CFP Course 102 - Unit 7: Property, Casualty, and Liability Insurance NEEDS EDITING....THEY ALL NEED EDITING

Structure of a Standard Homeowners Policy

A standard homeowners policy consists of two sections: Section I and Section II. Section I protects property and belongings, and Section II provides liability and medical payments coverage to the homeowner for acts occurring on and off of the insured's property.

Three types of coverages are generally available in a standard homeowners insurance policy.

All cover certain perils (named or unnamed) or the cause of a financial loss to the home of the policyowner. ■ Basic coverage: This covers a financial loss to the policyowner's home due to the fol- lowing 12 perils: — Fire — Lightning — Windstorm — Hail — Riot or civil commotion — Aircraft — Vehicles — Smoke — Vandalism or malicious mischief — Explosion — Theft — Volcanic eruption ■ Broad coverage: This covers a homeowner's loss due to the perils named under basic coverage plus the following 6 perils, for a total of 18: — Falling objects — The weight of ice, snow, or sleet — Accidental discharge or overflow of water or steam — Sudden and accidental tearing apart, cracking, burning, or bulging of a steam, hot water, air conditioning, or automatic fire sprinkler system, or of a household appli- ance — Freezing of a plumbing, heating, air conditioning, or automatic fire sprinkler sys- tem, or of a household appliance — Sudden and accidental damage from an artificially generated electrical current ■ Open perils coverage: This increased coverage is designed to protect against all per- ils except those specifically excluded from coverage and is the most comprehensive type of protection for any homeowner to purchase although, understandably, the most expensive. The most popular type of homeowners policies, the HO-3 and HO-5 poli- cies, have open perils coverage either in full or in part. Perils that are excluded from most homeowners policies include financial loss caused by: ■ earthquake; ■ flood; ■ neglect; ■ war or nuclear hazard; ■ power failure; and ■ intentional loss (such as the insured deliberately burning down his house).

Insurance for High-Risk Drivers

An automobile insurance plan is a risk-sharing pool that auto insurance companies use to write insurance on high-risk drivers. This pool provides for an equitable distribution of the risk among insurance companies and makes auto liability insurance available for people who cannot obtain insurance through normal channels. In addition, several states have established reinsurance pools and joint underwriting associations to insure high-risk drivers.

Insurance on Watercraft

An individual boat owners policy covers liability, physical damage, medical payments, and bodily injuries caused by uninsured boaters. Physical damage coverage is on an actual cash value basis. Coverage is on an open perils basis, subject to exclusions for wear and tear, gradual deterioration, and mechanical breakdown. Liability coverage covers bodily injury or property damage caused by watercraft owned by the insured. Coverage excludes intentional bodily injury, use of the watercraft without permission, injuries to people eligible for workers' compensation, and liability of individuals in the business of selling, repairing, storing, or moving watercraft.

Section I Coverages

Coverage A: Dwelling—Coverage B: Other Structures—Coverage C: Personal Property—Coverage D: Loss of Use—

Coverage C: Personal Property—

Coverage C refers to the personal belongings pos- sessed by the policyowner as well as the personal property of any resident family members. The limit on this coverage is typically 50% of the Coverage A limit. The standard homeowners policy provides only actual cash value (ACV) coverage on personal property. Here, actual cash value is the depreciated value of personal property per an internal insurance company table and is not the value of the property after depreciation for income tax purposes. The insured may choose to increase the coverage on personal prop- erty by electing replacement cost. Certain kinds of personal property have maximum dollar limits on the amount insured under the standard policy. For example, theft of jewelry is typically limited to an insured amount of only $1,500. Furs, stamp collections, and coin collections are other types of per- sonal property that have only limited coverage. Cash is typically limited to $200 of coverage. If the insured wishes to increase the amounts on property, he needs to insure the property under a scheduled personal property endorsement, sometimes referred to as scheduling or endorsing the property. Coverage on scheduled items is written on an agreed-value basis with the insured. Certain other types of personal property are normally excluded from Coverage C protec- tion. Among these are: ■ animals, birds, and fish; ■ motorized land vehicles used off the premises (e.g., a dune buggy); ■ property of roomers or boarders not related to the insured; ■ articles specifically described and specifically insured (e.g., a boat of a larger size); and ■ credit cards.

Coverage E: Personal Liability—

Coverage E protects the insured homeowner and all resident family members against personal liability for bodily injury and property damage that may occur on or off of the premises due to negligence. The homeowner's policy generally has a minimum $100,000 limit for liability coverage per occurrence; however, most homeowners insurance policies today offer a limit of at least $300,000 and this limit may be increased up to $500,000 for an additional premium. Coverage E only applies if the insured is found to be legally liable. As part of this coverage, the insured gives up the right to settle any lawsuit arising out of an injury or property damage occurring on or off of the premises (i.e., that right is subrogated to the insurance company), and the company agrees to pay all defense and settlement costs associated with a third-party claim. Coverage E does not cover the homeowner for liability arising from the operation of a home-based business.

Section II Coverages

Coverage E: Personal Liability—Coverage F: Medical Payments to Others—Optional Personal Liability Endorsements—

Motorcycles, Motor Scooters, and Recreational Vehicles

Coverage for motorcycles and motor scooters is written under a PAP with an endorse- ment called the miscellaneous-type vehicle endorsement. This endorsement amends the definition of covered auto to include a motorcycle, but does not provide coverage for non- owned motorcycles. Recreational vehicles are covered through the miscellaneous vehicle endorsement.

Optional Section I Coverages

Coverage is available through optional endorsements for sinkhole collapse and earth- quake. An optional endorsement can also be used to cover personal property on a replace- ment cost basis. With this endorsement, losses will be settled without a deduction for depre- ciation. The following four classes of property are not eligible for replacement cost coverage: ■ Antiques, fine art, and similar property ■ Memorabilia, souvenirs, and collectors items ■ Property not kept in good working condition ■ Obsolete articles that are stored or not being used

Earthquake Insurance

Earthquake insurance provides coverage for physical loss due to an earthquake. These policies generally have high deductibles which may be as high as 10% of the face amount of the policy. The reason for this is to avoid having to process numerous small claims after an earthquake which allows the underlying insurance company to keep the premiums down and focus on larger claims. California is the state which tends to have the most earthquakes. Citizens of California can obtain earthquake insurance through the California Earthquake Authority (CEA), a body sponsored by the state to insure homeowners and renters in the event of an earthquake. This organization was created because very few insurance companies want to be exposed to an area which has such a high risk of earthquakes due to the potential of a catastrophic level of damage from this peril. If clients live outside of California but are still within an earthquake zone, they may have to check with their state insurance commissioner or local insurance agent to identify carriers which provide separate earthquake insurance.

Errors and omissions (E&O) insurance.

Errors and omissions insurance provides protection against the deficient acts of a professional that handles money. Most financial services professionals, including financial planners, will have E&O insurance at either the individual or group level. A special type of E&O coverage, known as directors and officers insurance, is available for corporate executives and other professionals who serve on the board of directors of their own or other companies.

Part C: Uninsured Motorists—

Generally, Part C: Uninsured Motorists coverage pays for bodily injuries and may pay for property damages depending on the state in which the accident took place. In other words, the coverage pays what the uninsured, at-fault driver's liability insurance would have paid had the correct amount of the appropriate insurances been in place. Most states have laws requiring all motorists to carry liability insurance, but those laws are widely ignored. Uninsured motorist coverage also provides coverage in the case of a hit-and-run driver, whether the insured person was in a car or walking across the street. Generally, Part C: Uninsured Motorists coverage does not cover underinsured motor- ists; therefore, you may only receive what you can collect from the underinsured motorists unless you add on an underinsured motorist endorsement. This endorsement will allow you to collect any additional claim amount, up to your policy limit, above the underinsured motorist's coverage amount from your own insurance company.

HO-4: Tenants or Renters

HO-4 is designed for tenants who do not own their dwelling. In such cases, the tenant has a need only for personal liability coverage, plus coverage for contents and loss of use. The HO-4 policy does not protect the actual building or dwelling (Coverage A or Coverage B), which should be covered by the landlord's policy.

Inland Marine Coverage

Insurance on specific items of personal property that are not covered under the home- owners policy is provided under inland marine coverage for personal policies, either as an endorsement to the homeowners policy or as a separate policy. Items typically covered include furs, jewelry, and silverware. Coverage is on an open perils basis.

Optional Personal Liability Endorsements—

Liability coverage under Section II of a homeowners policy can be expanded by the use of optional personal liability endorsements. These endorsements may cover liability for false imprisonment, malicious prosecution, libel, slander, defamation, wrongful entry, eviction, or other invasion of the right of private occu- pancy.

Malpractice insurance.

Malpractice insurance is generally used where the deficient conduct of the insured may result in bodily harm (e.g., a physician, surgeon, or dentist). A typical policy will have a maximum per incident limit (usually high for any type of physi- cian) and an aggregate limit. The insurance company is permitted to settle claims out of court on behalf of the professional.

Monoline Fire Dwelling Program

Many dwellings, such as unoccupied dwellings in the process of construction, are not eligible for coverage under a homeowners policy. These dwellings can be insured through monoline fire forms, called dwelling policies, that do not provide personal liability insur- ance or personal theft coverage. ■ ■ ■ The three forms of dwelling policies are: dwelling property 1 basic form; dwelling property 2 broad form; and dwelling property 3 special form. The basic difference in the forms are the covered causes of loss.

Mobile Home Insurance

Mobile homes may be covered through an endorsement to an HO-2 or HO-3 policy with coverage similar to that for a conventional home. To be eligible for mobile home coverage, a unit must be a portable trailer at least 10 feet wide and 40 feet long that can be towed on its own chassis and be designed for year-round living. Coverage is for a maximum of 80% of replacement cost, but the policy can be endorsed to provide coverage on an actual cash value basis.

Workers' compensation insurance.

Most states require workers' compensation for the benefit of employees. Benefits are funded through premiums paid by the employer. The insurer is the state, and benefits paid are usually a percentage of the employees' average weekly pay (subject to maximum amounts) for employees who are injured on the job, and these benefits are considered final. The available medical benefits paid are not subject to any deductibles or coinsurance on the part of employees and are not taxable income at either the federal or state level. Death benefits are also payable to family members under the program.

Part A: Liability Coverage—

Part A provides bodily injury (BI) and property damage (PD) protection, up to the policy limit, for which the insured is legally responsible. These limits may be quoted according to either a split limit (a separate limit for BI on a per person and per occurrence basis and a third limit for aggregate PD to the other driver's vehicle) or one single limit (applying to all BI and PD liability claims arising from an accident). An insured is defined in Part A as: ■ you or any family member residing in the same household; ■ any person using your covered auto with permission of the insured; or ■ any organization that is responsible for the conduct of someone driving your covered auto (such as your employer). A covered auto is defined in Part A as: ■ any vehicle shown in the policy declarations; ■ any new vehicle in addition to those shown in the declarations, but only for a specified period (usually 30 days) or until the new vehicle is reported to the insurance company; ■ any trailer the insured owns; and ■ any auto or trailer that the insured does not own but that is used as a temporary substi- tute (i.e., while the covered vehicle is being repaired and a loaner is used). Finally, coverage is not provided under Coverage A (or any other PAP coverage) for any vehicle that is being used to transport people or property for a fee (public livery exclusion). However, a share-the-expense car pool is not considered a public livery, and a vehicle used for this purpose is covered.

PAP is structured in six parts (the first four are types of coverage)

Part A: Liability Coverage—Part B: Medical Payments—Part C: Uninsured Motorists—Part D: Coverage for Property Damage to Your Auto—Part E: Duties After an Accident or Loss—Part F: General Provisions—

Flood Insurance

Residential flood insurance provides coverage for physical loss from a flood. Loss settle- ment is on an actual cash value basis, but replacement cost is available for a one- to four- family dwelling that is occupied by the owner at least 80% of the year. Coverage is subject to the standard exclusions and a deductible. A flood policy is enforceable immediately during the first 30 days that coverage is available in a community. After the 30th day, there is a 30-day waiting period for coverage to be effective. Recall, the damage from a flood is not covered under a standard homeowners policy. This inspired Congress to create the National Flood Insurance Program (NFIP) in 1968. The main function of NFIP is to provide an option to purchase a flood insurance policy for property owners who may be exposed to floods. Some private insurance companies may also offer flood insurance in certain locations. Property owners in special flood hazard areas are usually required to purchase flood insurance as a condition to obtaining a mortgage. One of the major factors in determining the cost of the property owner's flood insurance is the elevation certificate. A community's permit file must have an official record that shows that all new buildings and substantial improvements in all identified Special Flood Hazard Areas (SFHAs) are properly elevated. This elevation information is needed to show compliance with the floodplain management ordinance. The Federal Emergency Management Agency (FEMA) encourages communities to use the elevation certificate, developed by FEMA, to fulfill this requirement since it also can be used by the property owner to obtain flood insurance. Communities participating in the Community Rating System (CRS) are required to use the FEMA Elevation Certificate. The property owner's flood insurance rates will be increased if the property owner does not have an elevation certificate or if the elevation certificate divulges any negative factors regarding elevation compliance. Conversely, the elevation certificate may provide positive information regarding actual elevation factors and may help decrease the insured's flood insurance rates.

Personal Liability Insurance Needs Analysis

Step 1 Evaluate the client's automobile, home, and other personal liability insurance coverage. Step 2 Evaluate the client's total amount of liability coverage against the client's total net worth. A client with a high net worth should consider additional amounts of liability pro- tection. Step 3 Once the amount of coverage is determined based on the client's risk management requirements, review the client's liability insurance policies to ensure that there are not any coverage gaps within the client's risk management plan.

a general idea of the steps which should be taken when performing a homeowners insurance needs analysis.

Step 1 The face amount of the policy must be 100% of the replacement cost value of the home. Annual reviews should be scheduled to assure that inflation has not increased the replace- ment cost value of the home beyond the policy's face amount. The planner should verify that the home is covered on an open perils basis to assure that most risks are covered within the policy except those specifically excluded from coverage. If the home is located in a flood or earthquake zone, the planner should add flood or earthquake insurance to the homeowner's insurance needs analysis to provide adequate protection. Earthquakes and floods are usually excluded from coverage in a standard homeowners insurance policy. Step 2 All personal property of any significance should be scheduled and valued in preparation of any future claims which may occur as a result of a covered peril. Endorsements should be added to any property which value exceeds the normal coverage limit. Remember, items such as jewelry have stringent limitations within a standard homeowners insurance policy. Step 3 The maximum amount of liability coverage should be chosen to help protect clients from any type of negligence lawsuits. Step 4 Choose the appropriate deductible. Increasing the amount of the deductible may help to reduce the annual premium

HO-2: Broad Form

The HO-2 policy provides broad coverage for the dwelling and personal property. In addition, this form broadens certain perils and adds other perils.

HO-5: Comprehensive Form

The HO-5 is similar to the HO-3 except that Coverage C (personal property) for an HO-5 policy is written on an open perils basis.

HO-8: Modified Form for Special Risks

The HO-8 policy provides coverage for those who live in an older home whose replace- ment cost exceeds its market value. The HO-8 policy uses a functional replacement cost provision for loss. Under the functional replacement cost, the insurance company agrees to pay the amount necessary to repair damage, but the coverage cannot be more than the materials and labor that make the dwelling functionally equivalent to its original style. The HO-8 policy covers basic perils only. Liability and medical payments coverage are also part of the policy.

commercial package policy (CPP).

The basic commercial property and liability insurance policy is a package policy (i.e., includes two or more coverages) known as a commercial package policy (CPP). The advan- tage of this policy is that it is comprehensive and has no gaps in overall coverage. This policy also features lower premiums in a combined form of coverages rather than the purchase of one-by-one coverage. The CPP was developed by the ISO, and each part of the package includes specifically covered business property, general liability, boiler and machinery, com- mercial auto coverage, and so forth.

Part E: Duties After an Accident or Loss—

The duties under this part are similar to those described earlier when discussing a homeowners obligation to notify the insurance company in the event of a loss. However, with respect to an automobile accident, the insured must file a police report to claim theft coverage for a stolen vehicle or to have unin- sured motorist coverage for a hit-and-run accident.

HO-6: Condominium Owners

The insurance needs of condominium owners differ from those of single-family residence owners because the condo property's common areas (e.g., elevators, hallways, lobbies, and laundry rooms) are covered by insurance policies owned by the condo association. An HO-6 policy provides coverage for the condo owner's personal belongings and any owned structural part of the building. This type of policy also provides liability protection.

Part D: Coverage for Property Damage to Your Auto—

This coverage is widely under- stood as covering damages to your auto caused by other-than-collision (comprehensive) and collision with another auto or object (e.g., a road sign). The coverage provides direct damage coverage on your covered auto and any nonowned auto (such as a rental car). The insured may purchase comprehensive coverage, collision coverage, both, or neither. However, a deduct- ible will apply that may be lowered or increased at the option of the insured. As discussed in Unit 6 of this course, increasing the deductible on either provision is a means of retaining risk. The adjustment of these deductibles (typically up) may also be an effective method of cash flow management on the part of the insured. Collision is defined under Part D as "the upset of your covered auto or its impact with another vehicle or object." Therefore, this provision covers damages incurred in an accident involving other vehicles or those sustained when an automobile runs off the road and into a tree. Other-than-collision or comprehensive coverage protects the insured from damages incurred where the perils are typically viewed as accidental and out of the insured's control. Examples include a loss incurred by reason of: ■ theft; ■ breakage of glass; ■ falling objects; ■ flood; ■ earthquake; ■ hail; ■ vandalism; or ■ contact with a bird or animal. Because the expected claim cost is usually lower, the premium for comprehensive cover- age is typically lower than that for collision coverage.

Coverage F: Medical Payments to Others—

This coverage pays necessary medical expenses of others that result from bodily injury arising out of the insured's or the insured's animals' activities on or off of the premises. Generally, the coverage will pay up to $1,000 per person per occurrence. Note the major difference between Coverage F and Coverage E. Coverage F is protec- tion that will automatically pay for bodily injuries regardless of fault; in contrast, Coverage E only pays for bodily injury and property damage for which the insured is legally liable.

Coverage B: Other Structures—

This coverage provides insurance protection for small, detached structures on the dwelling property, such as a storage shed. The limit on insurance is typically 10% of the Coverage A (dwelling) limit. Like Coverage A, Coverage B also reimburses the insured on a replacement cost basis.

Part B: Medical Payments—

This coverage provides payment for the reasonable and necessary medical expenses of the insured as a result of an automobile accident. Expenses must be incurred within three years of the incident, and limits are provided on a per person, per occurrence basis. Individuals covered by Part B are: ■ you or any family member while occupying the motor vehicle; ■ you or any family member when struck as a pedestrian by another motor vehicle; and ■ any other person while occupying your covered auto (same as Part A definition).

Coverage D: Loss of Use—

This coverage provides reimbursement to an insured home- owner for additional living expenses incurred living elsewhere while the home is being repaired. Additional living expenses is defined in the policy as the difference between the cost of living in temporary quarters and the normal costs that would have been incurred had there been no loss. That is, the insured is not simply reimbursed for the total of the additional living expenses. Coverage D protection is typically limited to 20% of the Coverage A limit in the stan- dard homeowners policy.

HO-3: Special Form

This is the most popular and widely purchased of the basic homeowners policies, accounting for the majority of all homeowners policies sold today. Under an HO-3 policy, real property is covered on an open-perils basis, unless the peril is specifically excluded by the policy. Personal property is covered on a named-perils basis. An HO-3 policy covers all of the perils listed in an HO-2 policy and any other peril not excluded. The value of the HO-3 is that this form will cover certain unusual losses not specifically named as perils in the HO-2. For example, suppose an insured homeowner with an HO-2 policy, who lives in a rural area, owns a shed that is damaged when a neighbor's livestock gets loose. Because none of the named perils addresses this particular situation, the loss will not be covered. However, had the shed been insured under an HO-3 policy, the damage would have been covered because an HO-3 policy generally has no such exclusions.

Part F: General Provisions—

This part includes standard contractual language appli- cable to all PAPs. However, as noted therein, the PAP covers an insured for travel only within the United States, its territories and possessions, and Canada. Therefore, if the insured is driving in Mexico (or some other country outside the coverage area), the PAP is not effective.

businessowners policy (BOP)

This policy is specifically designed for the needs of small to medium-sized businesses and covers buildings and the tangible property used in business operations. This policy comes in two forms: basic and special. The basic BOP form covers only listed perils, whereas the special BOP form is written on an open perils basis, meaning that all perils are covered unless specifically excluded. The policy also covers business liability for bodily injury and property damage caused by employees of the business.

Coverage A: Dwelling—

This provides coverage for repair or replacement of damage to the dwelling and any attached structures, such as a garage or deck. Land is always excluded from coverage. The homeowner typically buys an amount of coverage equal to the replace- ment cost of the dwelling, although, in some cases, may be required to carry more by the mortgage lender to pay off the mortgage in the case of a total loss. Financial planners need to recommend at least 100% of the replacement value of the home with regards to homeowners insurance coverage. Covered losses to the dwelling and other structures are paid on the basis of replacement cost or the amount necessary to pur- chase or replace the dwelling with materials of the same or similar quality at current prices. The financial planner has a fiduciary responsibility to their client to make sure 100% of a total loss is covered. The only way to insure that the client is fully covered is to recommend at least 100% of the replacement cost of the home because the homeowners insurance policy will only cover up to the face amount of the policy. A diligent financial planner should periodically review the replacement cost of the home due to changes in replacement value to make sure that the client's home is currently insured for at least 100% of the replacement cost of the home. Financial planners should not confuse the fair market value of a home with the replace- ment cost value. The fair market value (FMV) is the price at which an exchange will take place between a willing buyer and a willing seller, assuming that both parties are informed and neither of them is under duress to exchange the property. The replacement cost value is the current cost of replacing property with new materials of like kind and quality. Generally, the insurance company will have a software package that will estimate the replacement cost of the home. Homeowners insurance policies generally contain a provision that requires a policy- holder to have the dwelling insured for at least 80% of its replacement cost value in order to be reimbursed 100% for partial losses (minus the deductible). If not, the insured will receive only a partial reimbursement equal to the greater of the following (up to the policy limit): ■ The actual cash value of the part of the dwelling that is damaged. ■ The amount determined by the use of the following formula: insurance carried ×amount of the loss, less any deductible insurance required * The amount of insurance required is 80% times the replacement cost of the dwelling for partial losses. ■ The homeowners insurance policy will only cover up to the policy limit. Even if a pol- icyholder has the required 80% times the replacement cost of the dwelling, the policy will not pay out more than the limit or face amount. Always remember to have homes insured for 100% of their replacement cost value. Also note that, in commercial real property insurance policies, the insured must often carry insurance equal to 90% of the property's replacement cost value in order to receive 100% reimbursement on a partial loss (minus the deductible).

Automobile Needs Analysis Summary

This summary is to be used to provide students with a general idea of some of the steps that should be taken when performing an automobile insurance needs analysis. Step 1 Obtain the appropriate amount of liability, uninsured, and underinsured motorist protec- tion. Most states require a minimum amount of liability coverage by law. Step 2 Evaluate whether or not the automobile requires collision and comprehensive coverage. Generally, fully insuring a lower-valued vehicle is not cost effective. Step 3 Evaluate the amount of the deductible for collision and comprehensive coverage to obtain the most efficient coverage option assuming the vehicle warranted collision and comprehensive coverage. Increasing the deductible may help to reduce the premium.

Unemployment compensation.

Unemployment compensation is not so much indem- nity insurance (to make one whole) as it is in lieu of salary. Benefits are determined by pre- vious wage levels and are generally payable for 26 weeks from the time the individual loses a job. (This period can be—and often is—extended by Congress in times of recession or a slowdown in the overall economy.) However, unlike workers' compensation benefits that are nontaxable, unemployment compensation is fully taxable to the recipient. The employer pays a tax under the Federal Unemployment Tax Act (FUTA) to fund the unemployment benefit to the out-of-work employee. However, most states do not require payment of this benefit if the worker has voluntarily left employment status with the employer and is not the subject of a job layoff or job cutback program.

two types of professional liability insurance

are malpractice insurance and errors and omissions insurance. The type of policy that is underwritten depends on the type of profes- sion that is being insured.

Comprehensive personal liability insurance

protection against the legal obligations that arise from a person's negligence. This type of insurance pays any damages, up to the policy limit, that are imposed against an insured for acts covered by the policy. Also, the policy usually provides the insured with a legal defense in any lawsuit arising from a covered act and pays these defense costs in addition to the limits of liability. This liability insurance covers automobile liability, homeowners liability, employer liability, and general liability. General liability is associated with any negligent act and does not have to be related to an automobile or work. General liability insurance is designed to protect business firms and individuals from legal liability arising from their negligence. Liability insurance that is designed to protect an individual is comprehensive because it insures against all types of liability hazards. Personal liability insurance provides coverage for the insured's legal obligation resulting from bodily injury or property damage and also provides payment for the injured party's reasonable medical expenses. Personal liability is included in Section II of the homeowners policy with a minimum limit of $100,000, but an insured can purchase additional coverage through personal liability umbrella policy (PLUP). Exclusions include intentional acts, liability resulting from a business conducted by the insured, and liability arising from the operation of an automobile.

personal liability umbrella policy (PLUP)

structured to provide a layer of liability insurance coverage on top of the individual's homeowners and automobile insurance policy. An insured will usually purchase an umbrella policy from the same insurer that insures the insured's other property/liability risks. To be eligible for umbrella coverage, an insurer may require the insured to maintain minimum amounts of underlying liability coverage on one or more underlying policies. The standard amount of personal liability coverage provided by a PLUP is $1 million, but additional amounts may be obtained. Financial planners should get an accounting of the client's assets to make sure an appropriate amount of liability insurance is recommended. For example, a client with a net worth of $5 million should have at least a $5 million PLUP. In addition to general liability, a PLUP may cover other types of liability, such as aircraft or watercraft. Self-employed individuals and professionals have a greater need for PLUPs because they tend to be prime targets in liability suits. When both the umbrella policy and underlying homeowners or automobile policies cover a loss, the PLUP will not pay any claims until the underlying coverage has been exhausted. However, a drop-down limitation also applies in most instances. This limitation operates in the event that the insured fails to maintain the required underlying coverages but nonetheless incurs a claim. In that event, the insurance company will pay only the amount it would have been required to pay if the underlying policies had been in force with the correct limits.

homeowners (HO) policies have certain contractual conditions of which the finan- cial planner should be aware. The most important of these are as follows.

■ Duties after a loss. If a loss occurs to the insured's home, the insured must — give notice immediately to the insurance company or its agent; — protect the property from any further damage; — prepare an inventory of loss to the dwelling and personal property; and — file written proof of the loss with the insurance company within a specified time; the insurance company must provide a state-approved claim form for filing this loss. ■ Mortgage clause. The insurance company includes this clause to protect the mort- gagee's (or lender's) interest in the insured home. The mortgagee has the right to receive any loss or damage payments under the policy to the extent of its interest in the property. The mortgagee is responsible for notifying the insurance company if a change in ownership of the insured property takes place. The mortgagee must also pay any homeowners insurance premiums that are due (as a practical matter, homeowners insurance premiums are part of the escrow that is withheld by the mortgagee as part of the homeowner's monthly mortgage payment). ■ Abandonment of property. The insurance company does not have to accept property abandoned by an insured. On the other hand, the insured must surrender ownership of any lost or damaged property to the insurance company if wanting to claim a total loss. ■ Loss to a pair or set. When a loss to a pair or set (such as the theft of only one ear- ring) occurs, the insurance company may either repair or replace the damaged or lost items or pay the difference between the actual cash value of the property as a set before and after the loss. ■ Other insurance. When a loss is covered under more than one homeowners policy, the insured cannot collect from each policy in full. Rather, the other insurance clause stipulates that when more than one policy covers a loss, the insurer will pay only a proportion of the loss based on the limits of coverage provided by each policy. ■ Cancellation. Either party may cancel a homeowners policy. The insured may cancel immediately, but the insurance company may cancel only under certain conditions and only after giving advance written notice. During the first 60 days, the insurance com- pany may cancel a new policy for any reason, but after 60 days the company may can- cel only if there is a material misrepresentation by the insured or the risk has substan- tially changed. This type of cancellation requires 30 days' written notice. Cancellation for nonpayment of premium requires only 10-day written notice, however, and only 5 days' notice is required in certain exceptional situations, such as when the building is vacant or unoccupied or the utilities have been disconnected for 30 consecutive days.

premiums for automobile insurance are based on the following factors

■ Geographic location. Some areas of the country have higher claim frequency or severity than others, and cities generally have higher premium rates than rural areas. ■ Age, gender, and marital status. Young male drivers have the highest rates of automobile accidents, so they pay the highest premiums. ■ Use of the automobile. The lowest rating factor is farm use, followed by pleasure use. The highest rating factor is business use. ■ Number and type of automobiles. A multi-car discount is generally available for insureds who own more than one automobile. The age and type of the automobile is also an important factor because some types of cars are more expensive to repair than others. ■ Driving record. Drivers who have no at-fault accidents or driving violations for three consecutive years often qualify for lower premiums, while drivers with at-fault acci- dents or driving violations may have to pay a surcharge. Some insurers also give discounts for younger drivers who have completed driver educa- tion courses or who are good students.

basic homeowners (HO) insurance forms available in the marketplace today

■ HO-2: Broad Form (Named Perils) ■ HO-3: Special Form (Open Perils) ■ HO-4: Contents Broad Form (for Tenants or Renters) ■ HO-5: Comprehensive Form (Open Perils) ■ HO-6: Unit Owners Form (for Condominium Owners) ■ HO-8: Modified Form (for Older or Historic Home)

personal automobile policy (PAP) provides protections against the following three major losses

■ ■ ■ Damage to or loss of the insured's vehicle Injury to the insured or family members Legal liability for personal injuries and damages to property

Finally, similar to other insurance policies, certain exclusions are often found in a PLUP. Some of the more important exclusions include:

■ ■ ■ ■ any act committed with the intent to cause bodily injury to another; liability arising out of any business activities; director and officers liability; and workers' compensation obligations.

factors affecting the classification of property insurance risk

■ ■ ■ ■ the policy form and coverage provided; the location, construction type, and any unique characteristics of the property; the amount of insurance requested and the amount of the deductible; and the level of fire protection provided by the city or municipality.