UNIT 13: Property Insurance Basics

THINGS TO REMEMBER:

-Designated flood hazard zones are subject to restrictions on location, type, and elevation of all improvements (e.g., residential, commercial, industrial, and agricultural). -All federally-related mortgage loans require flood insurance on property located in FEMA designated flood zones. -If entire building is located above the 100-year flood plain, insurance requirement may be waived. -The location in a FEMA designated flood zone of any part of property is a material fact.

Premiums

-considered the consumer's cost of coverage. -However, the insurance policy is also a contract, subject to all the normal rules of contract law. For example, consideration in the form of premiums is required for the insurance contract to be valid. -Insurance policies also have definite beginning and ending dates.

Comprehensive Loss Underwriting Exchange (CLUE)

A database of consumer claims history that allows insurance companies to access prior claims information in the underwriting and rating process.

Deductible

Amount you must pay before you begin receiving any benefits from your insurance company

A condominium owner's insurance policy does NOT cover A) damage to ceilings. B) damage to walls. C) damage to floors. D) the building's roof.

D- Because condo ownership is limited to air space (ownership extends inward from interior walls, floors and ceilings), the main areas of real property concern are coverage of personal property and fixtures, as well as liability from injuries.

T/F?- A homeowners policy that provides both casualty and liability coverage is best referred to as a blanket policy.

FALSE

T/F?- Flood insurance is included in a homeowners policy.

FALSE- Flood insurance is a separate policy and is not included in a homeowners policy.

T/F?-Insurance policies typically cover vacant properties.

FALSE- Insurance policies typically exclude vacant properties that have a greater change of vandalism and theft.

designated flood hazard zones

Flood zones are geographic areas that FEMA has defined according to varying levels of flood risk. These zones are depicted on a community's Flood Insurance Rate Map or Flood Hazard Boundary Map. Each zone reflects the severity or type of flooding possible in the area.

Basic types of insurance policies

HO-3. This Homeowners' Special Form is an all-risk form insurance policy that provides even greater coverage than HO-2 because loss and damage to real property caused by all perils is covered unless excluded from coverage. HO-3 remains a named peril policy regarding damage or loss to personal property. Because it provides the insured with a greater amount of protection, it is the most commonly used residential policy today. It also meets the minimum coverage required by most mortgage lenders. HO-4. This Homeowners' Contents Broad Form is a tenant's policy (renter's policy) that covers the same perils as HO-2 regarding the insured's personal property. It cannot insure the building in which the tenant lives because the tenant does not hold the required financial interest in the property. HO-4 will frequently include liability insurance for any damage that the tenant might cause to the rented property. HO-5. This homeowners' policy insures an owner-occupied dwelling, other structures in connection with the dwelling, unscheduled personal property on and away from the premises, and loss of use. This policy also provides personal liability coverage and medical payments coverage. This is the broadest homeowners' form, as coverage is on an all-risks basis for the dwelling and other structures, as well as personal property. HO-6. This Homeowners' Unit-Owners Form policy is designed for the special needs of condominium owners. Because condo ownership is limited to air space, (ownership extends inward from interior walls, floors and ceilings), the main areas of real property concern are coverage of personal property and fixtures as well as liability from injuries. HO-7. An extended all-risk form providing broad coverage of both real and personal property. The HO-7 is designed for and primarily sold to owners of very expensive property. HO-8. This Homeowners' Modified Coverage Form is generally used when properties have less market value than the cost to replace them. It may be used to insure older homes.

Early or late possession by the parties—

Seller possession after closing or buyer possession before closing are two very risky situations for the parties as well as for the brokers involved. Imagine a seller remaining in possession after closing and causing a fire in the property. Consider the consequences if a buyer moves in before closing and causes damage to the property.

T/F?- In North Carolina, homeowners insurance policies and insurers are regulated by the North Carolina Department of Insurance.

TRUE

T/F?- The basic homeowners insurance policy can cover many types of perils, but the basic policy only covers fire damage.

TRUE

Base Flood Elevation (BFE)

Water surface elevation resulting from the Base Flood (or "1% Chance Flood") that is tied into a known vertical datum. -The base flood is used by the NFIP as the basis for mapping, insurance rating, and regulating new construction.

Broad Form (HO-2)

Wider coverage including falling objects and damage from ice, snow or sleet. -This Insurance policy is a named peril policy, which means that if a specific peril or hazard is not named in the policy, it is not covered.

Insurer

insurance company

Unoccupied building exclusion—

insurance company will not be liable for a loss if a building is vacant or unoccupied for a period of 60 days or more

condition

is a limitation on the coverage of a specific insured property. -For example, damage to a vehicle will only be covered if the vehicle was inside the garage at the time of the damage.

endorsement

is coverage for specific property or perils that are not covered in the original policy and is sometimes called a rider. -For example, if the homeowner owns a collection of rare books, an endorsement would probably be needed to fully insure the collection against loss.

exclusion

is some item, or loss due to a specific event, that is not covered by the policy. -For example, most policies exclude the coverage of loss due to acts of war or terrorism.

Property Insurance/casualty insurance

policy protects the insured from losses caused by damage to the insured property and the permitted improvements on that property.

Package Insurance Policy

protects the insured from BOTH types of losses.

liability insurance policy

protects the insured from losses or damage caused to third persons or their property.

In the event of buyer possession before closing,

sellers will need some version of landlord insurance -Listing agents should advise sellers to verify continued appropriate insurance coverage of listed property through closing/recordation.

Federal Emergency Management Agency (FEMA)

the nation's official emergency response agency -Manages the NFIP (National Flood Insurance Program)

In the event of late possession by seller,

the seller will need renters insurance and the new buyer owner will need landlord insurance. -Listing agents should advise sellers to verify continued appropriate insurance coverage of listed property through closing/recordation.

Standardized policy provisions

—All the details of coverage are contained in the various policy provisions. If it is a named peril policy, those perils that are covered will be clearly stated; whereas, if it is an all-risk policy, all the exclusions (what will not be covered by the insured) will be clarified. Any conditions or added endorsements to the policy will be specified.

Flood hazard area

Areas designated by FEMA as being prone to flooding.

Insured

A person covered by an insurance policy

A typical homeowners' insurance policy covers all of the following EXCEPT A) personal injury claims due to property owner's negligence. B) theft of property. C) vandalism and malicious mischief. D) flood damage.

D-Explanation The basis for most homeowners' policies is called a basic form (HO-1), and it usually provides property coverage against damage caused by fire and lightning; glass breakage; windstorm and hail; explosion; riot and civil commotion; damage by aircraft; damage from vehicles; damage from smoke; vandalism and malicious mischief; theft; and loss of property removed from the premises when it is endangered by fire or other perils.

Real estate brokers should advise consumers to inquire about the availability of insurance A) prior to settlement. B) anytime during the contract period. C) prior to closing. D) during the due diligence period.

D-Explanation The due diligence period is a time for the buyer under contract with a seller to investigate all the factors affecting the property under contract, including the availability and cost of insurance for the property. A broker should advise the buyer to inquire about insurance on the property during this period.

Insurance companies may exclude property owners from coverage after a vacancy of A) 60 days. B) 30 days. C) 90 days. D) one calendar year.

A-Explanation According to North Carolina statute, insurance companies may use 60 consecutive days as the unoccupied/vacancy time period. A property owner should also make sure the building is not vacant for a longer period than that stated in the insurance policy (e.g., 60 days).

The Federal Emergency Management Agency (FEMA) manages the NFIP. For properties designated by FEMA, the lender will insist on appropriate flood insurance, which the buyer can purchase through most insurance companies that sell homeowners policies. What does NFIP stand for? A) National Flood Insurance Program B) National Flood Interest Properties C) Nationwide Flood Insurance Program D) National Flood Issuance Program

A-Explanation FEMA produces maps that designate these flood hazard areas, and flood insurance is required.

Federal flood insurance is A) required in certain areas to insure properties financed by federally backed mortgage loans against flood damage. B) only required on real estate purchases located on the North Carolina coast. C) paid for by the federal government. D) only required in North Carolina on federally-owned lands.

A-The Federal Emergency Management Agency (FEMA) has designated many areas bordering on rivers and streams as flood hazard area. FEMA produces maps that designate these flood hazard areas, and flood insurance is required if a federally related mortgage loan is to be used for properties within those areas. The lender will insist on appropriate flood insurance, which the buyer can purchase through most insurance companies that sell homeowners policies.

T/F?-A package insurance policy protects the insured from losses caused to the property but also from losses caused to third persons or their property.

TRUE- A package policy protects the insured from both types of losses.

National Flood Insurance Program (NFIP)

-FEMA produces maps that designate these flood hazard areas, and flood insurance is required under the NFIP if a federally-related mortgage loan is to be used for properties within those areas. -The lender will insist on appropriate flood insurance, which the buyer can purchase through most insurance companies that sell homeowners policies. -The National Flood Insurance Act of 1968 is administered by FEMA and subsidizes flood insurance. The intent is to reduce the impact of flooding on private and public structures, encourage community floodplain management regulations, and provide affordable insurance.

Vacant or unoccupied property—

-Insurance policies usually contain exclusions for vacant property. -Vacant properties have a greater chance of vandalism, undiscovered damage, and theft, and can adversely affect property insurance claims. A vacant property is one that is completely empty, that is, the property lacks inhabitants and personal property. Vacancy can also be defined as "substantially empty of personal property necessary to sustain normal occupancy." -Unoccupied means that the property has been left in a state where the property still contains all items and possessions as if the owners were to return at any time. For a home to be determined as unoccupied, there must be sufficient items left in the house such as cooking utensils, functioning appliances like a microwave oven, toaster, refrigerator, and basic furniture. -If a property is indeed unoccupied, such as the case in a vacation home or a main residence where the owner is away for an extended period of time, normal coverage usually remains in place.

homeowners' insurance policy

A standardized package insurance policy that covers a residential real estate owner against financial loss from fire, theft, public liability, and other common risks.

A limitation on the coverage of a specific insured property is called A) an exclusion. B) a premium. C) an endorsement. D) a condition.

D-A condition is a limitation on the coverage of a specific insured property. For example, damage to a vehicle will only be covered if the vehicle was inside the garage at the time of the damage.

Under federal law, the purchase of flood insurance is mandatory for all federal or federally related financial assistance for the acquisition and/or construction of buildings in high-risk flood areas. This means that all federally related mortgage loans in high-risk areas require A) relocation of the property. B) FEMA inspections. C) rejection of flood insurance eligibility. D) flood insurance.

D-Explanation High-risk flood areas are called Special Flood Hazard Areas or SFHAs.

Which of the factors below does NOT go into calculating the amount paid for flood insurance? A) Number of floors B) Year of building construction C) Flood zone classification D) Number of occupants by sex

D-Explanation One of the factors is building occupancy, but no demographic information is provided except total number of occupants.

T/F?-From the perspective of an insurance company, past claims have no effect on future claims.

FALSE- Insurance studies indicate that policyholders who have made past claims are likely to make future ones. CLUE reports indicate a policyholder's past behavior and may impact that individual's chances of getting future insurance at a reasonable rate.

T/F?-The location of a property within a FEMA-designated flood zone is a material fact.

TRUE- Brokers must disclose if a property is located within a FEMA-designated flood zone.

T/F?-The HO-3 policy is an all-risk form insurance policy and the most commonly used residential policy today.

TRUE- The HO-3 policy provides the insurance with greater protection than other forms and also meets the minimum coverage required by most mortgage lenders; it is the most commonly used residential policy today.

Broker responsibilities with flooding-

Under North Carolina Real Estate License Law, a licensee has a duty to avoid any misrepresentation regarding permitted land use, to recognize potential land use problems, and an affirmative duty to discover and disclose any such problems. A broker is expected to be able to recognize patent signs of flooding on a property or when a property's location may make it susceptible to flooding (e.g., location near a river or creek). A broker should assist the parties with locating and reviewing the FEMA maps or checking with the local planning office to determine if there is any potential flooding problem.

Agreement to insure

—As with all enforceable bilateral contracts, both parties promise some action in exchange for the other party's promised action. The insurer promises to financially reimburse the insured in the event of a covered loss while the insured promises to make timely payment of premiums.

Declaration page

—This section clearly states the terms of the insurance policy. The actual dates of coverage are specified; and the insurance rating is determined by the property description. The basic details of the real and personal property coverage include the limits of liability coverage and any deductibles that the insured might have to personally pay before coverage can be applied. Any endorsements, or perils that have been added to the general policy, will be noted here. The declaration page will also contain the name of any mortgagee, signature of an authorized agent, and other administrative matters.