460.4-2

ISO HO 2000 SPECIAL HOMEOWNERS COVERAGE FORM ANALYSIS HO 00 03 10 00

(November, 2008)

CONDITIONS—SECTION I

1. Insurable Interest and Limit of Liability

Regardless of the number of people who have an insurable interest in the property covered, "we" will not be liable in any one loss:

• To an "insured" for more than the amount of such "insured's" interest at the time of loss; or

• For more than the applicable limit of liability.

This condition was slightly tweaked under the HO 2000 edition of the Special Form policy to better define the nature of the person (insured) to which the policy is obligated to pay. Specifically, the Special Form policy is only obligated to pay the policy limit that applies to a covered person who has suffered a loss to covered property.

2. "Your" Duties After Loss

The HO 2000 edition of the Special Form Policy includes stronger wording in this provision. The result is that it reinforces an insured’s prime obligation to strictly comply with its requirements. It mentions that if an insured fails to do his duty, and if that failure adversely affects the insurer, the insurer is no longer obligated to provide coverage. An insured's cooperation is critical to an insurance company's ability to perform under the insurance contract. Although it does not involve an HO policy, readers may find it useful to refer to PF&M Section 131_C087 "Uncooperative Insured Can’t Seek Arbitration" (Classic) in Court Cases.

In case of a loss to covered property, the "insured" is responsible for:

a. Giving prompt notice to the insurance company or the insurance company’s agent.

For an illustration of how the courts view this obligation, please refer to PF&M Section 389_C032, Notice To Broker Was Not Notice To Insurance Company and also please refer to PF&M Section 389_C040, Notice To Independent Agent Or Broker Held Not To Be Notice To Insurer, in Court Cases.

b. Notifying the proper authorities in case of loss by theft.

c. Notifying the credit card or electronic fund transfer card or access device company in case of loss under credit card, electronic fund transfer card or access device, forgery and Counterfeit Money Coverage.

Please see this analysis’s discussion of this coverage in item 6. Additional Coverages.

d. Protecting the property from further damage.

If repairs to the property are necessary, the insured is required to:

(1) Make reasonable and necessary repairs to protect the property; and

(2) Keep an accurate record of repair expenses.

There is one item that appears odd about this coverage. While the Special Form policy reimburses an insured for expenses involved with protecting or preserving property, this philosophy is inconsistent. If a homeowner kept materials or supplies on hand to help protect the covered property from loss, the policy would exclude such property from coverage if it were stolen or destroyed by a listed or eligible cause of loss. The policy only covers such materials or supplies if they are for rebuilding, renovating, repairing, remodeling, or a similar purpose; but not for preserving or protecting the covered property to mitigate or avoid the need to repair or replace the property.

e. Cooperate with us in the investigation of a claim.

This item was added in the HO 2000 edition of the Special Form policy and acts as a reminder that the insured must be an active and willing participant in the claims process.

Example: The Stonewall Family submitted a claim for $22,000 of damaged property because of a smoke loss. The Stonewalls sent in a detailed list of very expensive electronic equipment and leather furniture. Most of the equipment and furniture was bought in the last year. However, the Stonewalls had no store receipts, or warranty information. Further, the Stonewalls said that the debris was cleared immediately and unavailable for display. Nay Eve Property and Casualty Insurance’s adjuster denied the claim because they were unable to view the damaged property or substantiate the loss.

f. Prepare an inventory of damaged personal property.

The inventory must show the quantity, description, actual cash value and amount of loss. The "insured" should also attach any bills, receipts and related documents that will justify the figures reported in the inventory. This condition is unchanged from earlier editions of the Special Form policy.

For more a more detailed discussion on the valuation of personal property, please refer to PF&M Section 401.3 Actual Cash Value Guide.

g. As often as is required by the insurance company, the insured must:

(1) Show the damaged property;

(2) Provide the insurance company with the records and documents that they request and allow them to make copies; and

(3) Submit to and sign an examination while under oath and without being in the presence of any other "insured."

This condition may appear to be heavy-handed, but the insurer is in the vulnerable position of having to rely on the insured concerning the scope of the loss. The insurer is merely asserting its chances of getting accurate information for investigating a claim. Unfortunately, this condition often becomes a battleground between insurers and claimants. The interests of insureds may have been better served if this condition contained some wording that obligated an insurer to exercise courtesy and reasonableness when enforcing this provision.

h. Sending to us, within 60 days after "our" request, "your" signed, sworn proof of loss which describes, to the best of "your" knowledge and belief:

(1) The time and cause of loss;

(2) The interest of all "insureds" and all others in the property involved, including the existence of all property liens;

(3) Other insurance which may cover the loss;

(4) The details of any changes in title or occupancy of the property during the term of the policy;

(5) Any specifications of damaged buildings and detailed repair estimates;

(6) The inventory of damaged personal property described in an earlier part of this section;

(7) Receipts for additional living expenses incurred and records that support the fair rental value loss; and

(8) Any evidence or affidavit that supports a claim under the credit card, electronic fund transfer card, or access device, forgery and counterfeit money coverage, which verifies the amount and the cause of loss.

This item of the HO 2000 edition of the Special Form policy is virtually the same as in earlier editions. The only changes are asking that the insurable interest of "all" insureds be identified (instead of just the named insured) and the expansion discussed earlier concerning "electronic" fund transfer cards and "access devices." For all of the tweaking, conditional phrases and details used in this condition, what is actually required is this: shortly after the insurer makes its request: the insured must provide all pertinent details about the loss, the information must be supported by any available documentation and the information must be truthful. Inadequate or dishonest information can relieve the insurer from having to settle the claim.

3. Loss Settlement

In the HO 2000 edition of the Special Form policy, the loss settlement condition was revised to explain that any mention of replacement or repair cost does NOT include any expense created by any ordinance or law. The only exception is the coverage described under Additional Coverage 11. Ordinance or Law. In light of this clarification, covered property losses are settled in the following manner:

a. The following types of property are paid at actual cash value at the time of loss but not more than the amount required to repair or replace:

(1) Personal property;

(2) Awnings, carpeting, household appliances, outdoor antennas, and outdoor equipment, whether or not attached to buildings;

(3) Structures that are not buildings; and

(4) Grave markers and mausoleums.

Note: Grave markers and mausoleums are newly added items to this condition.

Actual cash value is generally considered to be the replacement cost of the item minus depreciation.

Example: Vanisha Clayman has a ten year old sofa that is destroyed in a fire. The insurance company considers the fact that the sofa originally cost $4,560, but offers to settle the loss at $372. When Vanisha complains that the settlement is so much less than the original price, the company explains that she did not lose a new sofa, but a piece of furniture she had been able to use for its entire product life. The insurer explained that its offer reflected the loss of value due to age, wear and tear, etc.

b. Dwellings and other structures are covered at replacement cost without deduction for depreciation. However, any payment would be conditional upon the following:

(1) At the time of loss, if the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, the insurance company will pay the cost to repair or replace, after application of deductible and without deduction for depreciation. In no case will the insurance company pay more than:

(a) The limit of liability under this policy that applies to the building;

(b) The replacement cost of that part of the building damaged for like construction and use; or

(c) The necessary amount actually spent to repair or replace the damaged building.

The HO 2000 edition of the Special Form policy clarifies that it does not matter if the covered property is rebuilt at a new location. Such a move would be considered inconsequential to the operation of the policy settlement. The payment under the policy would be limited to the maximum eligible cost that would exist if damaged property were rebuilt at its original location. The additional cost would belong to the policyholder.

(2) At the time of loss, if the insurance applicable to the damaged building is less than 80% of the building’s full replacement cost (before the loss), the insurance company isn’t obligated to pay more than the limit of insurance under the policy; further, the insurer is limited to paying the greater of:

(a) The actual cash value of that part of the building damaged; or

(b) That proportion of the cost to repair or replace, after application of deductible and without deduction for depreciation of the part of the building damaged, which the total amount of insurance in this policy on the damaged building bears to 80% of the replacement cost of the building.

(3) To determine the amount of insurance required to equal 80% of the full replacement cost of the building immediately before the loss, do not include the value of:

(a) Excavations, foundations, piers, or any supports which are below the undersurface of the lowest basement floor;

(Note that the HO 2000 edition of the Special Form policy adds footings and similar building supports to items that must be subtracted from any consideration of a covered property’s replacement cost.)

(b) Those supports in the above which are below the surface of the ground inside the foundation walls, if there is no basement; and

(c) Underground flues, pipes, wiring, and drains.

The insurance company will pay no more than the actual cash value of the damage until actual repair or replacement is complete. Once actual repair or replacement is complete, the insurance company will settle the loss according to the provisions discussed above. If, however, the cost to repair or replace the damage is less than 5% of the amount of insurance in this policy on the building and less than $2,500, the loss will be settled according to the provisions listed above, regardless of whether actual repair or replacement is complete.

An insured has the option not to worry about replacement cost loss settlement provisions and ask that his or her loss or damage to buildings be settled on an actual cash value basis. However, if the "insured" changes their mind, they have up to 180 days from the date of the loss to ask for any additional amount due according to a settlement based on the replacement cost. If the insured misses this 180 day window, the actual cash value settlement basis is their only reimbursement.

This condition emphasizes the point that it is very important to accurately document the replacement cost of the covered property. Property that doesn’t comply with the Special Form policy’s replacement costs provisions is subject to a tedious and complicated settlement process.

4. Loss to a Pair or Set

When property that is part of a pair or set suffers a covered loss, the insurer may choose to:

(a) Repair or replace any part of the pair or set which will restore the pair or set to its value before the loss; or

(b) Pay the difference between actual cash value of the property before and after the loss.

Note: This condition DOES NOT say whether the insurer has the option of paying the least or most expensive of the two options. However, it would be consistent with other settlement provisions of the policy that an insurer is likely to select the least expensive option.

5. Appraisal

If the "insured" and the insurer disagree on the amount of loss, either party can demand that the loss be appraised. In this process:

• each party chooses a competent, impartial appraiser no later than 20 days after getting the other party’s request for an appraisal,

• the two appraisers will choose an umpire, and

• each party has to share the cost of the judge and pay the entire expense for their own appraiser.

If the appraisers cannot agree upon an umpire within 15 days, either the insurer or the "insured" can ask that a judge be selected by a court of record in the state where the "residence premises" is located.

The appraisers have to submit separate opinions on the loss amount and an agreement between any two persons (among the appraisers and the judge) becomes binding on both the insurer and the policyholder.

Note on Condition 5. This was the Glass Replacement condition in earlier editions of the Special Form policy. This condition was eliminated since the HO 2000 edition of the Special Form policy handles glass replacement under the policy’s Additional Coverages section.

6. Other Insurance and Service Agreement

This represents a broader intent than the traditional other insurance provision since it addresses other sources of protection:

(a) If a covered loss is also protected by other insurance, the insurer’s payment obligation is shared with the other coverage source. Specifically, the insurer becomes obligated to pay only its share of the loss. The share is determined by taking the total amount of available insurance and determining the insurer’s percentage of coverage.

(b) this part of the Other Insurance condition is new under the HO 2000 edition of the Special Form policy. If any valid service agreement applies to the covered property, this insurance is triggered once the amount available under the service agreement is paid. Service agreement refers to the following:

• service plan

• property restoration plan

• home warranty

• other warranties.

This condition applies even if, rather than being called a warranty or plan, the other source of coverage calls itself insurance.

Example: Dave Glaringloss makes a claim for his home entertainment system which was destroyed when a vehicle slammed into his home, broke through the wall next to the entertainment system, and toppled the property and shelving onto the Italian marble tile floor. Dave’s receipts show that the various components had a total value of $5,269. Lowfair Ltd. Insurance’s adjuster had no problem with the claim amount but, while looking through Dave’s receipts, he noticed that the TV and DVD players were covered by the Plastik Elektro-Palace’s Consumptive Protektiv Plan. The plan guaranteed to replace the TV and DVDs if lost or destroyed within 18 months of their purchase date. Since Dave just bought the equipment 11 months earlier, Lowfair paid the $1,800 left after the Protektiv Plan paid $3,269. However, Lowfair depreciated the claim by $200.

Note: This condition only refers to other coverage, but does not specify whether the other source has to be valid and collectible. Therefore, a dispute could arise depending upon how this condition is exercised.

Example: Fran Weekwill’s newly purchased home is covered by an HO 00 08 policy. Fran is moving into her home with the help of the moving company she hired, Olde Paradigm Movers. Fran’s porch and porch roof are destroyed when the Olde Paradigm truck driver backs up too fast and slams into the front of her home. Olde Paradigm has a general liability policy with limits of $50,000. Fran’s policy has a limit of $50,000 on her dwelling. The damage to her property is estimated at $6,000. Fran’s insurance company pays Fran $3,000 for the loss and tells her to collect the rest from Olde Paradigm, even after the insurer discovers that Olde Paradigm’s insurer is bankrupt and is unable to honor their policy. While Fran argues that no other collectible coverage applies to her loss, her insurer says that another source of coverage did, technically, apply to the loss and it doesn’t matter if the coverage lapsed.

7. Suit Against Us

This condition is also clarified under the HO 2000 edition of the Special Form policy. An insured can’t sue his insurer without fully complying with the terms and conditions under Section I of the policy. Further, any suit has to be filed no later than two years after the loss date. In earlier editions, the insured only had one year after the loss date to file legal action against his insurer.

The intent of this provision is to make certain that an insured takes every course of action that is available and to use a lawsuit only as a last resort. It should be to everyone’s advantage if conflicts can be resolved without having to go to court. However, suits happen and if this alternative is chosen, the insured must file the action within two years of the loss date.

8. "Our" Option

"Our" refers to the insurance company. This condition obligates the insurer to either repair or replace the damaged property within 30 days after receiving the "insured’s" signed, sworn proof of loss. The insurer also has the option to use material that is similar in type or quality to repair or replace the damaged property. In other words, the insurance company is not obligated to pay a loss with cash. The insurance company can actually replace the damaged property with new or like property.

9. Loss Payment

The insurance company will adjust all losses with the "insured." The insurance company will pay the "insured" unless some other person is named in the policy or has a legal right to receive payment. All losses will be payable 60 days after the insurance company receives the "insured’s" proof of loss and after:

a. The insurance company reaches an agreement with the "insured";

"Insured" means "you" and residents of "your" household who are your relatives or other persons under the age of 21 and in the care of any person who meets the definition of "insured."

b. An entry of final judgment is entered; and

c. The insurance company receives filing of an appraisal award.

This condition explains to the insured that the insurance company is only obligated to deal with persons who have a valid interest in the loss and not with disinterested third parties such as lawyers or independent brokers or specialists.

10. Abandonment of Property

The insurance company is not required to accept any property which is abandoned by the "insured." In other words, an insurance company is not automatically responsible for taking care of or disposing damaged property.

Example: Raymun Veramyte’s vinyl ping pong table was reduced to a melted, useless lump during a fire. Raymun’s insurer sends him a check for $275 for the table, which he bought nearly two years earlier. The table cost $420 new, so the $275 reflected two years’ depreciation. Because it was a minor loss, the settlement was handled over the phone. Raymun asks his company to come and get rid of the ruined ping pong table which he has moved into his garage. His company claims specialist tells him that he’ll have to take care of disposing of the table...their claim file is closed.

11. Mortgage Clause

The HO 2000 edition of the Special Form policy eliminates the reference to "trustees" in this condition.

When the policy’s declarations page includes a mortgagee, that mortgagee will be paid along with the insured for any eligible loss involving property covered under dwelling coverage (Coverage A) or other structures coverage (Coverage B). The payment will be made according to the mortgagee’s insurable interest and, if there is more than one mortgagee, will reflect any order of precedence.

If the insurance company denies the "insured’s" claim, that mortgagee may preserve their right to a loss payment under the following circumstances:

(a) The mortgagee notifies the insurer of any change in ownership, occupancy or substantial change in risk of which it is aware;

(b) The mortgagee pays any premium due when the insured has failed to make the premium payment, AND

(c) The mortgagee provides the insurer with a signed, sworn statement of loss within 60 days of being told that this has NOT been done by the "insured." In other words, when a mortgagee exists, an insured’s failure to comply with the policy conditions does NOT endanger the mortgagee’s recovery for a covered loss IF the mortgagee agrees to fulfill the policy conditions in place of the insured. Further, if there are disputes involving a claim, the mortgagee assumes the ability to exercise the rights to appraisal or legal action against the insurer. However, the mortgagee is also obligated to the same terms: specifically, to comply with ALL policy provisions and to be subject to the same two year time frame for filing a lawsuit.

If the insurer cancels or does not renew the policy, the mortgagee will be notified at least 10 days before the date cancellation or nonrenewal takes effect. IMPORTANT: While this is the time frame appearing in the policy, the time limit and notification requirements are determined by laws of the state in which the policy is issued.

If the insurance company pays the mortgagee for any loss and denies payment to the "insured," the insurance company receives the mortgagee’s subrogation rights. However, any subrogation won’t affect the mortgagee’s full claim.

The insurer reserves the option of paying the mortgagee the entire principal balance on the mortgage along with any accrued interest. If the principal and interest are paid, the insurer acquires a full assignment and transfer of the mortgage. The transfer includes all securities that are held as collateral for the mortgage.

Example: Millie Strainfunds, the chief loan officer for Highflown Finance Co., gets a call from a claims adjuster from Hapless & Harried Fire and Casualty Insurance. He tells Millie that the Tramplongs’ home, on which Highflown is shown as a mortgagee, suffered a fire loss three months ago and, after repeated requests, the insured’s haven’t sent a proof of loss statement, nor cooperated in any loss settlement. Hapless has decided to clue Highflown in on the situation. Millie, seeing that they are owed nearly $89,000 on a loan, asks the adjuster to send her the necessary paperwork and she will file a proof of loss.

12. No Benefit to Bailee

Through this policy provision, an insurer denies any policy benefit to entities (personal or commercial) that charge or receive a fee for:

• holding,

• storing, or

• moving property

no matter what appears in any other provision of the Special Form policy.

13. Nuclear Hazard Clause

This clause is unchanged in the HO 2000 edition of the Special Form policy. "Nuclear hazard" refers to the following:

• nuclear reaction,

• radiation, or

• radioactive contamination,

regardless of the incident being controlled and no matter how the event is caused. Any consequence of a nuclear hazard is also considered a nuclear hazard.

Losses created or involving a nuclear hazard are not considered to be a fire, explosion, or smoke loss, even when these three perils are included within Section I of the Special Form policy.

This policy does not apply under Section I to loss caused directly or indirectly by nuclear hazard. The one exception is that direct loss by fire resulting from the nuclear hazard is covered.

14. Recovered Property

The insured and the insurer are obligated to tell each other when, after a loss has been paid, property involved in the claim has been recovered. What happens next is up to the insured. The insured may allow the company to have or keep the property or the property may be kept by (or returned to) the insured. If the property is returned to the insured, any payment has to be adjusted to reflect the condition or value of the property. In other words, the insured may have to return part or all of any loss payment.

15. Volcanic Eruption Period

Within a 72-hour period, all volcanic eruptions that occur will be treated as one eruption.

16. Concealment or Fraud

Under the HO 2000 edition of the Special Form policy, this condition has been changed from:

With respect to all "insureds" covered under this policy we provide no coverage for loss if, whether before or after a loss, one or more "insureds" have:

a. intentionally concealed or misrepresented any material facto or circumstance;

b. engaged in fraudulent conduct; or

c. made false statements:

relating to this insurance.

To the following:

We provide coverage to no "insureds" (emphasis added) under this policy if, whether before or after a loss, an "insured" has:

a. intentionally concealed or misrepresented any material fact or circumstance;

b. engaged in fraudulent conduct; or

c. made false statements:

relating to this insurance.

With all due respect to ISO, this revision should provide clarification to no person (sarcasm added) if, whether before or after reading this revised wording, a person has:

a. intentionally attempted interpreting any language,

b. sought an English/InsuranceSpeak Dictionary, or

c. read the wording while holding a Special Form policy in front of a mirror,

in an attempt to comprehend this revised condition.

The revised wording, rather than making the coverage intent clear, appears to add confusion. It may have been more prudent to develop a better revision or to have left the previous wording in place. Considering the alternatives available for wording this condition, it is likely that the selected passage will eventually be challenged in various courts where the form is used.

For an illustration of how an insurer’s obligation to provide coverage may be affected by concealment or fraud, please refer to PF&M section 469_C004 Application Information About Previous Cancellation Held To Render Policy Void in Court Cases.

17. Loss Payable Clause

In earlier editions of the ISO Homeowners Program, a clause concerning a loss payee had to be added to the policy by an endorsement. The HO 2000 edition of the Special Form policy adds this condition. Its purpose is to change the way the policy operates when a loss payee appears on the policy declarations. When a loss payee appears, the loss payee is included in the definition of "insured" in regards to the covered property. Further, the loss payee is entitled to written notification if the policy is cancelled or not renewed