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 When and Where Are the Insured and His Stuff Protected?

By Christopher J. Boggs, CPCU, ARM, ALCM October 23, 2009

   Nowhere does the homeowners' policy specifically extend worldwide personal liability protection to any insured. The policy does, however, specifically extend worldwide protection to the insured's personal property. And premises liability is strictly limited to only specifically described locations.
   One property and two liability protection features provided by the standard homeowners' policy are discussed in the following paragraphs.

   Personal property, personal liability and premises liability are highlighted below.

Personal property is simply the insured's "stuff" that does not qualify as part of the dwelling or other real property. There are two types of property insurable under a homeowners' policy: 1) real property; and 2) personal property. Real property is defined as land and everything attached to the land (i.e. the dwelling and other structures). Personal property is everything that does not qualify as real property.

Personal liability and premises liability present two different liability exposures. Personal liability results from the actions or inactions of a person. Premises liability arises from physical hazards associated with a premises rather than the negligence of a person.

Personal Property

There are not many limitations on where the insured's personal property is covered in the event of a covered loss. The policy specifically states, "We cover personal property owned or used by an 'insured' while it is anywhere in the world." "Anywhere" has no limitations. Essentially, the only exclusions related to the insured's stuff are the covered causes of loss (name peril coverage) and the limits available. Remember also that there are a few types of property that are specifically excluded by the form (animals, motor vehicles, property held for rent, etc.).

Personal Liability

   As stated in the opening paragraph, there is no specific wording in the homeowners' policy extending personal liability protection on a worldwide basis. But neither is there any coverage territory limitation placed on the personal injury protection provided by the homeowners' policy. The only limitations on personal liability relate to specifically excluded causes of injury or damage. Personal liability extended from Coverage "E" applies on a worldwide basis. Premises Liability Unlike coverage for personal liability (the actions of an insured), liability for bodily injury or property damage arising out of the premises exposure IS subject to specific limitations. Premises liability protection is limited to only those locations qualifying as "insured locations."
   According the Insurance Services Office's (ISO's) homeowners' policy: "Insured location" means:
a. The "residence premises";
b. The part of other premises, other structures and grounds used by you as a residence; and Which is shown in the Declarations; or Which is acquired by you during the policy period for your use as a residence;
c. Any premises used by you in connection with a premises described in a. and b. above;
d. Any part of a premises: Not owned by an "insured"; and Where an "insured" is temporarily residing;
e. Vacant land, other than farm land, owned by or rented to an "insured";
f. Land owned by or rented to an "insured" on which a one, two, three or four family dwelling is being built as a residence for an "insured";
g. Individual or family cemetery plots or burial vaults of an "insured"; or
h. Any part of a premises occasionally rented to an "insured" for other than "business" use.

Taken individually:
The "residence premises" is the location on which the dwelling/residence listed in the policy is located. This includes all the land and any "outbuildings" or structures on the premises. Liability protection can be extended to include a second residence provided it is used by the insured and is named on the policy (or was acquired during the policy period). Storage warehouses and units are considered an insured location since they are "used…in connection with" the residence premises. Hotel rooms, vacation condos or other such temporary residences are extended liability protection in the homeowners' policy.
"Vacant" is stringently defined and enforced in the extension of premises liability to include vacant land. As the term suggests, it means NOTHING on the premises. No buildings, no fences, no growing crops (as evidenced by the farmland exclusion), etc.; basically, there is to be no improvement to or on the land at all. If there are improvements on the land, the only way to extend premises liability to the location is by specifically listing in on the policy.
A builders risk policy is necessary to extend property protection to a house under construction, but premises liability coverage for the one-to-four family dwelling being constructed at another location is extended from the homeowners' policy — provided the insured is building the house to live in themselves. Nothing in the policy limits this extension of coverage to the state in which the residence premises is located; however, it is advisable to get the underwriter's opinion.
The only question regarding cemetery plots and burial vaults is (not trying to be funny), how can a dead person be an "insured?" Evidently, this extends coverage to pre-purchased family burial plots not yet in use. For example, my parents, although still alive, purchased and paid for specific burial plots years ago. If someone is injured on one of these plots, premises liability protection is extended from the homeowners' policy. I have two daughters, one day they will likely get married. For the occasion my wife and I will probably rent a ball room at a hotel or country club for the reception. The final definition of "insured location" extends premises liability protection to this exposure. However, this extension of premises liability protection does not apply if I rent the space for business purposes (for example, Mary Kay directors renting a meeting room are not covered under this extension).
Medical payments to others (Coverage "F") is subject to largely the same restrictions placed on premise liability (with a few off-location exceptions). But because medical payments coverage is a no-fault coverage, its provisions are not detailed in this post.

Conclusion
Knowing explicitly where the homeowner client is and is not protected can open doors of discussion allowing the agent to uncover exposures not previously considered or known. There are over 110 homeowners' policy endorsements (the number varies by jurisdiction), knowing the policy and asking the right questions may lead the agent to an endorsement not previously considered.

How to Calculate the Amount Payable for a Homeowners Property Loss

By Christopher J. Boggs, CPCU, ARM, ALCM
July 30, 2009

Calculating a homeowners' property loss payment seems rather basic - on the surface. But there are a lot of moving parts to consider and apply before arriving at the final payment amount. Attached is a flowchart attempt at walking through the homeowners' property loss payment process. Print out the two-page flowchart and read the following instructions for its completion. The second page of the flowchart numbers the boxes as described in the instructions below.

The next few paragraphs describe the calculation process as it relates to homeowners' policy property losses in general with a specific focus on the HO-3 with the HO 04 90 endorsement (Personal Property Replacement Cost). Key factors initially needed to complete this process are the:

  • Total Damage Amounts to both the dwelling and personal property;
  • Policy limits; and
  • Deductible.

Total Damage Amount

How much will it actually cost to repair or replace the damaged or destroyed dwelling or personal property? Without this information no other steps can be taken. The "total damage amount" is taken from the proof of loss form supplied to the insured by the insurance carrier after a loss occurs - as detailed in the "Duties After Loss" of the Section I Conditions.

Once the insurance carrier provides and requests the proof of loss form, the insured has 60 days to file the requested information. Notice that the policy does not state that the proof is due 60 days from the date of loss; it is due 60 days after requested by the carrier.

The total damage amount obviously can exceed the policy limits. In the flowchart, the policy limits are requested in block "1" for two reasons: 1) later in the process it is needed to calculate any coinsurance penalty that may apply to the dwelling (Coverage "A"); and 2) because the ultimate payout cannot exceed the policy limits. Do not lower the actual "total damage amount" to match the policy limits as the insured will be penalized when the deductible is subtracted.

Special Limits on Personal Property

Some articles of personal property insured by the homeowners' policy are subject to specific sub-limits. Included among this list of limited property are money, securities, watercraft, trailers and personal property used in business. Other property is limited based on the type of loss; for example, jewelry and firearms are limited only if the loss is caused by theft.

In addition to the list of personal property subject to sub-limits, there is a schedule of excluded personal property. Property insured elsewhere (such as on a personal articles floater), animals, most "motor vehicles," aircraft and property of roomers and boarders is included on this list of excluded property.

A review of the applicable homeowners' policy will provide a full list of both limited personal property and excluded personal property.

Box "2" and box "3" in the flowchart apply to both classes of personal property. If there is damaged property subject to a sublimit or excluded entirely, as questioned in box "2," the list of excluded or limited value property is listed in box "3."

Three pieces of information are necessary to complete box "3": 1) a description of the property; 2) the value of that property; and 3) the amount of coverage allowed in the policy. All damaged personal property subject to a sublimit is listed on the form. The replacement cost (or ACV depending on the endorsements attached) value of the specified property is listed in the second column labeled "Value;"the amount of coverage provided by the policy for that class of property is listed in the third column shown as "Amount Available." If the "Value" is less than the "Amount Available," schedule the actual value. Specifically excluded personal property can also be listed in this box; however "nothing" or "$0" should be placed in the "Amount Available" column.

The "value" and the "amount available" are totaled and recorded in the last line of the box beside "TOTAL." These amounts are used to develop the insurable "Amount of Personal Property Coverage" detailed in the box "4."

If the personal property "total damage amount" does not include any limited or excluded personal property, boxes "3" and "4" can be skipped and the entire personal property damage amount can be transferred to box "5" (labeled "Actual Insurable Damage").

Calculating the Amount of Personal Property Coverage Available

The full value of limited and excluded personal property (detailed above) must be subtracted from the personal property "total damage amount" (listed in box "1"). The allowable amount of coverage (per the insurance policy as calculated in box "3") is added back to the result. The result is the total "Amount of Personal Property Coverage" indicated at the bottom of box "4."

This total is transferred to the "Personal Property" line found in box "5" labeled "Actual Insurable Damage." As stated in the box, this is the lesser of the "total damage amount" or the product of the calculation detailed above and demonstrated in box "4."

Actual Insurable Damage

At this point in the flowchart, dwelling and personal property limits remain separate as the dwelling coverage must still pass the coinsurance test. The dwelling coverage in box "5" is simply carried forward from the "total damage amount" block. Personal property coverage amounts are the lesser of the amount in box "1" or the "amount of personal property coverage" developed in the fourth block as detailed above.

Coinsurance

Notice that in a homeowners' policy the only property subject to a coinsurance calculation is real property. This is explained in greater detail in the two-part coinsurance series presented earlier. Not applying the coinsurance condition to personal property is appropriate since the insured does not necessarily have the opportunity to choose the personal property limit because the amount of coverage is granted as a percentage of the dwelling coverage.

Coinsurance is a function of the amount of insurance carried (IC) compared to the amount of insurance required (IR) by the homeowners' policy coinsurance condition. To be fully insured for partial real-property losses the insured must carry 80 percent of the dwelling's total insurable value (TIV) at the time of the loss. (Of course this leaves a gap if there is a loss that exceeds this limit.) Deciphering the insured's compliance with the coinsurance provision is accomplished in boxes "6" and "7."

The basic coinsurance formula (ignoring the deductible) is:

  • (Insurance Carried (IC)/ Insurance Required (IR)) x Loss = Amount Eligible for Payment

Insurance Required (IR) is calculated by multiplying the TIV at the time of the loss by the coinsurance requirement. The coinsurance requirement in the standard homeowners' policy is 80 percent. To develop "IR" in the standard homeowners' policy, the formula is:

  • TIV x 80% = IR.

Insurance required (IR) is calculated in box "6." If the dwelling policy limit, as scheduled in box "1," is greater than the IR, the coinsurance condition is met and no other calculation is required. Simply add the amount of dwelling damage to the amount of personal property damage listed in the "Actual Insurable Damage" box (box "5") and place that total in the "Total Amount of Insurable Damage" box (box "8").

However, if the policy limit is less than the calculated IR, then the coinsurance condition has not been met and box "7" must be used. This box applies the basic coinsurance formula as presented above to arrive at the "coinsured" value. But, as detailed in the coinsurance series, the homeowners' policy does not apply coinsurance as a penalty. The amount developed applying the coinsurance condition is compared to the dwelling's actual cash value (ACV); the insured is granted the greater of these two values. Essentially the coinsurance amount is the least the insured will ever get paid in a homeowners' policy subject only to the policy limits.

When a coinsurance calculation is necessary, the result is compared to the dwelling's ACV. The greater of these two values is added to the personal property's actual insurable damage as shown in box "5." This sum is placed in box "8" titled "Total Amount of Insurable Damage." This is the first time the differing values meet.

Deductible

Deductibles are subtracted from the total amount of insurable loss in property policies. Many make the mistake of trying to subtract the deductible from the policy limit in the event of a total loss. Also, only one deductible applies to a loss; there is not a dwelling deductible and a personal property deductible.

In the flowchart, the deductible (as listed in box "9") is subtracted from the "total amount of insurable damage" to produce the "Amount of Eligible Loss" (found in box "10").

Amount of Eligible Loss

After the application of the deductible to the "total amount of insurable damage," the "amount of eligible loss" is produced and recorded in box "10." This amount is compared to the policy limits. If the policy limits are greater than this amount, the entire amount is paid. If, however, this amount exceeds the policy limits, the insurance is limited to the amount of coverage purchased (the policy limits).

Notice the phrase, "Remember to add all applicable 'Additional Coverages' to this amount" in box "10." The homeowners' policy offers several coverages in addition to the limits purchased. Those amounts must be added to and paid in addition to the "amount of eligible loss."

Examples of these additional coverages include debris removal, reasonable repairs, ordinance or law, loss assessment and fire department service charges. A complete list of additional coverages, their amounts and their conditions is found in the homeowners' policy.
 

Bob Turner

918-660-0090

bobturner@insureok.com

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