Actuarial Notes

HO-3 Coverage Conditions

Study guide: Exam DISC-IA

HO-3 Coverage Conditions are the Section II conditions and the Sections I and II conditions of the ISO Homeowners 3 – Special Form (HO 00 03, 05 11 edition). The Section II conditions govern the liability coverages — the limit per occurrence, severability, the insured's duties after an occurrence, suits against the insurer and other insurance — and the Sections I and II conditions govern the whole policy: liberalization, waiver, cancellation, nonrenewal, assignment, subrogation and death.

\text{Refund} = P \times \frac{n_{\text{remaining}}}{n_{\text{term}}}

t_{\text{notice}} = \begin{cases} 10 \text{ days} & \text{nonpayment, or new policy under 60 days} \\ 30 \text{ days} & \text{other cancellation and nonrenewal} \end{cases}

  • Symbols: P is the policy premium, n_{\text{remaining}} the days from the cancellation date to the expiration date and n_{\text{term}} the days in the policy term; the HO-3 refunds premium pro rata whoever cancels. t_{\text{notice}} is the least advance notice the insurer must give before a cancellation takes effect, or before the expiration date for a nonrenewal.
  • Section II, limit of liability: The Coverage E limit is the most paid for all damages from one occurrence, however many insureds, claims or injured persons. All bodily injury and property damage from one accident, or from continuous or repeated exposure to substantially the same harmful conditions, is one occurrence. The Coverage F limit is the most paid for one person's medical expenses from one accident.
  • Severability of insurance: The insurance applies separately to each insured, so an exclusion that applies to one insured does not by itself remove coverage for another, but it does not increase the limit for one occurrence. The exception is an exclusion worded "an insured", such as expected or intended injury: the form defines "an insured" as one or more insureds, so that exclusion removes coverage for every insured when any one of them expected or intended the injury.
  • Duties after an occurrence: The insurer has no duty to provide coverage if failing to perform these is prejudicial to it. The named insured or another insured must give written notice as soon as practical with the policy's identity, the time, place and circumstances, and the names and addresses of claimants and witnesses; cooperate in the investigation, settlement or defense; promptly forward every notice, demand and summons; at the insurer's request help it settle, enforce rights of contribution or indemnity, conduct suits and attend hearings and trials, and secure evidence and witnesses; for damage to property of others, submit a sworn statement of loss within 60 days and show the damaged property; and not voluntarily make payments, assume obligations or incur expenses, except at the insured's own cost or for first aid at the time of injury.
  • Duties of an injured person under Coverage F: The injured person or a representative must give written proof of claim, under oath if required, as soon as practical, authorize the insurer to obtain medical reports and records, and submit to physical exams by a doctor of the insurer's choice as often as reasonably required. Payment under Coverage F is not an admission of liability by an insured or the insurer.
  • Suit against us: No action can be brought against the insurer unless Section II has been fully complied with. No one may join the insurer as a party to an action against an insured, and no action under Coverage E can be brought until the insured's obligation has been decided by final judgment or by an agreement the insurer signs.
  • Bankruptcy, other insurance, policy period: An insured's bankruptcy or insolvency doesn't relieve the insurer of its obligations. Section II is excess over other valid and collectible insurance, except insurance written specifically as excess over this policy's limits, such as an umbrella. It applies only to bodily injury or property damage occurring during the policy period.
  • Concealment or fraud, Section II: The insurer does not cover an insured who, before or after a loss, intentionally concealed or misrepresented a material fact, engaged in fraudulent conduct or made false statements relating to this insurance. Under Section II the penalty falls on that insured; under Section I no insured is covered (HO-3 Property Conditions).
  • Liberalization: A change that broadens coverage under this edition without additional premium applies automatically from the date it is implemented in the state, if that date falls within 60 days before or during the policy period, unless it comes in a general revision that also restricts coverage.
  • Waiver or change: A waiver or change of a provision is valid only in writing by the insurer. Requesting an appraisal or an examination does not waive any of its rights.
  • Cancellation: The named insured may cancel at any time by returning the policy or writing to the insurer. The insurer may cancel only for these reasons, with written notice delivered or mailed to the mailing address in the declarations: for nonpayment, at any time with at least 10 days' notice; for any reason during the first 60 days of a policy that isn't a renewal, with 10 days' notice; after 60 days, or at any time on a renewal, only for a material misrepresentation of fact that would have stopped the insurer issuing the policy, or for a substantial change in the risk since issue, with 30 days' notice; and for a policy written for more than a year, for any reason at an anniversary, with 30 days' notice. Premium is refunded pro rata, with the notice or within a reasonable time after cancellation.
  • Nonrenewal: The insurer may decline to renew by delivering or mailing written notice at least 30 days before the expiration date. Proof of mailing is sufficient proof of notice. The mortgagee also gets at least 10 days' notice (HO-3 Property Conditions).
  • Assignment: An assignment of the policy is not valid without the insurer's written consent.
  • Subrogation: An insured may waive in writing, before a loss, all rights of recovery against any person. If not waived, the insurer may require an assignment of rights of recovery to the extent of its payment, and the insured must sign the papers and cooperate. Subrogation does not apply to Coverage F or to damage to property of others (Salvage and Subrogation).
  • Death: If the named insured or the resident spouse dies, the policy covers the legal representative for the deceased's premises and property covered at the time of death, a household member who was an insured at the time of death while a resident of the residence premises, and, for the deceased's property, the person with proper temporary custody of it until a legal representative is appointed.

Cancelling a Homeowners Policy An insurer issues a new one-year HO-3 for a premium of $1,460 (365-day term). Decide whether it may cancel, and with how much notice: (a) on day 30, after an inspection shows the roof is in poor condition; (b) on day 120, because the insured has made two small claims; (c) on day 200, after learning the insured concealed a prior fire on the application, a fact that would have stopped it issuing the policy; (d) on day 219, for nonpayment. In (c), what premium is refunded if the cancellation takes effect with 146 days remaining?

Answer

  • (a) Yes, 10 days: in the first 60 days of a new policy the insurer may cancel for any reason.
  • (b) No: after 60 days the only grounds are nonpayment, material misrepresentation and substantial change in risk. The insurer may nonrenew with 30 days' notice before expiration.
  • (c) Yes, 30 days: material misrepresentation is a ground after 60 days.
  • (d) Yes, 10 days: nonpayment is a ground at any time.

The refund is pro rata.

\begin{align*}
\text{Refund} &= 1{,}460 \times \frac{146}{365} \\
&= 584
\end{align*}

One Occurrence, Two Insureds The named insured and her 17-year-old son both supervised a backyard party at which a guest was badly burned by a fire pit. The guest sues both for $500,000. Coverage E is $300,000. The son, without telling the insurer, offered the guest $20,000 to settle. How does the policy respond?

Answer Both are insureds and severability applies the policy to each, but the burn is one occurrence, so the most Coverage E pays for both together is $300,000. Defense costs are additional. The son's offer was a voluntary assumption of obligation, which binds the insurer only at his own cost, and a failure to perform the duties after an occurrence removes coverage only if it prejudices the insurer. The guest cannot join the insurer in the suit against the insureds, and cannot sue the insurer under Coverage E until their obligation is fixed by final judgment or an agreement the insurer signs.

After the Named Insured Dies The named insured, a widower, dies in March. His adult daughter, who lived with him, stays in the house, and his estate's executor is appointed in May. In April a guest is injured on the premises, and in June a pipe bursts. Who is covered?

Answer The daughter was an insured, a resident relative, at the time of death, and she remains one while she lives at the residence premises, so the April claim is covered for her. Until the executor was appointed, the person with proper temporary custody of the property was an insured for the deceased's property. From May the executor, as legal representative, is insured for the deceased's premises and property covered at the time of death, so the June water damage is covered for the estate.

How it appears on the exam

  • DISC-IA: Section 6.3 covers the HO-3's coverage conditions. Questions test the cancellation grounds and notice periods, the pro rata refund, the per-occurrence limit with several insureds, the duties after an occurrence, who may sue the insurer and when, the difference between Section I and Section II concealment or fraud, subrogation and the death provision.

Exam traps

  • 30 days, not 20: The HO-3's notice is 30 days for cancellation after 60 days and for nonrenewal; the personal auto policy's is 20.
  • Fraud penalties differ by section: Under Section II only the insured who committed the fraud loses coverage. Under Section I no insured is covered.
  • Severability doesn't multiply the limit: Covering each insured separately never gives each one a full limit for the same occurrence.
  • No subrogation for medical payments: The insurer can't recover Coverage F or damage to property of others payments from a third party.
  • Prejudice is required: A late notice or a voluntary payment removes coverage only if it prejudices the insurer; a voluntary payment is otherwise just the insured's own cost.