INSURED CAPACITY: NAMED INSUREDS

Commonly, more than one person qualifies as an insured under a policy. The person named in a policy’s declarations is the named insured. The named insured under the policy has greater rights and responsibilities than other persons who may also qualify as insureds. Insured Capacity: Other Persons Insured The policy’s definitions sections will define who, other than the named insured, may qualify as persons insured under a homeowners policy. For example, your mortgage lender is added to coverage as an additional insured to the extent of its security interest in your house, condominium, or townhouse. This is generally the outstanding loan balance. A mortgage Homeowners Insurance 41 lender is usually added to coverage under an insurance industry standard endorsement or provision known as a standard mortgage clause. Sometimes the language of the standard mortgage clause is included directly within the policy form, as opposed to being added as an endorsement to the policy. The definition of insured under the ISO standard HO 3 homeowners policy includes such persons as: ◆ the named insured and his or her relatives who are residents of the named insured’s household; ◆ nonrelatives of the named insured under the age of 21 who are residents of the household and are in the care of the named insured; and, ◆ full-time students who were (a) residents of the named insured’s household before moving out to attend school, and (b) relatives of the named insured, and (c) under the age of 24, or (d) in the care of a named insured or a relative resident of a named insured and under the age of 21. The persons insured provisions of homeowners policies issued by insurers that use their own forms may differ. Depending on your particular circumstances, the definition of who does and does not qualify as an insured under different insurers’ policies may be of importance to you. For example, some insurers’ homeowners coverage persons insured definitions do not extend insured capacity to students off premises. Thus, if you have a child away at school or college, his or her personal property may not be covered if your policy does not include your child as an insured person while away at school or college. What is most important to note is that residents of a household who are not relatives of the named insured and who are (a) over 21 and (b) not in the care of a named insured do not qualify as insureds. An example of this would be if the named insured is renting a room to a boarder or is letting a nonrelative live on the insured premises without charge. In this situation, that 42 The Complete Book of Insurance person’s property (i.e., his or her clothing and other possessions) is not covered by the named insured’s homeowners policy, because such persons do not qualify as persons insured. Insurable Interest In order to qualify for coverage under the first-party property coverages of the homeowners policy, a person cannot simply qualify as an insured. He or she also must also have an insurable interest in the damaged or destroyed property for which payment of a loss is sought. This principle is perhaps best illustrated by considering the situation of a mortgage lender that is an insured under a homeowners policy issued to the borrower on the home loan. The mortgage lender has a security interest in the residence to the extent of the outstanding balance owed by the borrower. By virtue of the mortgage clause in the homeowners policy, the mortgage lender has an insurable interest in the residence and is entitled under the policy to be named as a payee on any check issued by the insurer for damage to or destruction of the home. The mortgage lender does not, however, have an insurable interest in the home as to any sums payable for damage to or destruction of the residence that exceed the outstanding loan balance. Nor does the mortgage lender have any insurable interest in the homeowner/borrower’s personal property and is not entitled to payment for damage to or destruction of the borrower’s personal possessions. Covered Property Answering what is covered property is generally easy. It will be set forth in your policy. As to the dwelling and other structures (some policies use the term separate structures) portion of the ISO HO 3 policy, the policy does not cover land—including the land on which the dwelling or other structures are located. Under the other structures coverage, other structures that are rented or held for rental to any person who is not a tenant of the dwelling are not covered. There is an exception to this provision for other structures rented for use solely as a private garage. Homeowners Insurance 43 Nor does the other structures coverage apply to structures from which any business is conducted. The clear import of this limitation, which corresponds with several other policy provisions discussed later, is that homeowners policies are intended to cover risks of loss incidental to the personal use and occupancy of a dwelling and associated oth Low Limit Covered Property There are several categories of covered property that are made subject to rather low limits. Most homeowners insurers will insure these categories of property for higher limits at a higher premium. These categories of personal property for which coverage is afforded subject to sublimits are: ◆ a $200 sublimit on cash, bank notes, bullion, gold, silver, platinum, coins, metal, scrip, stored value cards (i.e., electronic gift cards), and smart cards; ◆ a $1,500 sublimit on securities, accounts, deeds, evidences of debt (i.e., promissory notes), letters of credit, manuscripts, personal records, passports, tickets, and stamps, regardless of the medium (paper or computer software) on which this type of material exists; ◆ a $1,500 sublimit on watercraft, including their trailers, furnishings, equipment and outboard engines or motors; ◆ a $1,500 sublimit on trailers or semitrailers used for items other than watercraft; ◆ a $1,500 sublimit for loss by theft of jewelry, watches, furs, or precious or semi-precious stones; ◆ a $2,500 sublimit for a loss by theft of firearms and related equipment; ◆ a $2,500 sublimit for loss by theft of silverware, silver plate, gold ware, gold plate, platinum ware, platinum plate, and pewter, including flatware, hollowware, tea sets, trays, and trophies; ◆ a $2,500 sublimit on property located on residence premises that are used primarily for business purposes; ◆ a $500 sublimit on business property away from residence premises except as described in the following two categories; Homeowners Insurance 45 ◆ a $1,500 sublimit on electronic apparatus and accessories while in or on a motor vehicle, but only if the apparatus is equipped to be operated by power from the motor vehicle’s electrical system even though capable of being operated by other power sources; and, ◆ a $1,500 sublimit on similar items as described in the preceding paragraph while away from residence premises but while not in or on a motor vehicle, with the same operating power limiting language. This is an area in which comparison of the coverages offered by insurers using the ISO HO 3 homeowners policy, as opposed to proprietary policy forms, may make a difference to you. There is a great deal of variation from insurer to insurer, both in the magnitude of the sublimits their policies provide and the categories of property that are subject to such sublimits. The policies offered by some insurers provide broader coverage than that of the ISO HO 3 policy. Other companies’ policies provide lesser or narrower coverage. This is one of the areas in which comparison shopping and research may be of value to you. The more coverage you can get without the need to schedule certain categories of property, potentially the better for you. On the other hand, scheduling property that may be difficult to value in the event of loss provides the protection of an agreed amount of coverage in the event of loss. The ultimate decision depends on the extent and value of your personal property possessions that may fall into the categories of property subject to these sublimits. No Coverage Under the standard ISO HO 3 homeowners policy, certain categories of personal property receive no coverage. These are: ◆ articles separately described and specifically insured, regardless of the limit for which they are insured under any other insurance (to avoid double recovery); ◆ animals, birds, or fish; 46 The Complete Book of Insurance ◆ motor vehicles and accessories, equipment, or parts while they are in or on the motor vehicle; ◆ aircraft (not including model or hobby aircraft not intended to carry people or cargo); ◆ hovercraft, flare-craft, and air-cushion vehicles; ◆ property of roomers, boarders, or other tenants, excepting property of roomers or boarders who are related to an insured; ◆ property located in an apartment regularly rented or held for rental to others by an insured; ◆ property rented to or held for rental to others off the residence premises; ◆ business data, regardless of whether stored as paper, electronic, or computer records; ◆ credit cards and electronic fund transfer cards, except as otherwise covered. (See the discussion of Additional Property Coverages, p.59.) Perils Covered Although it is something of a misnomer, the real property coverages of all the homeowners policies discussed (as opposed to personal property coverages) is so-called all-risk coverage. Under all-risk policies, coverage is defined by the policy’s exclusions. The typical all-risk property insuring agreement provides that the insurer insures against risk of direct physical loss to property…. This means the risk of loss to dwellings and separate structures. Most homeowners insurers also sell named perils policies, in which covered property is only covered if loss results from a specifically listed peril. Such named perils policies are usually less expensive than the all-risk policies sold by the same insurer. This is true both of insurers that use standard ISO policy forms, as well as insurers that use proprietary policy forms. As noted at the beginning of this section, the term all-risk policy really is a misnomer. This is because the all-risk coverage of such policies only applies Homeowners Insurance 47 to dwellings and separate structures. The property coverage applicable to personal property is named perils coverage in most cases. There are really two functional differences between all-risk coverage and named perils coverage. First, as noted, under all-risk coverage, direct physical loss to covered property is covered unless the cause of loss is excluded. Under named perils coverage, covered property is only covered if loss is caused by a peril that is specifically listed in the policy. The real difference here is that, in a practical sense, the list of covered perils under an all-risk policy is more inclusive than under a named perils policy. Second, whether a policy is an all-risk or named perils policy affects the burden of proof in the event there is a coverage dispute after a loss that results in a lawsuit between the insured and the insurer. Under the laws of most states, the insured of an all-risk policy need show no more than that damage to or destruction of covered property occurred. The burden of proof then shifts to the insurer to prove that an exclusion precludes coverage. In the world of property insurance, the terms peril, risk, and risk of loss refer to fortuitous, active, physical forces, such as fire, lightning, windstorm, theft, and vandalism (just to give a few examples). The concept of risk or peril as an active physical force is pretty self-apparent. The condition of fortuity requires a bit more explaining: fortuitous means occurring by chance or accidentally. For example, damage to property caused by wear and tear or failure to maintain is not loss that occurs by chance. Loss due to normal wear and tear is deterioration through use—a certainty, not a fortuity. The fortuity requirement precludes coverage for intentional damage or destruction of property. This is why, for example, arson is not covered. There is another reason why intentional damage to or destruction of property is not covered. If such damage was covered, it would create an undesirable incentive for insureds to destroy property for the purposes of generating cash when they found themselves in financial difficulty. Covered Locations Before discussing covered and noncovered perils, an explanation is needed regarding the geographic reach of coverage. As noted, the personal property 48 The Complete Book of Insurance coverage of most homeowners policies is worldwide. Most homeowners policies also afford coverage to locations other than simply the residence premises in the policy’s declarations. This can be seen by reviewing the policy’s definition of residence premises and insured location. In the standard ISO HO 3 (and the HO 2 named perils policy as well), residence premises means: ◆ the single family dwelling that the named insured resides in; or, ◆ a 2-, 3-, or 4-family dwelling in which the named insured resides in one or more of the dwelling units; or, ◆ that part of any other building where the named insured resides; and, ◆ which is shown as the residence premises in the policy’s declarations. This definition is clear that residence premises is just one place—the place specified in the policy’s declarations. The definition of insured location, however, makes sure that coverage extends to other locations as well. Insured location includes: ◆ the residence premises; ◆ other premises, other structures, and grounds used by the named insured as a residence and which is either: ■ shown in the policy’s declarations or ■ which the named insured acquires during the policy period for use as a residence (in practical terms if, for example, you have a second or vacation home, that second or vacation home would be covered if it were listed in your policy’s declarations); ◆ any premises used by the named insured in connection with either of the two preceeding categories of insured location (e.g., a storage facility); ◆ any part of the premises that are not owned by the named insured at which the named insured is temporarily residing; Homeowners Insurance 49 ◆ vacant land, other than farmland, that a named insured owns or is renting; ◆ land that is owned by or rented to the named insured on which the named insured is building a one, two, three, or four unit residence for him- or herself or for another insured; ◆ individual or family cemetery plots or burial vaults of an insured; and, ◆ any part of premises occasionally rented to an insured for other than business use (e.g., if you were to rent a vacation cabin or cottage for a few weeks, it would qualify as an insured location). Named Perils Policies Most all-risk homeowners policies are just sort of all-risk, because their coverage for contents/personal property is named perils coverage. There are exceptions, however. The personal property/contents coverage of some carriers’ policies is all-risk coverage. This is an example of how an insurer may seek to compete with other insurers, including direct writers, by offering broader coverages at a comparable price. It is differences like this that make comparison-shopping between homeowners policies of various companies difficult unless you have taken the time and trouble to have educated yourself. For example, if a direct writer’s policy’s contents coverage is named perils coverage, that insurer’s agent, who only represents a single insurance company, would be unlikely to point out the differences between the coverage of the policies offered by the company he or she represents and one offered by a company whose homeowners policies include all-risk coverage on contents. Unless you know the difference and can assess that difference in terms of a potential noncovered loss exposure, you cannot make an informed decision. Whether you have a named perils or all-risk homeowners policy, you are protecting your dwelling, other structures, and personal property from the following covered named perils. 50 The Complete Book of Insurance ◆ Fire and lightning. ◆ Windstorm or hail. There are some important limitations to this covered peril. Coverage exists for the interior of buildings or the contents within a building caused by rain, snow, sleet, sand, or dust, unless the direct force of wind or hail first damages the building, causing an opening in the roof or wall through which entry of the rain, snow, sleet, sand, or dust enters. This restriction has tended to preclude coverage for rain, snow, sleet, sand, or dust damage that is the result of poor maintenance or that is caused by leaving doors or windows open. ◆ Explosion. ◆ Riot or civil commotion. ◆ Aircraft (including self-propelled missiles and spacecraft). This is actually a more common cause of loss than you might imagine. Think of how many news reports you have seen in your lifetime about a private airplane that has crashed and damaged or destroyed one or more homes. ◆ Vehicles. There is an exception to this peril. No coverage exists to fences, driveways, or walkways caused by a vehicle that is owned or operated by a resident of the residence premises. Note that this exception applies only to these three limited categories of property. If you or another resident of your household has an accident and causes vehicle damage to your dwelling or garage, that damage will be covered. ◆ Smoke. Here again, there is some qualifying and limiting language. Smoke means the sudden and accidental damage from smoke, including the emission or puff back of smoke, soot, fumes, or vapors from a boiler, furnace, or related equipment, but does not include loss caused by smoke from agricultural smudging or industrial operations. If you experience a fire loss, or if a neighbor experiences a fire loss and you suffer resulting smoke damage to your house or contents, that smoke damage will be covered. Homeowners Insurance 51 ◆ Vandalism and malicious mischief. These two terms are essentially duplicative. Under the law of most states, if a word or phrase used in an insurance policy is not specifically defined, its meaning is determined by reference to dictionaries of ordinary usage. Therefore, if you see a word or a phrase in a policy and the policy does not define that word, check the dictionary. The vandalism and malicious mischief coverage does not apply if the dwelling has been vacant for more than sixty consecutive days immediately before the date of loss. This vacant property limitation does not apply to dwellings that are in the course of construction. ◆ Theft. The theft coverage is subject to several qualifications. First, the peril of theft includes attempted theft. This recognizes that an unsuccessful attempt to steal an item of property nonetheless can result in damage to or destruction of property. For example, you scare off a burglar who is trying to steal your television and the burglar drops the television, destroying it. Theft also includes loss of property from a known place when it is likely that the property has been stolen. In other words, no one witnessed the disappearance of an item of property, but theft is the most likely explanation. For example, you discover that your lawnmower is missing from your unlocked garden/tool shed where you normally keep it between uses. However, the peril of theft does not include loss caused by theft: ■ committed by an insured; ■ in or to a dwelling under construction or of materials or supplies used in construction until after the construction is complete and the dwelling is occupied; or, ■ from that part of residence premises that is rented by an insured to a person who does not qualify as an insured. (This is yet another provision that reinforces the notion that a tenant’s personal property is not something that the named insured under a homeowners policy has an 52 The Complete Book of Insurance additional interest in. It also reinforces that if you have a tenant, the tenant must procure his or her own insurance for his or her personal possessions in order to protect them from the risk of loss.) ◆ Falling Objects. You might think for a moment, that sounds like a rather odd peril. What might a loss caused by a falling object entail? They are actually more common than you might expect. For example, if you live below a hillside with rocky soil, under the influence of heavy rains, a large rock might dislodge from the hillside and roll downhill, striking your residence. The damage resulting from that descent is clearly fortuitous and would be covered. ◆ Weight of Ice, Snow, or Sleet. This peril does not include damage to buildings or contents other than from the weight of ice, snow, or sleet itself. For example, damage to the dwelling or contents caused by a roof failure due to the weight of accumulated snow would be covered. Resulting water damage to the interior or contents caused by the melting of snow subsequent to the roof failure may not be covered. Nor does this peril apply to loss to awnings, fences, patios, pavements, swimming pools, foundations, retaining walls, bulkheads, piers, wharves, or docks. ◆ Accidental Discharge or Overflow of Water or Steam. This is a pretty complicated covered peril. The manner in which this peril is stated in the current ISO HO 2 and HO 3 policy forms has been substantially clarified as compared with previous versions, particularly with respect to a topic that has received a lot of publicity in recent years—the subject of coverage for claims of mold damage and mold contamination. This peril is defined as accidental discharge of water or steam from within a plumbing, heating, air conditioning, or fire protective sprinkler system or from within a household appliance. This peril expressly provides that the terms plumbing system or household appliances does Homeowners Insurance 53 not include a sump pump or related equipment or a roof drain, gutter, downspout, or similar fixtures or equipment. What is not made clear is what a plumbing system does or does not comprise. Whether a plumbing system includes both pressurized supply lines and fixtures, and nonpressurized drain and toilet lines is ambiguous. This peril also includes as covered the cost to tear out and replace any part of the dwelling or other structure when it is necessary to do so in order to repair the system or appliance from which the water or steam has escaped. This tear-out-andreplacement coverage only applies to other structures if the water or steam causes actual damage to a building on the residence premises. The accidental water or steam discharge coverage does not apply if the dwelling has been vacant for more than sixty consecutive days prior to the loss. Company specific proprietary policies may vary in terms of the length of this time period. Nor does the accidental water or steam discharge peril include the cost of repair of the system or appliance from which the water or steam escaped. This peril also does not cover loss caused by or resulting from freezing, except as is provided for in the separate enumerated peril of freezing. Nor does it cover loss on the residence premises that is caused by an accidental discharge or overflow that occurs off the residence premises. Finally, the current ISO HO 2 and HO 3 policy forms state that the accidental water or steam discharge peril does not include loss caused by mold, fungus or wet rot unless hidden within the walls or ceilings or beneath the floors or above the ceilings of a structure. The intent of this provision is to limit coverage for loss caused by mold to circumstances in which the mold growth or damage is not reasonably apparent to the insured. If an accidental water discharge occurs, the elimination of coverage for loss caused by mold or fungus provides an incentive for the insured to take 54 The Complete Book of Insurance prompt action to remove the escaped water and to repair water damage so as to prevent the growth of mold in the first place. Mold can only grow in an environment where there is a constant source of water—for example, where there is a repeated or continuous leak or seepage from a plumbing line or drain, such as beneath a kitchen sink. In effect, the manner in which this provision is now drafted strikes a reasonable balance for an insured’s expectations of coverage between a covered accidental water discharge loss and an uncovered loss that is the result of long-term neglect or failure to maintain the premises on the part of the insured. Many of the mold growth and contamination cases that have received attention in the news media have arisen from neglect or failure to maintain situations, rather than from accidental discharge of water or steam situations. ◆ Sudden and Accidental Tearing Apart, Cracking, Burning, or Bulging. This peril affords coverage for direct physical loss caused by the sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system, air conditioning system, an automatic fire protective sprinkler system, or an appliance for heating water. Again, this peril contains an exception for loss caused by freezing, except as provided for in the separate peril of freezing. ◆ Freezing. This peril affords coverage for loss caused by freezing of plumbing, air conditioning, fire protective sprinkler systems, or household appliances only if the insured has used reasonable care to maintain heat in the buildings or shut off the water supply to all such systems and appliances. Again, this peril provides that plumbing systems do not include sump pumps, rift drains, gutters, or downspouts. ◆ Sudden and Accidental Damage from Artificially Generated Electrical Current. This peril is defined more in terms of what it does not include than what it does include. It states that it does not Homeowners Insurance 55 include loss to tubes, transistors, electronic components, or circuitry that are a part of appliances, fixtures, computers, home entertainment units, or other types of electrical apparatus. In short, this peril covers direct physical loss to the dwelling or contents (other than electronic devices) that results from power surges or arcs, such as, for example, fire, explosion, or smoke damage. ◆ Volcanic Eruption. This peril is fairly self-explanatory. It does contain an express limitation excluding loss from earthquakes, land shock waves, or tremors. Earthquake is a commonly excluded peril from standard property policies, both personal lines and commercial lines policies. In areas that are subject to earthquake, earthquake insurance can be purchased, usually in the form of an endorsement to a policy or as a separate earthquake damage policy. In addition, from a practical standpoint, geographic areas that are at risk of a volcanic eruption loss are seismically active, and therefore also are reasonably susceptible to earthquake losses. It can be imagined that in the right confluence of circumstances, a volcanic eruption loss might present some loss adjustment challenges if the volcanic eruption was accompanied by sufficiently strong earthquakes that may have caused or contributed to the damage.

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