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Chapter 14 Property Insurance Learning Objectives Define the basic concepts and terminology of insurance. Describe the various types of homeowner’s insurance policies. Describe co-insurance. ©OnCourse Learning

Property Insurance Basic Concepts and Terminology Insurer insurance company that provides the insurance coverage to parties who may have an insurable interest in the property Insured person who benefits from the insurance coverage provided by the insurer. The insured must have an insurable interest in the property. Property or hazard insurance Provides coverage to the basic structure of the property basic type of structural coverage begins with fire insurance protection ©OnCourse Learning

Property Insurance Basic Concepts and Terminology Peril An insurance peril is the source of loss. The first peril insured against is fire. Liability insurance Every property owner should consider purchasing liability insurance. provides coverage for the financial claims of others. Package policy Combines insurance coverage for the two major elements of property and liability. For an income producing property, it can also cover loss of income. ©OnCourse Learning

Property Insurance Standardized Homeowner’s Insurance Fire insurance policy is the standard insurance policy Additional coverage can be added through riders which adds to the premium: Hail Explosion Windstorm Aircraft Civil commotion Vehicles Smoke A policy may have qualifications, exclusions, or conditions limiting coverage of some of these perils. ©OnCourse Learning

Property Insurance Standardized Homeowner’s Insurance Provides coverage for: Structure Contents Fire Windstorm Hail Dust Waves Surface water Freezing of plumbing Vandalism Industrial smoke ©OnCourse Learning

Property Insurance Common Homeowner’s Insurance Policies Homeowner’s policies are identified as HO-1 through HO-7. HO-1 and HO-5 are rarely used anymore by insurance companies. HO-2 and HO-3 cover owners of single family dwellings HO-3 is the most common policy. HO-4 is the tenant’s policy. HO-6 is designed for condominiums and cooperatives. HO-7 is an extended all-risk form that covers real and personal property. ©OnCourse Learning

Property Insurance Basics Common Homeowner’s Insurance Policies The standardized policy provisions are the most significant differences between HO-2 and HO-3 policies: HO-2 policy “named peril” policy Itemizes all perils covered by policy Covers NO perils not itemized HO-3 policy “all-risk” policy Itemizes perils which are not covered. Covers all perils EXCEPT ones itemized. ©OnCourse Learning

Property Insurance Common Homeowner’s Insurance Policies Standard form (HO-3) policy establishes the contractual relationship between the insurer and the insured Sets forth restrictions and the insured agrees to abstain from deceptive practices in this section. The declaration page spells out the following items: period of coverage identified specifically property description can affect the insurance rating description of improvement that is being insured ©OnCourse Learning

Property Insurance Common Homeowner’s Insurance Policies Standard form (HO-3) policy Declaration Page estimates percentage of personal property value, potential for outside living expenses, loss of income for (income producing properties) Endorsements are additions to the policy that increase the number of perils or items covered by the policy. Names of all of the parties with an interest in the agreement are listed here. includes property owner, lender (mortgagee), and insurance agent. ©OnCourse Learning

Property Insurance Basics Common Homeowner’s Insurance Policies A condition limits the coverage of a specified property. An exclusion is something that is not covered for loss. Examples might include losses resulting from earthquake, nuclear hazards, floods, or acts of war. Endorsements add coverage for specified items or perils that are not covered under other provisions of the policy. Examples: valuable personal property (works of art, collectibles, jewelry) personal computers (used for business purposes) ©OnCourse Learning

Property Insurance Select Legal Issues Insured must have a legitimate insurable interest in the property in order to be eligible for insurance coverage. Insurable interests include: owner part owner trustee receiver, life tenant mortgagor mortgagee ©OnCourse Learning

Property Insurance Select Legal Issues Co-insurance clauses If an insured has less than the minimum required coinsurance, the insurer will pay only a portion of his losses Insurer will never pay more than the actual loss or the amount of the policy Require the property owner to insure the property for at least 80% of its value. ©OnCourse Learning

Property Insurance Select Legal Issues The insurance company’s liability is calculated according to the following formula: ©OnCourse Learning

Property Insurance Select Legal Issues Co-owners All owners should be listed on the insurance policy This includes married couples who own property as joint tenants or by the entirety. Policies only insure those named in the policy and only for their portion of interest in the property. ©OnCourse Learning

Property Insurance Select Legal Issues Mortgagees have an insurable interest in a property. Most often, insurance policies name the mortgagee as loss payee along with the property owner/mortgagor Mortgagee insured for the amount of principal balance owed not to exceed the policy’s coverage limits Insurance policies Generally assignable with the written consent of the insurance company Assignment is most likely to occur with a loan assumption Policies seldom assigned anymore ©OnCourse Learning

Property Insurance Select Legal Issues Flood insurance is required if: financing is being provided by any federally regulated institution and property is located in any area designated as a flood hazard area by the Federal Emergency Management Agency (FEMA). ©OnCourse Learning

Property Insurance Select Legal Issues Unoccupied Building Exclusion May cause a policy to cease coverage for all or certain perils when the building is vacant for more than a period of time specified in the policy. Agents may want to advise sellers of this when listing vacant property. ©OnCourse Learning

Property Insurance Residential Sales Transactions Concerns Early or Late Possession by Parties If seller retains possession after closing, or if buyer moves in before closing; property is no longer considered “owner occupied” Typical home owner’s policy will not be sufficient. Agent should encourage parties to contact insurance professionals ©OnCourse Learning

Property Insurance Residential Sales Transactions Concerns Loss before Recordation/Closing Standard OTP 2-T states the seller shall retain the risk of loss before the closing (recordation of the deed). The parties should always ascertain the new deed has been properly recorded before canceling the seller’s policy. ©OnCourse Learning