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Lecture 5

Lecture 5 Homeowner S Insurance

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Louisiana State University
FIN 3440

Homeowners InsuranceThe home is one of the most expensive and important assets that the average person will own in a lifetimeThe Homeowners Policy HP is similar to the automobile insurance policy because it includes both property and liability protections for the insuredLenders usually require homeowners to have homeowners insurance if they financed the home with a mortgageAlso if you live in an area prone to flooding or earthquakes you may also be required to have these types of insurance for your home as well although they are not part of a standard homeowner policyAfter your home mortgage is paid you are not legally required to have homeowners insurance but if you dont have it you risk losing the investment in your homeHomeowner policy costs are a function of numerous factors including home square footage additional structures current building costs materials of construction area crime frequency of natural disasters proximity to a fire station and other factorsIn most areas of the US homeowners policies include the standard homeowner forms as listed below in Table 1 See p 5961 of your text for more detailsThree of these policies HO2 HO3 and HO8 are designed for people who own homes one policy HO4 is designed for tenants and one policy HO6 is designed for owners of condominium unitsTABLE 1HOMEOWNER POLICY TYPESHO2 The broad homeowners policy covers your home against 16 named perils volcanic eruption theft vandalism or malicious mischief smoke damage caused by vehicles damage caused by aircraft riot or civil commotion explosion windstorms or hail fire or lightning sudden and accidental damage from artificially generated electrical current not loss due to a tube transistor or similar electronic equipment freezing of a plumbing heating airconditioning or automatic fireprotective sprinkler system or of a household appliancesudden and accidental tearing apart cracking burning or bulging of a steam or hotwater heating systeman air conditioning or automatic fire protective systemaccidental discharge or overflow of water or steam from within a plumbing heatingairconditioningor automatic fireprotective sprinkler system or from a household applianceweight of icesnowor sleet and falling objectsHO3The special homeowners policy protects your home against all perils except those specifically excluded by the contract and protects the contents of the home against the same perils as HO2This is the most popular homeowners policy in the US Typical exclusions of the two policies above HO 2 and 3 include flood earthquake war nuclear accident and others specified in the policyAn interesting exclusionary clause that caused grief for many homeowners in Hurricane Katrina in Louisiana and Mississippi is the controversial concurrent causation clause readpage 72 and in INSIGHT 202 of your textFlood Insurance can be obtained as a separate policy from both the National Flood Insurance Program and from a few private insurersEarthquake coverage can be obtained as a separate policy or as an endorsement to the homeowners or renters policy from most insurance companies Maintenance Damage or Intrinsic Loss is not covered in your homeowners policy lack of maintenance mold termite infestation and infestation from other pestsHO4The renters policy generally protects the possessions of tenants in a house or apartment against the same 16 named perils in HO2It also provides liability coverage but doesnt protect the actual dwelling which should be covered under the landlords policyRenters who want only personal property protection not liability protection can purchase an appropriate policyAlso see INISIGHT 201 p 61 of your text for a short case story on renters insuranceHO6The coop and condominium owners policy provides coverage for liability and personal property much like HO4HO8The modified older home policy covers only 10 perils and insures the house only for repair costs or its actual cash value not its replacement costOtherwise the cost of rebuilding some homes with the materials and details of the original would make replacementcost coverage prohibitively expensiveAn HO8 policy pays to restore the damaged property but not necessarily with the same kind or quality of materials as the original You want your policy to cover your home structure your personal possessions the cost of living expenses elsewhere if your home is being repaired and your liability to othersSection I of the homeowners policy covers the first three items structure possessions and living expenses and Section II covers the last item liability to othersThe coverage under Section II liability and medical payments coverage is the same for all forms but Section I of the various HP forms differChapters 20 and 21 of your text are users guides to Sections I and II respectively for the Homeowners 3 Special Form Policy detailed in Appendix A of your text The key provisions of the homeowners policy in Sections I and II are discussed belowSection I DwellingStructurePersonal PropertyLoss of UseSection I for forms 2 3 and 8 which provide coverage for dwelling and other structures include four basic areas of coverage called parts A B C and D and additional coverage in Part EPart AThis part offers protection for the dwelling itselfAdequate coverage is needed here to cover the cost of rebuilding your home at current construction costs excluding the cost of the landPart BThis part offers a limited amount of protection for other structures on the property equal to a percentage of Part A example10 for HO3This includes structures separated from the dwelling by a clear space such as a detached garage fences patios and swimming pools Part C Most homeowners policies offer protection on personal property or contents equal to 5070 of Part AYou can determine if this is enough coverage by conducting a home inventory and increase the limit for your possessions if there is a need for greater coverageCoverage may be also be decreased if the insured does not own personal property equal to 50 of the value of the dwelling but it typically cannot be decreased below 40This part includes language that states We cover personal property owned or used by any insured while anywhere in the worldTherefore the policy covers both owned and borrowed property and with the exception of property at a secondary residence only 10 coverage personal property located at a place other than the primary residence is covered up to the full limit specified for personal propertyCoverage on personal property is typically on an actual cash value basis ie depreciated value although an optional replacement cost endorsement is available for a higher premium approximately 10 than the actual cash value policy for a range of personal property itemsSome types of property such as jewelry furs guns and other property are commonly insured for maximum dollar limits up to a limit of 10002000 for losses See Exhibit 202 of your text for more detailsIf you want higher limits on these items you can buy a special personal
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