Loss. The homeowners policy excludes coverage for intentional loss “by or at the direction of an insured” and “with the intent to cause a loss.” Although this exclusion aims to eliminate payment to persons who commit arson losses, it goes beyond this situation by eliminating payment to other persons insured who were not involved in the intentional act. These could include an innocent spouse or a person with an interest in the dwelling who has been added as an additional insured under the policy.²

A.9. Government Action. Loss resulting from government actions is excluded. These include the destruction, seizure, or confiscation of property by order of any government authority. This could include property illegally held or used for illegal purposes. Sometimes, government authorities will seize or confiscate illegal substances and the structure in which the property is located. The exclusion does not apply to acts of destruction taken to prevent the spread of fire.

B.1–B.3 Concurrent Causation Exclusions. Exclusions B.1 through B.3, usually referred to as the “concurrent causation” exclusions, were added to the policy (and to most other broad form and special form property contracts) in the 1980s in response to a series of adverse court decisions.³

Exclusion B.1 applies to loss caused by weather conditions that contribute to an otherwise excluded peril. For example, landslide caused by excessive rain or rain combined with wind would be excluded. Loss caused directly by the weather condition such as windstorm damage would be covered.

Exclusion B.2 applies to loss caused by acts or decisions, including failure to act or decide, of any person, group, organization, or governmental body. Loss resulting from failure of a governmental body to maintain flood control structures or failure to enforce zoning or building codes would be excluded.

Exclusion B.3 relates to loss caused by faulty, inadequate, or defective activities such as planning, design, maintenance, or faulty materials. Loss resulting solely from inadequate building design would not be covered, but the ensuing loss such as by fire arising from faulty installation or repair would be covered.

Dwelling and Other Structures Exclusions The remaining exclusions applicable to Coverages A and B fall into two broad classes. First, four exclusions, designated c.(1) through c.(4), relate to perils that are covered as named perils in the other homeowners forms. These exclusions relate to freezing of plumbing and damage to fences, pavements, patios, and certain other property by freezing, thawing, or the pressure of water or ice, theft in or to a dwelling under construction, and vandalism and any ensuing loss if the building has been vacant for more than 60 days. We will discuss these exclusions when we examine the named-peril coverage applicable to personal property.

The second class of exclusions, c.(5) and c.(6), are a series of open-peril exclusions that appear in nearly all open-peril contracts. They exclude losses that are considered uninsurable because they are inevitable or because it is difficult to fix the time at which the damage takes place. The first of these exclusions, c.(5), excludes loss caused by mold, fungus, or wet rot. An exception applies to loss caused by mold, fungus, or wet rot that is hidden in walls, ceilings, or floors that results from accidental discharge, leakage, or overflow of water from the plumbing system or domestic appliances. Despite the specific exclusion of mold damage, the exception to the exclusion for hidden mold caused by burst pipes has triggered litigation in several parts of the country, with juries sometimes finding coverage that was unintended.⁴ In the early part of this decade, insurance coverage for damage by mold became a national issue, intensified by the interest of the media and legal profession. Insurance claims for mold damage soared in some states. Some legal profession members dubbed toxic mold “the asbestos of the new millennium.” In 2002, ISO responded with endorsements to allow insurers to limit their exposure to wet rot and mold.⁵

ISO's endorsement, Limited fungi, wet or dry rot, or bacteria coverage, adds a definition of fungi (“any type or form of fungus, including mold or mildew, and any mycotoxins, spores, scents, or byproducts produced or released by fungi”) and a new additional coverage for loss caused by fungi. The additional coverage, which applies only when the fungi or wet rot results from a covered cause of loss, covers the cost to remove the fungi or wet rot, the cost to tear out and replace any part of the building needed to gain access to the fungi or wet rot, and the cost to test the air to confirm that fungi are present. The coverage amount is limited to the amount indicated in the schedule for Section I. Section II liability for property damage or bodily injury resulting from an “occurrence” involving fungi, bacteria, or wet or dry rot is scheduled on the endorsement.

The remaining open-peril exclusions are grouped together as exclusion c.(6) and include the following:

(a) Wear and tear, marring, or deterioration

(b) Mechanical breakdown, latent defect, inherent vice or a quality in property that causes it to damage or destroy itself

(c) Smog, rust, or other corrosion

(d) Smoke from agricultural smudging or industrial operations

(e) Discharge, release, or dispersal of contaminants or pollutants unless caused by one of the named perils for which personal property is insured

(f) Settling, cracking, shrinking, bulging, or expansions of pavements, patios, foundations, walls, floors, or ceilings

(g) Birds, rodents, or insects

(h) Nesting or infestation discharge or release of waste products or secretions, by any animals

(i) Animals owned or kept by an insured

Any ensuing loss to property insured under Coverages A and B that is not excluded by another policy provision is covered. For example, if a mechanical breakdown resulted in a fire, the resulting fire would be covered.

Coverage C: Personal Property Perils Insured Homeowners form HO-3 covers damage to personal property against loss by 16 named perils. Because the coverage on personal property under forms HO-2, 4, and 6 covers loss by the same 16 perils, the following discussion of the perils covered under this form will serve to illustrate the coverage under these other forms. A complete analysis of these perils requires a close examination of the form, but the following explanation provides an indication of the scope of their coverage.

Fire and Lightning The basic peril against which coverage is provided in nearly all property insurance forms is fire. Surprisingly, the term fire is nowhere defined in the policy. Although the term is undefined, court decisions over many years have established that the fire contemplated in insurance policies is of a specific type. Fire, according to the courts, is “combustion proceeding at a rate rapid enough to generate flame, glow, or incandescence.”⁶ In other words, there must be light. Mere smoke, scorching, or charring is insufficient to constitute a fire.

Not all fires are covered under the fire peril. The courts distinguish between a friendly fire and a hostile or unfriendly fire. A friendly fire is one that is within the confines for which it was intended; the friendly fire was intentionally kindled and burns where it is supposed to. A hostile fire, on the other hand, has escaped its intended confines. Only hostile or unfriendly fires are covered under the fire peril.

In addition to the destruction by the fire, the “direct loss by fire” peril provides coverage for any damage that results from the smoke from a hostile fire or is caused by water or attempts by firefighters to extinguish a hostile fire.

Windstorm and Hail The wind and hail insuring agreement excludes damage caused by rain, snow, sleet, sand, or dust to the building's interior unless the exterior walls or roof are first damaged by direct action of the wind or hail. Thus, if an insured leaves a window open and the wind blows rain into the house, damaging the contents, there is no coverage. However, if the window were first broken by the wind, damage to the contents would be covered.

In addition to the exclusion relating to damage to the structure's interior, there is an exclusion of damage by wind or hail to watercraft, their trailers, or equipment, unless such items are inside a fully enclosed building.

Explosion Explosions are covered whether they originate within or outside the building. There are no exceptions or exclusions.

Riot or Civil Commotion Damage caused by rioters and persons engaged in civil commotion is covered, subject to few exceptions. Even “pillage and looting” are covered if they occur during and at the place of the riot. The only area in which an issue has arisen is in the distinction between a riot (which is covered) and an insurrection (which is excluded as a form of war). The courts have differentiated between the two: An insurrection is distinguished by its intent to overthrow duly constituted authority. A riot, in contrast, is a “tumultuous disturbance of the peace,” something that happens in response to police brutality, civil unrest, or sometimes after a loss at an NCAA basketball tournament game.

Aircraft The aircraft peril provides coverage against damage to insured property caused by aircraft, including self-propelled missiles or spacecraft. This coverage includes damage resulting from direct physical contact of the insured property with aircraft but could also include damage resulting from objects falling from aircraft or even “sonic boom.”

Vehicles Coverage applies for damage to insured property caused by vehicles, including vehicles owned or operated by an insured.

Smoke Although the fire peril includes coverage for damage caused by smoke from a hostile fire, the smoke peril broadens this to include coverage for sudden and accidental smoke damage from other sources, including the emission or puffback of smoke, soot, fumes, or vapors from a furnace or boiler. Smoke from agricultural smudging and industrial operations is excluded.

Vandalism and Malicious Mischief Vandalism and malicious mischief refers to the willful and malicious damage to or destruction of property. Loss by vandalism is not covered if the building has been vacant for over 60 days.⁷ The policy also provides that a dwelling under construction is not considered “vacant.”

Theft Except for forms HO-5 and HO-8, the theft coverage of the homeowners forms is identical.⁸ The theft peril provides coverage for theft, including attempted theft or loss of property from a known location when it is likely the property has been stolen. The phrase “loss of property from a known location when it is likely that the property has been stolen” is intended to reduce the insured's burden of establishing the loss resulted from theft where there is no conclusive proof. The policy requires the insured to give immediate notice to the police if an article is stolen.

There are two sets of exclusions applicable to the theft peril: a set of general theft exclusions and a set that applies only to property that is away from the insured premises.

General Theft Exclusions There are three general theft exclusions.

1. Theft committed by any insured
2. Theft in or from a dwelling under construction or of materials or supplies for use in the construction until the dwelling is completed and occupied
3. Theft from any part of a residence rented by an insured to anyone except another insured

With respect to the first, theft from one family member by another is not covered. In addition, although the definition of the dwelling includes lumber, materials, and appliances on the premises and intended for use in construction, the second general theft exclusion eliminates insurance against the stealing of such items. The exclusion with respect to theft from any part of the dwelling that is rented relates not only to portions of the house that may be let to roomers and boarders but also to the occasional rental of that portion of the dwelling customarily occupied by the insured. Such a situation might arise, for example, if the insured were leaving town for an extended period and decides to rent out the residence.

Off-Premises Theft Exclusions Three exclusions apply to property while away from the premises.

The first off-premises exclusion eliminates coverage for campers or trailers stolen while away from the premises, and the second excludes theft of watercraft or their furnishings, equipment, and outboard motors,.

The third exclusion provides that property theft from any residence owned, rented to, or occupied by any insured is not covered except while an insured is residing at the location. For example, if the policyholder owns a summer cottage, its contents are covered for other perils (subject to the 10 percent limitation on contents at a secondary residence), but the theft coverage does not apply except while the individual is residing at the cottage. An exception to this exclusion provides that coverage will apply to the property of a student residing away from home if the student has been at the residence at any time during the 90 days immediately preceding the loss. This provides coverage for property left at a dormitory, sorority, or fraternity during occasions such as spring break, Christmas, or Thanksgiving, when students leave the campus.

Falling Objects This peril covers damage caused by falling objects such as tree limbs but is not limited to this. A building's contents are not covered for loss by falling objects unless the building's exterior first sustains damage. Also, damage to the falling object is excluded. The exclusion of “damage to the falling object itself” eliminates coverage for damage to items if they are dropped or fall. Thus, if a heavy mirror fell from the wall, damaging the interior of the building and itself, there is no coverage under the “Falling Objects” peril.

Weight of Ice, Snow, or Sleet Damage caused by the weight of ice, snow, and sleet is covered, but the damage must result from the weight. Melting snow that leaks into the dwelling causing damage would not be covered. Damage to awnings, fences, patios, pavement, swimming pools, foundations, retaining walls, bulkheads, piers, wharves, or docks is also excluded.

Accidental Discharge or Overflow of Water or Steam Coverage is provided for the accidental discharge, leakage, or overflow of water from a plumbing, heating, or air-conditioning or automatic sprinkler system or from within a domestic appliance. This includes burst or leaking pipes and the overflow of plumbing fixtures such as bathtubs, or appliances such as automatic dishwashers. Coverage includes the cost of tearing out and replacing the building part to make repairs, but the loss to the system or appliance is excluded.

Sudden and Accidental Tearing Apart, Cracking, Burning, or Bulging of Heating or Air-Conditioning Systems This insuring agreement provides coverage against loss caused by “Sudden and accidental tearing apart, cracking, burning or bulging of a steam or hot water heating system, an air-conditioning system or of a household appliance.” Damage to steam or hot water heating systems of the type specified can occur if the water level for such systems becomes too low and damage of this type was the original rationale for this coverage. Damage of the types specified, from any cause, is covered.

Freezing of Plumbing, Heating, and Other Systems and Appliances Loss resulting from freezing of plumbing, heating, or air-conditioning or automatic sprinkler systems or domestic appliances is covered, provided the insured has used reasonable means to maintain heat in the building or unless the water has been shut off and the system has been drained. (If the building is protected by a sprinkler system, draining will not be an allowable option.) Unlike the water leakage peril, coverage applies for damage to a system or appliance damaged by freezing.

Sudden and Accidental Damage from Artificially Generated Electrical Current Sudden and accidental injury to wiring and appliances from artificially generated currents is covered as an insured peril. The major exclusion with respect to artificially generated electricity is damage to tubes, transistors, electronic components, or circuitry, which are excluded. Although damage to television sets, stereos, and the like that is caused by artificial electricity is excluded, the same damage, if caused by lightning (natural electricity), is covered.

Volcanic Eruption The Volcanic Eruption peril covers “above-ground” effects of volcanic eruption, such as damage caused by lava and debris from an earthquake. As noted earlier, the general exclusions exclude damage by shock waves and ground tremors caused by volcanic eruption.

Homeowners 4 Contents Broad Form

The Homeowners 4 Contents Broad Form (HO 00 04), which is designed for tenants, provides protection against the same named perils as does the contents coverage of Form HO-3. The only difference in the insuring agreement of the various perils is in connection with the Additional Coverages titled Building Additions and Alterations and Glass or Safety Glazing Material.

The Building Additions and Alterations coverage applies to building improvements or installations made by the insured in a rented apartment or dwelling. This coverage, also sometimes called tenant's improvements and betterments, covers the insured's “use value” in such improvements. A tenant who installs extensive renovations in rented property does so in the expectation that he or she will have the use of the property for a time period. If the property is destroyed, the tenant loses the use of the additions or improvements. The Building Additions and Alterations additional coverage provides compensation for this loss. The coverage on Building Additions and Alterations is limited to 10 percent of the coverage on contents.

Glass breakage under Form HO-4, as in Form HO-2, applies to glass that is a part of the building, including storm doors and storm windows. Under Form HO-4, the Glass or Safety Glazing Material additional coverage applies as a part of the Building Additions and Alterations coverage.

Coverage on personal property insured under Form HO-4 may be extended to an open-peril basis by the Homeowners Special Personal Property Coverage—Form HO 00 04 Only Endorsement. The open-peril coverage of this endorsement parallels the open-peril coverage on personal property under Form HO 00 05, discussed next.

Homeowners 5 Comprehensive Form

The Homeowners Comprehensive Form HO-5 provides open-peril coverage for buildings and personal property. In addition, the Loss of Use coverage is triggered by direct losses that fall within the scope of the open-peril coverage.

Exclusions under Form HO-5 As in the case of open-peril forms generally, coverage under Form HO-5 is defined and limited by the exclusions. Some of these exclusions have been encountered in our discussion of Form HO-3. Others are specific to the open-peril coverage on personal property.

Form HO-5 includes, first, the Section I exclusions that appear in all the homeowners forms and that apply to all coverages (Ordinance or Law, Earth Movement, Water, Power Failure, Neglect, War, Nuclear Hazard, Intentional Loss, and Governmental Action). However, Form HO-5 modifies the Water exclusion of Form HO-5 so that it does not apply to personal property while away from the premises. Besides these general exclusions, there are three other groups of exclusions.

The first of the three sets of exclusions consists of the same open-perils exclusions that apply to the building under the unendorsed Homeowners 3 Special Form, with the exception of Vandalism and Malicious Mischief and Collapse. These exclusions apply to all coverages under Section I.

The second group of exclusions applies only to the Dwelling and Other Structures coverage. These consist of the standard exclusions of Vandalism and Malicious Mischief and Collapse (other than as provided in the Collapse Additional coverage).

The final group of exclusions applies only to the Personal Property coverage. These exclusions applicable to personal property have not been encountered in the other forms examined and, therefore, deserve somewhat more detailed attention. There are five exclusions applicable to the open-peril contents coverage, designated 1 through 5.

1. Breakage of eyeglasses, glassware, statuary, marble, bric-a-brac, porcelains, and similar fragile articles (other than jewelry, watches, bronzes, cameras, and photographic lenses) unless caused by a specifically named peril. The specific perils for which breakage of fragile articles is covered include fire, lightning, perils of extended coverage, vehicles, vandalism and malicious mischief, collapse of a building, water not otherwise excluded, theft or attempted theft, or sudden and accidental tearing apart, cracking, burning or bulging of a steam or hot water heating system, air-conditioning system, or appliance for heating water.
2. Dampness of atmosphere or extremes of temperature unless the direct cause of loss is rain, snow, sleet, or hail
3. Refinishing, renovating, or replacing property other than watches, jewelry, and furs
4. Collision other than collision with a land vehicle, sinking, swamping, or stranding of watercraft, including their trailers, furnishings, equipment, and outboard motors
5. Acts or decisions, including the failure to act or decide, of any person, group, organization, or governmental body

Theft Coverage under Form HO-5 Because theft is not covered as a specifically named peril, questions sometimes arise in connection with the theft coverage of Form HO-5. The broad open-perils of Form HO-5 include coverage for loss of real or personal property by theft. The theft coverage of Form HO-5 is subject to a single exclusion: theft in or to a building under construction until the structure is completed and occupied. The other exclusions of the named-peril forms do not appear in the form, and such losses are covered, such as theft by an insured, theft of watercraft or campers away from the premises, and theft from a secondary residence. Furthermore, the form restates the limits on jewelry, furs, silverware, and firearms, clarifying that coverage applies to loss by theft and by misplacing or losing the property as well.

Homeowners 6 Condominium Unit–Owners Form

Homeowners Form HO-6 is designed to cover the special exposures of a condominium unit-owner. To understand these special exposures, it may be helpful first to review the nature of a condominium. Basically, a condominium is a multiple occupancy building in which individuals own units of living space, i.e., a cube of air formed by the four walls, ceiling, and floor. The common areas of the building are jointly owned by all unit owners as tenants-in-common. These common areas include the basic structure, the grounds, halls, stairways, and other facilities. Because the condominium arrangement involves individual and joint ownership, the responsibility for insurance is divided. The individual unit-owners grant the right to purchase insurance on the common ownership elements to a condominium association. This avoids difficulties that might arise from nonconcurrency, rebuilding of the damaged premises, and so on, if each owner attempted to insure his or her part of the common elements. Although the condominium association purchases insurance on the common ownership elements, the unit-owner is generally responsible for the insurance on additions to his or her own unit. The exact definition of the unit-owner's responsibility varies with state law and sometimes with the association's bylaws. In some instances, the unit-owner is responsible for all real property within the confines of the perimeter of the condominium unit. This could include interior partitions, appliances, plumbing fixtures and the interior décor, such as wallpaper, paneling, and carpeting. In addition to needing coverage on unit-owners' additions, the condominium unit-owner needs coverage on his or her own personal property. Form HO-6 is designed to meet both needs.

Coverage of Form HO-6 The coverage under the Homeowners 6 Unit-Owner's form generally parallels the coverage of Form HO-4, providing protection against loss by the broad named perils discussed in detail earlier. However, Form HO-6 contains special provisions tailoring it to the needs of the condominium unit-owner. These special provisions, which deal with the condominium exposure and differentiate this form from the tenants form, relate to the unit-owner's additions to the condominium unit.

Unit-Owner's Building Items Coverage A of Form HO-6 (which like Coverage A of Form HO-2 or Form HO-3 is designated Dwelling Coverage) covers building alterations and additions, plus certain other items of real property identified in the Dwelling insuring agreement. The definition of insured property under the Dwelling Coverage includes (1) alterations, appliances, fixtures, and improvements that are a part of the building contained within the residence premises, (2) items of real property that pertain exclusively to the insured's premises, (3) property that is the insured's responsibility under the condominium association agreement, and (4) structures owned by the insured, other than the condominium unit.

The first item of coverage includes the insured's individual interest in the condominium unit, consisting principally of the unit's interior finishings. As previously noted, this includes the interior decor and the unit's real-property furnishings.

The second element of the coverage covers other real property that pertains to the premises. This might include, for example, structures such as balconies or patios, but it could include trees, shrubs, or plants.

The extension to property that is the unit-owner's responsibility under the association agreement is not defined or limited and could include almost any property for which the unit-owner is responsible under the agreement.

Finally, the coverage on structures owned solely by the insured is this form's equivalent of the Other Structures coverage (Coverage B) of the other homeowners forms. It could include a garage, tool shed, or other structure, provided such structure is owned solely by the insured.

Endorsements to Form HO-6 Although the Unit-Owner's form provides basic coverage for the owner of a condominium, it may be modified by endorsement to provide broader coverage and coverage tailored to the specific needs of the unit-owner.

Open-Peril Coverage on Unit-Owner's Building Items The coverage on unit-owner's additions, like the coverage on the contents, is on a broad named-peril basis. However, the coverage on real property may be extended by endorsement to an open-peril basis, providing similar coverage on a unit-owner's additions as is provided on the building under Form HO-3.

Open-Peril Coverage on Personal Property In addition to the option of extending the coverage on building items to an open-peril basis, the condominium unit-owner's form may be endorsed to provide open-peril coverage on personal property. The Unit-Owners Coverage C Special Coverage Form (HO 1731) provides similar coverage on contents as discussed in connection with Form HO-5.

Rental Unit Coverage Special provision is made for those situations in which the condominium unit is rented by the owner to other persons. Many condominium units, particularly those in recreational areas, are purchased with the intention of renting the property, at least for parts of the year. When the Rental Unit coverage endorsement is added to the policy, the definition of personal property is amended to provide coverage on property in the residence premises regularly rented or held for rental to others. (The Basic form covers personal property only if occasionally rented to others.) In addition, coverage is added for theft of personal property from any part of the residence premises rented to other than an insured, an exposure that is excluded under the Basic form without the endorsement. The Theft coverage, however, excludes theft of money, gold, silverware, and items of a similar nature from the residence premises when rented to others.

Assessment Coverage As in the case of the other homeowners forms, Loss Assessment is automatically included as an additional coverage in Form HO-6. Increased limits of Assessment coverage are available by endorsement under Form HO 04 35. Like the basic Loss Assessments coverage, the increased limits provide coverage under Section I for losses resulting from damage by perils insured under the unit-owner's own policy and in Section II for losses that arise out of liability suits covered under the terms of Section II of the policy. A provision in the Loss Assessment Endorsement sets a $1000 limit on payment for assessments that arise from a deductible in the association's property insurance policy.

Homeowners 8 Modified Coverage Form

The homeowners forms were conceived as a program for superior exposures in the dwelling field. The discount offered for packaging of coverages contemplates high insurance to value and reduction of adverse selection by the fixed relationships among the property coverages. Although this concept has operated satisfactorily in most instances, some insureds, for one reason or another, were not able to obtain coverage under the home-owners package. One major class of buyers who could not obtain coverage under the homeowners forms consisted of owners of certain types of older property. Some dwellings, for example, were built many years ago, when labor-intensive techniques characterized the home-building industry. These dwellings often involve obsolete types of construction or are too large in relation to the insured's needs. In most instances, the structure's replacement cost far exceeds their market value. Older, obsolete dwellings can have a replacement cost of $500,000 or more even though the market value is $100,000 or $200,000. Owners of such property often do not see any sense in insuring the building for twice its purchase price. In addition, many insurers are reluctant to provide replacement cost coverage for the full replacement cost of such buildings.

To meet this dilemma, the Insurance Services Office (ISO) introduced a new homeowners form in 1978, the Homeowners Modified Coverage Form 8. The coverage of Form 8 is similar to that of Form HO-2, but there are several important limitations. The two most important differences between Form 8 and the other homeowners forms are the following:

1. The policy does not include the standard replacement cost provision contained in other homeowners forms but substitutes a unique functional replacement cost approach to building losses.
2. Theft coverage applies on premises only, and is limited to $1000 per occurrence.

Form 8 Loss Settlement Provisions Because many dwellings insured under Form 8 are older dwellings constructed during periods when labor-intensive methods characterized the building trades, replacing parts of a damaged building could be prohibitive in cost. Instead, for partial losses, the contract agrees to make “functionally equivalent repairs.” The insurer agrees to pay the amount necessary to repair the damage but not more than the cost of using common construction materials and functionally equivalent methods that are less costly than obsolete, antique, or custom construction materials and methods. This means that hand-plastered walls will be replaced with plasterboard, and marble will be replaced with Formica. If the building is not repaired, payment is limited to the lowest of the limit of insurance, the property's market value (excluding the land), or the actual cash value of the loss. There is no functional replacement formula like the replacement cost formula in other homeowners forms.

Although the coverage of Form 8 is more limited than that of the other homeowners forms, the introduction of this form has made package buying available to many personal insurance buyers who previously were forced to purchase individual packages. Despite the limitations of the form, Form HO-8 represents a more attractive alternative than the separate contracts that would otherwise be required to provide the same coverage.

HOMEOWNERS SECTION I OPTIONAL COVERAGES

Although the homeowners forms constitute an attractive package of protection for the average family, several optional coverages are available by endorsement. We have noted some of these: the inflation guard and guaranteed replacement cost endorsements, and the replacement cost endorsement for personal property. In addition, the following are noteworthy optional endorsements.

Optional Perils

Four endorsements are available to extend the policy's coverage to include additional perils: the Sinkhole Collapse Endorsement, the Earthquake Endorsement, Refrigerated Property Coverage Endorsement, and the Water Back Up and Sump Overflow Endorsement.

Sinkhole Collapse All homeowners forms except HO-4 and HO-6 may be endorsed to provide coverage against sinkhole collapse. The sinkhole collapse peril covers damage to insured property caused by underground erosion of limestone or similar rock caused by water. The cost of filling the sinkhole is not covered.

Earthquake The Earthquake Endorsement modifies the basic Earth Movement exclusion of the policy, reimbursing for loss to insured property resulting from earthquake or volcanic eruption, excluding only loss by flood or tidal wave generated by these catastrophes. The coverage does not, of course, apply to damage to the land, and it is subject to a percentage deductible. In most jurisdictions, the deductible is 5 percent of the value of each item insured. In some jurisdictions, where the earthquake hazard is severe, a larger deductible is used.

Refrigerated Property Coverage The Refrigerated Property Coverage Endorsement (HO 04 98) covers damage to property stored in freezers or refrigerators against loss caused by the interruption of electrical service to the refrigeration unit or by the unit's mechanical failure. The coverage is subject to a $500 limit and is subject to a $100 deductible.

Water Back Up and Sump Overflow The Water Damage exclusion of all homeowners forms specifically denies liability for water damage, which is defined to include “water which backs up through sewers or drains and which overflows from a sump.” In most jurisdictions, this exclusion can be eliminated by endorsement for an additional premium. The Water Back Up and Sump Overflow endorsement (HO 04 95) provides coverage for direct physical loss, not caused by the negligence of an “insured,” to covered property that is caused by water that backs up through sewers or drains or water that overflows from a sump. Coverage for water damage that overflows from a sump applies even if the overflow results from the mechanical breakdown of the sump pump. There is no coverage, however, if the water back up or sump pump overflow was caused by flood. Damage to the sump pump or related equipment that is caused by mechanical breakdown is excluded. The insured may select a limit of $10,000, $15,000, $20,000, or $25,000, and the coverage is subject to a $250 deductible. The deductible does not apply to loss under Coverage D, Loss of Use.

Other Endorsements

Other endorsements are available to provide coverage for exposures that are uncommon and for which the average insured may not require coverage. Making coverage for such exposures available as an option isolates the costs associated with the exposure so only those who need the coverage are required to pay for it.

Other Members of Your Household The growth of nontraditional households has prompted the insurance industry to change some of its policy provisions. The definition of insured in the homeowners policy, for example, does not extend coverage to a resident of the named insured's household who is not a relative and is not a person under age 21 in the care of an insured. In the year 2000 revision of the program, ISO introduced a new endorsement titled Other Members of Your Household (HO 04 58) that addresses this problem. The endorsement may be used to modify the definition of insured to include a person of any age or gender living with the named insured to share expenses or in a personal relationship. The effect is similar to providing a HO-4 policy for the person named; coverage applies to personal property the insured owns or uses under Section I, and the individual is an insured for the liability coverage under Section II. There is an additional premium for the endorsement.

Assisted Living Care Coverage A second area in which changing family patterns are recognized concerns the elderly. Often, the insured must place a relative (who need not be a household resident) into a care facility. A new Assisted Living Care Coverage endorsement (HO 04 59) extends the definition of insured to provide coverage on personal property of such relatives. Internal limits apply on personal property for items such as hearing aids, eyeglasses, wheelchairs, and false teeth. Coverage is also provided for additional living expense in the event of loss or damage to the assisted living facility. Finally, the endorsement extends the Section II liability coverage of the policy to provide comprehensive personal liability coverage for the designated relative. There is a premium charge for the endorsement.

Scheduled Personal Property Endorsements The Scheduled Personal Property Endorsements (HO 04 60 and HO 04 61)) are used when specific open-peril coverage is to be provided on valuable items such as jewelry and furs, silverware, musical instruments, cameras, and stamp and coin collections. The coverage available under these forms is discussed in the next chapter.

Nonbuilding Replacement Cost The Home-owners forms cover “other structures that are not buildings” at actual cash value. Examples of such structures include fences, mailboxes, light poles, satellite dishes, and swimming pools. Replacement Cost Settlement for Certain Non-Building Structures (HO 04 43) can be used to convert some of these structures to replacement cost loss settlement. To qualify, the other structure must be constructed of reinforced masonry, metal, fiberglass, or plastic materials. Structures made of wood do not qualify.

Coverage on Computers Computers are not scheduled under the Scheduled Personal Property Endorsement but may be insured under a special computer coverage endorsement (HO 04 14). Although there is no specific exclusion of computers under the blanket personal property, the named-peril coverage for sudden and accidental damage by artificially generated electrical current specifically excludes damage to tubes, transistors, electronic components or circuitry, eliminating coverage for a major cause of loss to computers and their equipment. The Special Computer Coverage Endorsement provides open-peril coverage on the insured “computer equipment.”

Owned Golf Carts Coverage is available for physical damage to owned golf carts by endorsement to the homeowners policy. The Owned Motorized Golf Cart—Physical Loss Coverage Endorsement (HO 05 28) covers loss to an owned motorized golf cart, including permanently installed accessories and equipment, scheduled in the endorsement. Coverage is on an open-peril basis, with the option of including or not including collision. Coverage is subject to a $500 deductible. Physical damage coverage on other recreational motor vehicles is usually written under a recreational motor vehicle policy, which combines physical damage coverage with liability coverage.

IMPORTANT CONCEPTS TO REMEMBER

vacancy

unoccupancy

consequential damage

Loss Assessment additional coverage

Ordinance or Law additional coverage

Scheduled Personal Property Endorsement

Earthquake Damage Assumption Endorsement

Ordinance or Law exclusion

Earth Movement exclusion

Power Failure exclusion

Neglect exclusion

Special Personal Property Coverage Endorsement

sinkhole collapse

hostile fire

friendly fire

QUESTIONS FOR REVIEW

1. Without going into great detail, explain the essential difference among the Homeowners 2 Broad Form, the Homeowners 4 Tenant's Form, and the Homeowners 3 Special Form.

2. For each of the following losses, indicate whether coverage would or would not be provided under the Homeowners 3 Special Form:

1. A hot water heater explodes.
2. The insured's automobile damages the garage.
3. Trees are vandalized.
4. Freezing of pipes causes damage.
5. A set of snow tires is stolen from the garage.

3. With respect to each of the following losses, indicate whether coverage would or would not be provided under the Homeowners 2 Broad Form:

1. A delivery truck backs over the insured's prize cherry tree.
2. The insured backs his or her car over a 10-speed bicycle.
3. Overflow of a bathtub causes damage to a kitchen ceiling.
4. An airplane ticket is stolen from the insured's motel room.
5. Lightning damages the picture tube of a television set.

4. Identify the perils included in the Homeowners 2 Broad Form that are not contained in the Homeowners 8 Modified Coverage Form. With respect to those perils that are included in both forms, indicate the manner in which the coverage under the Broad form is broader than the coverage for the same peril under the Basic form.

5. Owing to a power transformer burnout, the entire city in which you live is without power for four days. There is some inconvenience, but your greatest loss is the damage to your freezer when the meat within it spoils. The freezer is unusable, and the meat is a total loss. Would you expect the loss of the freezer or the meat to be covered under the Homeowners 2 Broad Form? Why or why not?

6. Your parents are planning a two-month trip to Europe. Your father, assuming you are an expert in the field of insurance, asks you if the house being empty for two months will affect the coverage under his homeowners policy. You examine the policy and find that it is a form HO-3. What do you tell him?

7. Briefly explain the doctrine of concurrent causation. In what ways have the homeowners policies been modified in response to this doctrine?

8. The theft coverage under the homeowners policies is subject to a number of exclusions and other limitations. Identify the exclusions applicable to the theft peril and any other limitations imposed by the homeowners forms with respect to theft losses. For each of the exclusions or limitations identified, indicate the manner in which additional protection might be obtained.

9. List and briefly explain the general exclusions under Section I of the homeowners forms. Which of these exclusions can be deleted or modified?

10. Explain the special exposures of a condominium unit-owner that led to the development of a separate homeowners form for such individuals. Explain the manner in which these exposures are handled under the Condominium Unit-Owner's form.

QUESTIONS FOR DISCUSSION

1. Your homeowners policy is about to be renewed. It is written to cover your dwelling for its original construction cost. The policy is a Homeowners Form HO-3 and is standard in all respects: The coverages are all standard percentages, and no policy endorsements or modifications exist. What changes to this basic contract should you consider?

2. Josh Jones is insured under a Homeowners Form HO-3, with $50,000 in coverage on the dwelling and standard amounts on all other coverages. Jones borrows a neighbor's camping trailer and while attempting to back it into his garage, hits the garage door. The damage to the borrowed trailer is $425 and to the garage door, $300. Unfortunately, the neighbor is an impoverished college student and does not have any insurance on the trailer. Indicate, with reference to the specific policy provisions applicable, whether Jones's policy will apply to the trailer and to the garage.

3. The Homeowners Special Form insures the dwelling on an open-peril basis. What perils that are not covered under the Broad Form would be covered under the Special Form?

4. Sue and Mary share a small apartment. Some of the property in the apartment belongs to Sue and some belongs to Mary, and some items are owned jointly. Mary purchases a Homeowners 4 Contents Broad Form (tenant's form), with herself as the named insured. What coverage is provided under this form for the personal property owned by Mary, by Sue, and by the two jointly?

5. A distant uncle dies, leaving you his $150,000 condominium unit in Aspen, Colorado. It is rented to skiers during the winter months and managed by a local realtor. You elect to spend your summers living in the unit. On investigation, you find that the uncle has been insured under a Homeowners Form HO-6, with $25,000 in coverage on the unit's contents. All other features of the policy are standard. What modifications in this policy would you consider?

SUGGESTIONS FOR ADDITIONAL READING

Cherry, Robert L, Jr. and John B. Geary. “Chinese Drywall and Homeowners Insurance: An Update,” CPCU Society EJournal, August 2012.

Cole, Cassandra R., and Kathleen A. McCullough. “The Mold Crisis,” Journal of Insurance Regulation, Spring 2005, Vol. 23: pp. 3–16.

Cook, Mary Ann. Personal Risk Management and Property-Casualty Insurance, Malvern, Pa.: American Institute for Chartered Property Casualty Underwriters/Insurance Institute of America, 2010.

CPCU Society EJournal. Available at cpcusociety.org

Fire, Casualty, and Surety Bulletins, Personal Lines Volume. Erlanger, Ky.: National Underwriter Company. Available electronically at: http://cms.nationalunderwriter.com/.

Grace, Martin F. and Robert W. Klein. “The Perfect Storm: Hurricanes, Insurance, and Regulation.” Risk Management and Insurance Review 12(1), Spring 2009.

Marshall, Thomas S., and Faith R. Neale. “Troubled Waters In Mississippi: The Homeowners Market and the Attorney General Lawsuit.” CPCU EJournal, November 2006.

Vaughan, E. J. “What is Insurable Value?” American Agency Bulletin (Sept. 1965).

WEB SITES TO EXPLORE

Best's Review	www.bestreview.com
Information Information Institute	www.iii.org
International Risk Management Institute	www.irmi.com
NAIC InsureU	www.insureuonline.org
National Underwriter	www.nationalunderwriter.com

¹A leading case in this area states “War refers to and includes only hostilities carried on by entities that constitute governments at least de facto in character.” Pan American World Airways v. Aetna Casualty and Surety, U.S. Second Circuit Court of Appeals (1974).

²In 1998, the NAIC adopted a model law that, when adopted by a state, nullifies the intentional loss exclusion of the homeowners policy with respect to damage suffered by a victim of domestic abuse and caused by a coinsured. The model law prohibits insurance companies from denying, canceling, or nonrenewing coverage based on abuse status and requires insurers to pay claims filed by innocent coinsureds.

³These exclusions were added to the policy in 1984 in response to a doctrine adopted by some courts called concurrent causation, which held that when a loss results from two causes, one of which is excluded and the other not excluded, the loss is covered. This stretched the coverage of broad form and special form contracts beyond its drafters' intent, providing coverage for flood and earthquake losses on the grounds that although these causes of loss were excluded, they were concurrently caused by perils that were not excluded (zoning laws that allowed structures to be built in flood or earthquake areas or negligence of a contractor in not making the structures earthquake resistant). The concurrent causation exclusions bring the scope of the coverage back to its original intent.

⁴In 2001, a Texas District Court jury awarded an insured $32 million for mold damage to a 22-room mansion and mental anguish, finding the insurer had mishandled a Homeowners policy claim for mold damage. (See Mary Belinda Ballard et al. v. Fire Insurance Exchange, a member of the Farmers Insurance Group. No. 99-05252, 354th Judicial District Court, Travis County, Texas).

⁵There are two endorsements: HO 04 26 may be used with all forms except HO-3 and HO-5. Form HO 04 27 is designed for use with HO-3 and HO-5.

⁶Western Woolen Co. v. Northern Assurance Co., 139 Fed. 637 (1905).

⁷Insurance contracts frequently reduce or exclude coverage when the insured property is “vacant” and some contracts restrict coverage in case of “unoccupancy.” A building is vacant when it has neither occupants nor contents. It is unoccupied when it has contents but no occupants.

⁸Theft coverage under Forms 5 and 8 is discussed later in the chapter.