Real Estate License Exam - Level 16: Property Insurance

Morale Hazards

the result of an environment or set of circumstances that makes people more likely to engage in risky behavior. -Ex. teen angry that they have to clean up the oily rags before TV time, so they shove them in the basement near the radiator

Seepage

when a slow leak causes damage over time. This is less likely to be covered by insurance, because it implies a lack of maintenance. Seeping water damage, like mold, rust, and neglect, is usually not covered, especially if it isn't reported right away. Insurance is designed to cover sudden or unexpected occurrences, not normal wear and tear or issues caused by neglect.

Replacement Cost of a Property

the actual cost of replacement without regard to depreciation of the property. It is considered a stronger property loss insurance coverage than actual cash value coverage.

For what year's insurance payment does a lender collect money from a borrower to hold in escrow?

the next year

Direct Writing Companies

Insurance companies that sell directly to consumers without going through agents.

Insurance Brokers

Do not have appointments with insurance companies, and are the most independent of the options. They get quotes from companies and submit applications on their clients' behalf. They often charge higher fees than agents.

HO-8 Insurance

For older homes whose replacement cost exceeds their market value. It's an actual cash value named peril policy, similar to an HO-1, but without covering full replacement cost. -Usually homeowners end up with HO-8 policies because they can't qualify for a better policy due to the age and state of repair of their home. It covers catastrophic loss, but not much else.

Blanket Policy

Give businesses more protection without having to take out specific policies for every little thing. They also cost more than specific policies. *They are most appealing to commercial property owners

Co-Insurance Requirement

Insurance companies will figure out the minimum amount of acceptable insurance based on a percentage of the replacement cost of the property. -If a property owner under-insures their property, they can face a coinsurance penalty.

Certificate of Insurance

Proof that the borrower has purchased acceptable insurance

The National Flood Insurance Program (NFIP)

Property owners have to purchase separate flood insurance from the NFIP, which is administered by FEMA, or through an insurer's "write your own" flood policy. -The NFIP creates what are called flood maps: maps that show the likelihood that an area will be flooded.

HO-7 Insurance

Similar to an HO-3 policy, but designed especially for people who own mobile or manufactured homes.

What is the purpose of an umbrella policy?

To increase liability coverage above normal limits

DP-2 Insurance (9 additional perils)

"Broad Form" dwelling insurance, is a step up from DP-1. It's still a named peril policy, but it names many more perils, including: 1) Damage from the weight of snow and ice 2) Glass breakage 3) Burglary damage 4) Accidental discharge or overflow of water and steam 5) Falling objects 6) Pipes freezing 7) Electrical damage 8) Collapse 9) Tearing apart, cracking, burning, or bulging **Replacement cost policies, which means you'll be given the cost to replace damaged buildings.

Who procures the property insurance?

-For personal properties, the homeowner is responsible for purchasing an insurance policy. Usually, a policy will be valid for a year, though payments might be spread out monthly. -If a homeowner allows their insurance policy to lapse, their lending institution may choose a policy for them to cover at least the amount of the loan. -In commercial property, either the investor or the property management company will purchase the insurance policy for the building.

3 kinds of hazards

1) Physical hazards 2) Moral hazards 3) Morale hazards

What real estate agents SHOULD do when it comes to clients and insurance.. (6)

1) Tell clients in advance that they'll need insurance to close if they have a mortgage 2) Offer to connect clients with trustworthy insurance agents or brokers 3) Explain why insurance is important and necessary 4) Make sure they understand that they will have to pay for a year of property insurance before closing 5) Explain how the escrow of property insurance works with lenders 6) Advise all-cash clients to obtain sufficient property insurance

What are 3 reasons property owners can't get insurance companies to provide the kind of coverage they need?

1) location of property 2) age of property 3) condition of property

HO-6 Insurance

A broad-form policy for people who own condos. Also called a walls-in policy, it covers everything from the walls in of a particular unit (because that's as much as you own as a condo owner — the rest of the building is owned collectively by you and your neighbors). -A condo building will have a separate policy, paid for by the owners' common area fees, that covers the rest of the building.

Commercial Property Insurance

A catch-all description that could mean any number of types of coverage for a commercial property or business. Both dwelling insurance and a business owner's policy are types of commercial property insurance. -They usually include at least building coverage, liability coverage, and property coverage (property in this sense means stuff like equipment and tools, not real estate).

Business Owner's Policies

Cover commercial buildings, property, and business liability. They're a package policy designed for businesses that own buildings.

Hazards

Dangerous situations or actions that are more likely to cause perils. Frayed wiring, sky diving, and flamethrower fights are all hazards.

Independent Agents

Have relationships, called appointments, with different insurance companies. Insurers tell agents what policies they can sell at what price and set their compensation. Agents have the power to initiate a policy on a property owner's behalf.

Adjuster

Individual from insurance company who decides whether the claim made by the insured property owner is covered by the property owner's insurance, and how much the damage will cost to fix (or how much the insurance company is willing to pay). **The property owner then has to meet their deductible, after which they may be eligible to get money from their insurance company to fix the problem.

What percentage of the replacement value of a home is required to be insured?

Most insurers require at least 80% of the replacement value of the home to be insured, though some policies, like blanket policies, require 90% or even 100%. The specific policy will lay out the coinsurance requirements.

Why should homeowners who qualify for standard insurance get that insurance instead of NYPIUA insurance?

NYPIUA coverage is more expensive.

Co-Insurance Penalty

When buildings are inadequately insured and property owners' insurance fall below the coinsurance requirement, they must pay a penalty when damage is incurred even if the damage is less than the amount of insurance had on the building

HO-4 Insurance

also called "renter's insurance." It doesn't cover the home at all, but instead only covers the stuff inside.

Sudden damage

from a burst pipe or other unforeseen plumbing issue. In general, things that happen suddenly are more likely to be covered by insurance.

Personal Property Coverage

i.e., the stuff inside your home, is usually covered at somewhere between 20% and 50% of the value of the home. If you have really nice stuff, just up that coverage. For specific valuable items like jewelry, furs, or antiques, you might need a separate rider (and possibly an official appraisal).

Which of the following would NOT be considered when determining the cost of a homeowner's insurance premium?

the size of the mortgage (the amount of the deductible is considered!)

Flooding

when water from an external, weather-related source does damage. Whether it's a storm surge or from rainfall, flood water coming in from the outside and damaging a home is almost never covered (not even by an umbrella policy) unless the property owner has purchased a separate flood policy.

HO-2 Insurance (6 additional perils)

"Broad Form" homeowners insurance, it is named peril insurance, and usually includes the following perils, in addition to the ones named in HO-1 policies: 1) Falling objects 2) Damage from the weight of ice and snow 3) Freezing pipes or other appliances 4) Sudden tearing, bulging, burning, or cracking 5) Sudden, accidental discharge or overflow of water or steam 6) Damage from artificially generated electric current

DP-1 Insurance (11 perils)

"basic form" dwelling insurance, it is the most bare-bones dwelling coverage you can get. It's a named peril policy, and while each policy's coverage can be slightly different, it often covers the following perils: 1) Fire 2) Lightning 3) Internal explosion 4) External explosion 5) Windstorm 6) Hail 7) Riot 8) Civil commotion 9) Smoke 10) Aircraft 11) Volcanic explosion **They are actual cash value policies, meaning depreciation is deducted from replacement costs (which is a bad thing).

HO-1 Insurance (12 perils)

"basic form", it is the most bare-bones homeowner's policy. It's a named peril policy that typically covers the following perils (12): 1) Fire 2) Smoke 3) Lightning 4) Explosions 5) Vandalism and malicious mischief 6) Riots and civil commotion 7) Damage caused by aircraft 8) Damage caused by vehicles not owned by the policy-holder 9) Windstorms 10) Hail 11) Theft 12) Volcanoes *Rarely sold anymore because it's so basic

A business owner's policy is a common type of package insurance for people who own a building that they run a business out of. It includes 3 types of insurance:

1) Business property insurance, which protects the buildings and the property within, including equipment, tools and inventory 2) Business income insurance, which covers a loss of income if your business has to temporarily close due to a disaster 3) Professional liability insurance, which covers the costs of lawsuits claiming your business made an error that cost clients money

What real estate agents should NOT do when it comes to clients and insurance.. (4)

1) Don't do anything that could lead to charges of self-dealing or that could violate RESPA, like accepting a referral fee from an insurance agent, or selling insurance to your clients directly. 2) Don't ignore the need to educate your client about insurance, even if they are cash buyers. 3) Don't delay closing by failing to give your client a heads-up about getting insurance early in the game. 4) Don't choose your client's insurance policy for them, or give them specific advice that is better left to insurance professionals.

There are four different kinds of people property owners can buy insurance from.

1) Independent agents 2) Insurance brokers 3) Captive agents 4) Direct writing companies

Two Types of Policies (2)

1) Named peril policies: cover only the things specifically listed, a.k.a. the named perils. 2) All-risk policies: cover everything except the specific named exceptions.

4 basic categories on a flood map

1) Zone V: a high-risk coastal area. Zone V properties are required to carry flood insurance. 2) Zone A: high-risk properties, and are inside what's called the 100-year flood plain. That means there's a 1% chance or higher the area will flood each year. Zone A properties are required to have flood insurance. 3) Zones B, C, and X: properties either in the 500-year flood plain or outside of a flood plain altogether. They're considered low-risk for flooding and aren't required to carry flood insurance. 4) Zone D: designations haven't been studied for flood vulnerability. They're not required to have flood insurance.

The Coastal Market Assistance Program (C-MAP)

A program administered by NYPIUA for owner-occupied one-to-four family dwellings (including condos and apartments) in Brooklyn, Queens, the Bronx, Staten Island, Nassau, Suffolk, and Westchester. -It's a voluntary network of insurers that helps coastal New Yorkers get insurance coverage. -To qualify, homeowners must live within a mile of the shore (in Brooklyn, Queens, Staten Island, and the south shore and forks of Long Island) or 2,500 feet of the shore (in the north shore of Long Island, Westchester, and the Bronx). ***C-Map coverage is only for people who can't get standard insurance coverage.

Captive Agents

Agents that exclusively work for a single insurance company.

D-3 Insurance (6 exceptions)

All-risk policies. Remember from before, that means they cover everything except the named exclusions. Usually, these are: 1) Law and ordinance (meaning costs associated with bringing a damaged building up to a new building code) 2) Earth movement (separate) 3) Flood (separate) 4) Neglect 5) War 6) Nuclear hazard *Replacement cost policies. They can include loss of rent policies, liability insurance, or even contents coverage, if you're insuring a second home or other dwelling with your own stuff inside.

HO-5 Insurance

Also called "comprehensive form," HO-5 policies usually offer more comprehensive coverage for personal property than HO-3 policies. -HO-5 policies usually have the same exclusions as HO-3 policies, but may have higher personal liability coverage limits.

Co-Insurance Penalty Formula

Amount of loss x (Limit of insurance ÷ Required insurance) - Deductible = Loss recovery

Umbrella Policy

An insurance policy that extends coverage above and beyond that provided by one or more underlying policies. It does not pay until underlying policies have maxed out their coverage limits. -Covers any gaps in your other insurance, or gives you a higher liability limit than other policies are able to, usually for a pretty small price.

Physical hazards

Conditions or situations that increase the chance of a loss *The most common kind of hazard. -Ex. oily rags sitting near radiator in the basement

New York Property Insurance Underwriting Association (NYPIUA)

Considered an "insurer of last resort" for high-risk properties that are denied insurance on the open market. Their premiums are higher than average, so property owners that don't have to go through NYPIUA can probably get better deals elsewhere. -NYPIUA offers basic form named peril coverage for fires, wind (including hurricanes), hail, explosion (except for steam boilers), riot, civil commotion, aircraft, vehicles, and smoke, as well as coverage for vandalism and malicious mischief. -For a higher premium, property owners can get NYPIUA broad form coverage that includes property damage by burglars (not theft of property); falling objects; weight of ice, snow, or sleet; accidental discharge of water or steam; sudden cracking of a steam or hot water heating system; freezing; and sudden damage from artificial electric currents. -Coverage is on an actual cash value basis, and includes a 2% hurricane deductible (more on this later).

Moral Hazards

Hazards that are the result of immoral behavior, like lying or fraud. -Ex. Homeowner that sets pile of oily rags on fire in basement to commit insurance fraud

Coinsurance Requirements for Homeowners

Homeowners also face a coinsurance requirement for their property: usually 80%, but sometimes higher. If a homeowner falls below their coinsurance requirement, instead of paying a penalty, they may have their coverage convert from replacement cost to actual cash value.

Why do lenders require property insurance?

If something happens to that property, the bank wants to make sure they are able to recoup the money they've lent. So at the very least, buyers are required to have enough insurance to cover the value their loan.

Liability Insurance

Insurance coverage that protects against claims that one's negligence or inappropriate action resulted in a loss to another party. -Ex. neighbor slipping on your sidewalk

Property Insurance (Fire Insurance, Hazard Insurance or Homeowners Insurance (HOI))

Insurance that indemnifies the policyholder for direct and indirect property losses. Coverage can be broad, as with an all-risk policy, or more limited via a named-peril policy. *NONNEGOTIABLE for anyone purchasing property with a mortgage.

Cancellation and Non-Renewal of Policy

Insurers can cancel or refuse to renew policies for property owners for various reasons, including non-payment of premiums. -To do so, they must send out a notice of non-renewal 45-60 days in advance of ending the policy, stating the reasons they're ending it. -To change or limit coverage, insurance companies are required to give 20 days' notice to the insured.

Hurricane Deductibles in New York

Many insurance policies now carry a special deductible for damage done by a hurricane, ranging from 1% to 5% of the home's value (which can be a huge amount — that's $50,000 for a $1,000,000 home, which isn't really that unusual for NYC real estate). -Hurricane deductibles can kick in for any named storm, only at Category 1, or only at Category 2. It depends on the policy, and should be explained on the declarations page.

Liability Coverage

Money to defend yourself if someone sues you and/or pay the medical bills if someone hurts themselves on your property. Homeowners policies generally start at $100,000 of coverage. It's possible to increase that amount, and, if you reach the limits of coverage offered and still want more, that's where the umbrella policy comes in

Dwelling Policies

Only cover a building and not its contents. These are designed for investment properties.

Homeowner's Policies

Package policies that usually cover a building, its contents, and have some liability coverage. They are designed for people's primary residences.

HO-3 Insurance (12 exceptions)

The most common type of homeowners insurance. HO-3 is an all-risk policy, though personal property (your stuff inside the house) is usually only covered for the perils named in a typical HO-2 policy. Typical exclusions for HO-3 policies include: 1) War 2) Nuclear accident 3) Earthquake or sinkhole 4) Flooding 5) Landslide or mudslide 6) Mold, fungus, rust, and rot 7) Neglect 8) Intentional damage 9) Vermin or bird infestation 10) Damage from pets 11) Foundation settling 12) Law and ordinance *Most HO-3 policies include personal liability coverage. They also generally cover structures like decks and garages that may or may not be actually attached to the home.

Why do most insurers require at least 80% of the replacement value of the home to be insured?

The reason insurance companies require 80% coverage is based on the rough tax calculation that a property's value is 20% land and 80% improvements. You'll learn in the tax level that this is not always exactly true, which is why some insurance companies are requiring up to 100% coverage.

Actual Cash Value of a Property

The replacement cost less any depreciation. It is used to determine the reimbursement amount in a property loss claim for many insurance policies. -These policies are usually cheaper, and are for older homes whose replacement cost is higher than their market value.

Monoline vs. Package Policies

The two general kinds of insurance are monoline, where only one type of insurance coverage is offered, or a package policy, that combines coverages from two or more types (lines) of insurance, such as property and liability, into a single policy.

Rider or Endorsement

When you want to add on an extra to an insurance policy, that's called adding a rider or endorsement. These additional policies can cover anything from earthquakes to theft.

Deductible

the specified amount the insured must pay on a loss before an insurance company will cover a claim. -Can be a straight dollar amount, or a percentage of the value of the home. -In general, the higher the deductible, the cheaper the monthly premiums.

Perils

things that can cause a loss: high winds, ice, velociraptors, etc.