Actuarial Notes

HO-3 Liability Coverages

Study guide: Exam DISC-IA

HO-3 Liability Coverages are the coverages of Section II of the ISO Homeowners 3 – Special Form (HO 00 03, 05 11 edition): Coverage E, personal liability, which pays damages an insured is legally liable for because of bodily injury or property damage caused by an occurrence and defends the insured; Coverage F, medical payments to others, which pays others' medical expenses without regard to fault; and four additional coverages paid on top of the limits — claim expenses, first aid, damage to property of others and loss assessment.

E = \min(D,\ L_E)

F = \sum_j \min(M_j,\ L_F)

\text{Property of others} = \min(\text{RC},\ 1{,}000)

  • Symbols: D is the damages, including prejudgment interest, that insureds are legally liable for from one occurrence and L_E is the Coverage E limit per occurrence. M_j is the necessary medical expenses of injured person j and L_F is the Coverage F limit for one person in one accident. RC is the replacement cost of others' property damaged by an insured, paid up to $1,000 per occurrence. Defense costs and the other claim expenses are paid in addition to L_E.
  • Coverage E insuring agreement: If a claim is made or suit brought against an insured for damages because of "bodily injury" or "property damage" caused by an "occurrence" to which the coverage applies, the insurer pays up to its limit for damages the insured is legally liable for, including prejudgment interest, and provides a defense by counsel of its choice even if the suit is groundless, false or fraudulent. It may investigate and settle as it decides, and its duty to settle or defend ends when the limit for the occurrence is exhausted by paying judgments or settlements.
  • Definitions it turns on: An "occurrence" is an accident, including continuous or repeated exposure to substantially the same harmful conditions, that results in bodily injury or property damage during the policy period. "Bodily injury" is bodily harm, sickness or disease, including required care, loss of services and resulting death. "Property damage" is physical injury to, destruction of, or loss of use of tangible property.
  • Who is an insured: The named insured and spouse; resident relatives; other residents under 21 in the care of one of them; a full-time student who lived in the household before leaving for school, if under 24 and a relative, or under 21 and in the household's care; and, under Section II only, anyone legally responsible for animals or watercraft that an insured owns and the policy covers (but not someone using them in a business or without the owner's consent), and, for a motor vehicle the policy covers, the insured's employees and anyone using it on an insured location with consent.
  • Insured location: The residence premises; other residences shown in the declarations or acquired during the period; premises used in connection with them; premises not owned by an insured where an insured is temporarily residing; vacant land other than farm land owned by or rented to an insured; land where a one- to four-family residence is being built for an insured; cemetery plots of an insured; and premises occasionally rented to an insured for non-business use.
  • Coverage F: The insurer pays the necessary medical expenses incurred or medically ascertained within three years of an accident causing bodily injury: reasonable charges for medical, surgical, x-ray, dental, ambulance, hospital, professional nursing, prosthetic devices and funeral services. It does not apply to the named insured or regular residents of the household, other than residence employees. For anyone else it applies to a person on the insured location with an insured's permission, and to a person off the insured location if the injury arises from a condition on the insured location or the ways immediately adjoining, or is caused by an insured's activities, by a residence employee working for an insured, or by an animal owned by or in the care of an insured. Payment is not an admission of liability by anyone.
  • Additional coverage A, claim expenses: The insurer pays expenses it incurs and costs taxed against an insured in suits it defends; premiums on bonds required in those suits, for bond amounts up to the Coverage E limit; reasonable expenses an insured incurs at its request, including lost earnings (not other income) of up to $250 a day, to help investigate or defend; and post-judgment interest on the entire judgment until it pays or tenders its share up to the limit.
  • Additional coverage B, first aid: Expenses an insured incurs for first aid to others for bodily injury the policy covers. First aid to an insured is not paid.
  • Additional coverage C, damage to property of others: Up to $1,000 per occurrence, at replacement cost, for property damage to others' property caused by an insured, whether or not the insured is legally liable. It does not pay for damage recoverable under Section I; caused intentionally by an insured aged 13 or older; to property owned by an insured, or by a tenant of an insured or a resident of the household; or arising from a business, from premises the insured owns, rents or controls other than an insured location, or from aircraft, hovercraft, watercraft or motor vehicles, except a recreational off-road vehicle the insured does not own and that need not be registered.
  • Additional coverage D, loss assessment: Up to $1,000 for the named insured's share of an assessment by a property owners' association, charged during the policy period, because of bodily injury or property damage not excluded under Section II, or because of liability for an act of an unpaid, elected director, officer or trustee. The $1,000 applies per accident or per act however many assessments there are, and governmental assessments are not covered.

A Guest's Fall An HO-3 has a Coverage E limit of $300,000 and a Coverage F limit of $5,000 per person (illustrative limits). A guest falls on a loose stair tread at the insured's home. The insured pays $150 for first aid at the scene, the insurer pays the guest's $4,000 of medical bills under Coverage F, and the guest later sues. The insurer spends $20,000 defending the suit and settles it for $90,000, and the insured loses two days' wages of $300 a day attending a deposition at the insurer's request. What does the insurer pay in total?

Answer Coverage F pays without a finding of fault, Coverage E pays the settlement, and the claim expenses and first aid are paid in addition to the limits.

\begin{align*}
F &= \min(4{,}000,\ 5{,}000) \\
&= 4{,}000 \\
E &= \min(90{,}000,\ 300{,}000) \\
&= 90{,}000 \\
\text{Claim expenses} &= 20{,}000 + 2(250) \\
&= 20{,}500 \\
\text{Total} &= 4{,}000 + 90{,}000 + 20{,}500 + 150 \\
&= 114{,}650
\end{align*}

The lost earnings are capped at $250 a day, and the defense costs do not use up any of the $300,000 Coverage E limit.

Damage to Property of Others Decide what the damage to property of others coverage pays: (a) the insured borrows a neighbor's laptop, which would cost $1,400 to replace, and drops it; (b) the insured's 10-year-old son throws a ball through a neighbor's window, $350 to replace, while playing; (c) the insured's 15-year-old daughter deliberately scratches a classmate's bicycle.

Answer

  • (a) $1,000. Coverage E excludes property in an insured's care, but this additional coverage pays at replacement cost up to $1,000, liable or not.
  • (b) $350. The coverage pays whether or not the child is legally liable, and the exclusion for intentional damage reaches only insureds aged 13 or older.
  • (c) Nothing. The damage was caused intentionally by an insured aged 13 or older.

Does Coverage F Apply? Decide whether Coverage F pays each person's medical bills: (a) a neighbor's child hurt on the insured's trampoline, which she was invited to use; (b) a jogger bitten by the insured's dog in a public park; (c) the insured's 12-year-old son, who lives at home, hurt falling from the same trampoline; (d) a stranger hurt when a softball the insured hit at a city park strikes her.

Answer

  • (a) Yes: a person on the insured location with an insured's permission.
  • (b) Yes: off the insured location, injury caused by an animal owned by an insured.
  • (c) No: Coverage F does not apply to regular residents of the household. His bills belong on the family's health insurance.
  • (d) Yes: off the insured location, injury caused by an insured's activities.

How it appears on the exam

  • DISC-IA: Section 6.1 asks candidates to determine the HO-3's liability coverages. Questions describe an injury or damage caused by a household member, an animal or a condition of the premises, and ask whether Coverage E, Coverage F or an additional coverage responds, who counts as an insured and how much is paid outside the limits.
  • Paired with Section 6.2: Most applied questions continue into the HO-3 Liability Exclusions.

Exam traps

  • Coverage F never pays the household: The named insured and regular residents are outside it, except residence employees.
  • Defense is in addition: Coverage E's limit is for damages; defense costs, bond premiums, the insured's lost earnings and post-judgment interest are claim expenses paid on top.
  • Property of others pays without liability: The $1,000 coverage needs no legal liability and pays replacement cost, but not intentional damage by an insured 13 or older.
  • Three years for medical bills: Coverage F pays expenses incurred or medically ascertained within three years of the accident.
  • Students away at school: A full-time student who lived at home before leaving is an insured if under 24 and a relative, or under 21 and in the household's care.