TECH Tornado Damage and Property Policy
Loss Payment
TALK
By Irene Morrill, CPCU, CIC, ARM, CRM, CRIS, LIA, CPIW
Vice President of Technical Affairs
June 2011
The recent tornado devastated the homes, rental properties and businesses of many insureds.
Let's take a quick look at how the personal lines policies could respond to a loss and a brief look
at commercial lines.
ISO Homeowners Policy
Building Losses
We know that the ISO HO policy pays building losses on a R/C basis if the limit is at least 80%
of the building replacement value immediately preceding the loss. Most of our carriers require
100% (or the value derived from the valuation rating system that they require you to use …
since no one really knows what 100% of value is!). As luck would have it, most of your
companies required you to re-evaluate the building values within the last 5-8 years. Hopefully,
with the yearly increase, the building is still insured adequately.
The MA amendatory endorsement (HO 01 20) to the ISO HO policy states loss payment as:
a. If, at the time of loss, the amount of insurance in this policy on the damaged building is
80% or more of the full replacement cost of the building immediately prior to the loss, we
will pay the cost of repair or replacement, after application of deductible and without
deduction for depreciation. We will pay replacement cost if the damaged building is
repaired or replaced by you on the "residence premises" or some other location within
the Commonwealth of Massachusetts within a reasonable time, but not more than two
years from the date of loss.
We will pay the least of the following amounts:
(1) The limit of liability under this policy that applies to the building;
(2) The replacement cost of that part of the building damaged with material of like kind
and quality and for like use; or
(3) The necessary amount actually spent to repair or replace the damaged building.
If the building is rebuilt at a new premises, the cost described in (2) above is limited
to the cost which would have been incurred if the building had been built at the
original premises.
Is the building limit of insurance sufficient to pay for the damage?
Massachusetts Association of Insurance Agents
91 Cedar Street—Milford, MA 01757
TECH HOTLINE 800-870-7091 · 800-972-9312 · 508-634-2900 · 508-634-2929 (Fax)
TECH TALK—PAGE 2 June 2011
Is the building limit of insurance sufficient to meet the 80% insurance requirement? If not, then
the policy does NOT respond on a R/C basis … but pays the greater of ACV or the dreaded
underinsurance penalty formula which some of us like to call co-insurance (but it is not).
b. If, at the time of loss, the amount of insurance in this policy on the damaged building is
less than 80% of the full replacement cost of the building immediately before the loss, we
will pay the greater of the following amounts, but not more than the limit of liability under
this policy that applies to the building:
(1) The actual cash value of that part of the building damaged; or
(2) That proportion of the cost to repair or replace, after application of any deductible and
without deduction for depreciation, that part of the building damaged, which the total
amount of insurance in this policy on the damaged building bears to 80% of the
replacement cost of the building.
I guess the ―good news‖ with the underinsurance penalty formula is that it really doesn’t apply in
total losses. When the loss amount is seriously over the limit of insurance … one gets the limit of
insurance. If the ACV of the loss should happen to be less than the limit, then ACV would be paid,
but is unlikely in most total loss situations.
Coverage B and Tornado Loss
This is certainly one of the situations where Coverage B will also be activated. Garages, fences,
lamp posts, swimming pools, retaining walls, and driveways are also probably demolished. This
could be a situation where the insured might find themselves lacking in limit. Whether one has
the HO-91 or HO-2000, the Coverage B limit is 10% of the Coverage A limit for one and two
family homes. According to ISO, a 3 or 4 family home only receives 5% of the Coverage A limit.
How often do all of these items get damaged by the same situation?
Hopefully, Coverage B is adequate or the HO 04 48 Other Structure on the Residence Premises
increase endorsement was utilized.
Debris removal
The Coverage A and Coverage B limits are essentially for building/structure losses. We hope the
loss is small so that the damage TO the property as well as the removal of the debris necessary
before repairs can be made is less than the Coverage A or B limit. With tornado damage the
limits might be necessary JUST for the damage TO the property. But, how can repairs be made
unless the debris is removed and the area is cleaned?
E. Additional Coverages
1. Debris Removal
a. We will pay your reasonable expense for the removal of:
(1) Debris of covered property if a Peril Insured Against that applies to the damaged
property causes the loss; or
(2) Ash, dust or particles from a volcanic eruption that has caused direct loss to a
building or property contained in a building.
This expense is included in the limit of liability that applies to the damaged property. If
the amount to be paid for the actual damage to the property plus the debris removal
expense is more than the limit of liability for the damaged property, an additional 5%
of that limit is available for such expense.
If the A, B or C limit is not sufficient … then there is an additional 5% of THAT limit available.
This still might not be sufficient. Various companies had added a ―debris removal load‖ to their
property valuations. Hopefully, this is the case with clients suffering large or total losses.
TECH TALK—PAGE 3 June 2011
Building codes and zoning ordinances
Massachusetts is an old state and has many older buildings. Actually, building codes are
constantly changing so a 5 year old house might not be up to current building code requirements.
Remember the loss settlement provision discusses payment for that part of the building DAMAGED
with like kind and quality materials. Replacement cost means: what you had is what you get, but
new. When codes change, we are generally ―grandfathered‖; but when damage occurs, we have
to rebuild to code and not ―as was.‖ Hopefully, rebuilding to code is CHEAPER which COULD
happen. Otherwise, the building costs due to code changes are excluded from the loss settlement
provision. The HO-2000 reinforces this with the following paragraph which begins the loss
settlement provision:
C. Loss Settlement
In this Condition C., the terms "cost to repair or replace" and "replacement cost" do not
include the increased costs incurred to comply with the enforcement of any ordinance or law,
except to the extent that coverage for these increased costs is provided in E.11. Ordinance Or
Law under Section I – Property Coverages. Covered property losses are settled as follows:
The HO-91 does not contain this paragraph but does have the language regarding ―damaged
property‖ and ―like kind and materials.‖
The HO-2000 includes an additional coverage for Ordinance or Law. The HO-91 adds it through
the state amendatory endorsement.
11. Ordinance Or Law
a. You may use up to 10% of the limit of liability that applies to Coverage A for the
increased costs you incur due to the enforcement of any ordinance or law which
requires or regulates:
(1) The construction, demolition, remodeling, renovation or repair of that part of a
covered building or other structure damaged by a Peril Insured Against;
(2) The demolition and reconstruction of the undamaged part of a covered building or
other structure, when that building or other structure must be totally demolished
because of damage by a Peril Insured Against to another part of that covered
building or other structure; or
(3) The remodeling, removal or replacement of the portion of the undamaged part of a
covered building or other structure necessary to complete the remodeling, repair or
replacement of that part of the covered building or other structure damaged by a
Peril Insured Against.
b. You may use all or part of this ordinance or law coverage to pay for the increased costs
you incur to remove debris resulting from the construction, demolition, remodeling,
renovation, repair or replacement of property as stated in a. above.
c. We do not cover:
(1) The loss in value to any covered building or other structure due to the requirements
of any ordinance or law; or
(2) The costs to comply with any ordinance or law which requires any "insured" or
others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize,
or in any way respond to, or assess the effects of, pollutants in or on any covered
building or other structure.
.....
This coverage is additional insurance.
Hopefully, the HO 04 77 Increased Ordinance or Law endorsement was added to provide a higher
% of Coverage A available. If not, then I hope that 10% of Coverage A is sufficient for the
claimant.
TECH TALK—PAGE 4 June 2011
What about those pesky trees and damaged lawn …
Well, property policies don’t cover ―landscaping‖ well. Wind is NOT a covered situation for trees,
shrubs or plants.
3. Trees, Shrubs And Other Plants
We cover trees, shrubs, plants or lawns, on the "residence premises", for loss caused by
the following Perils Insured Against:
a. Fire or Lightning;
b. Explosion;
c. Riot or Civil Commotion;
d. Aircraft;
e. Vehicles not owned or operated by a resident of the "residence premises";
f. Vandalism or Malicious Mischief; or
g. Theft.
So the landscaping costs caused by the tornado are NOT covered.
What about the REMOVAL of the landscaping debris?
Well … somewhat of a problem:
1. Debris Removal
a. We will pay your reasonable expense for the removal of:
(1) Debris of covered property if a Peril Insured Against that applies to the damaged
property causes the loss; or
So the cost to remove landscaping is NOT covered under the 5% debris removal discussion.
However, there is SOME LIMITED coverage … darn limited.
The HO-2000 states:
b. We will also pay your reasonable expense, up to $1,000, for the removal from the
"residence premises" of:
(1) Your tree(s) felled by the peril of Windstorm or Hail or Weight of Ice, Snow or
Sleet; or
(2) A neighbor's tree(s) felled by a Peril Insured Against under Coverage C; provided
the tree(s);
(3) Damage(s) a covered structure; or
(4) Does not damage a covered structure, but:
(a) Block(s) a driveway on the "residence premises" which prevent(s) a "motor
vehicle", that is registered for use on public roads or property, from entering
or leaving the "residence premises"; or
(b) Block(s) a ramp or other fixture designed to assist a handicapped person to
enter or leave the dwelling building.
The $1,000 limit is the most we will pay in any one loss regardless of the number of
fallen trees. No more than $500 of this limit will be paid for the removal of any one
tree.
This coverage is additional insurance.
A maximum of $500 per tree is available IF the tree either damaged a structure or blocks a
driveway or handicap access. The overall limit is $1000 but a sub-limit of $500 per tree applies.
The HO-91 only provides $500 and only if the tree damaged a covered structure.
TECH TALK—PAGE 5 June 2011
What if the tree is ON the house … is there only $500 to remove it from the premises? NO! The
general rule of thumb is that the cost to get the tree OFF the house or structure is a ―reasonable
repair‖ and part of the loss damage. However, the reasonable repair cost is to get it OFF the
house and generally ―drop it on the lawn.‖ Then the cost to get it off the premises would be
subject to the debris removal additional coverage.
Some companies have a higher limit available for tree removal. This is a company specific
option, not an ―ISO-option.‖
What if HO 05 02 Additional Limits of Liability Endorsement for Coverages A, B, C, D is
attached to the HO policy?
B. If there is a loss to the building insured under Coverage A that exceeds the Coverage A limit
of liability shown in the Declarations:
1. We will increase the Coverage A limit of liability to equal the current replacement cost of
the building;
2. We will increase, by the same percentage applied to Coverage A, the limits of liability for
Coverages B, C and D. However, we will do this only if the Coverage A limit of liability is
increased under Paragraph B.1. as a result of Coverage A loss;
3. We will adjust the policy premium from the time of loss for the remainder of the policy
term based on the increased limits of liability; and
4. For the purpose of settling that loss only, Section I Condition C. Loss Settlement
Paragraph 2. is deleted from the policy forms and Paragraph 2.a. is deleted from
Endorsement HO 01 20, Special Provisions – Massachusetts, and replaced by Paragraphs
2., 3. and 4. as follows
Good news … Coverage A increases to what is needed for replacement cost of
b. The necessary amount actually spent to repair or replace the damaged building; or
So … the more Coverage A one has … the more Coverage B, C and D … since all are percentages
of Coverage A and this endorsement increases the other coverages "correspondingly".
Also, one has more debris removal since there is an additional 5% of a higher limit. One also
has more ordinance or law since the additional coverage provides 10% of the larger Coverage A.
Unfortunately, one does NOT have unlimited debris removal or ordinance or law, so there could
still be a limit issue.
What if HO 05 08 Specified Additional Amount for Coverage A is added?
Not as beneficial as the Additional limits of Liability. This endorsement ONLY affects
Coverage A.
B. If there is a loss to the building insured under Coverage A that exceeds the Coverage A limit
of liability shown in the Declarations, for the purpose of settling that loss only:
1. We will provide an additional amount of insurance, up to the amount described in the
Schedule above; an
The endorsement provides a specified % increase - usually 1.25 or 1.50. Coverages B, C and D
do NOT increase. However, Ordinance or Law will now be 10% of the new Coverage A limit.
Debris removal for Coverage A will now be 5% of this new higher limit.
TECH TALK—PAGE 6 June 2011
Contents Losses
What about the contents? With ISO … contents is 50% of the building value. Contents is
adjusted on an ACV (depreciated) basis. The following is from the ISO HO-2000. The only
difference for the HO-91 is there is no mention of grave markers.
1. Property of the following types:
a. Personal property;
b. Awnings, carpeting, household appliances, outdoor antennas and outdoor equipment,
whether or not attached to buildings;
c. Structures that are not buildings; and
d. Grave markers, including mausoleums;
at actual cash value at the time of loss but not more than the amount required to repair
or replace.
Hopefully contents was endorsed for replacement cost coverage with the HO 04 90. Many
companies also increase the contents from 50% to 70% when this endorsement is used.
Will the limit of insurance be sufficient to pay the loss to the damaged contents as well as the
removal of the contents debris? Hopefully, if not, remember there is an additional 5% of the
Coverage C limit of insurance available and it IS an additional limit of insurance.
There is no penalty formula for underinsurance in contents loss payment, but the insured will
have to justify the claim. The loss conditions (applicable to all property types) require:
6. Prepare an inventory of damaged personal property; show in detail, the quantity,
description, actual cash value and amount of loss. Attach to the inventory when available
all pertinent bills and documents that substantiate the figures in the inventory;
7. We may reasonably require you to:
a. Exhibit the damaged property;
b. Provide us with records and documents pertinent to the loss and permit us to make
copies; and
c. Submit to an examination under oath, while not in the presence of another "insured",
and sign the same;
8. Submit to us, within 60 days after we request, your signed, sworn proof of loss which
sets forth, to the best of your knowledge and belief:
a. The time and cause of loss;
b. The interest of all "insureds" and all others in the property involved and all
encumbrances on the property;
c. Other insurance which may cover the loss;
d. Changes in title or occupancy of the property during the term of the policy;
e. Detail estimates for repair of the damage;
f. An inventory of damaged personal property described in 6. above;
g. Receipts for additional living expenses incurred and records supporting the fair rental
value loss; and
h. Evidence or affidavit supporting a claim under the Credit Card, Electronic Fund
Transfer Card or Access Device, Forgery And Counterfeit Money Coverage, stating the
amount and cause of loss.
If your clients are like me … they have NO clue of what they owned … or lost. There is a website
that might be helpful www.knowyourstuff.org . It makes people think of what they had and
assign values to it.
TECH TALK—PAGE 7 June 2011
Additional Living Expense
Under the ISO HO-2000 ALE is 30% of the Coverage A limit and 20% under the HO-91. In most
situations where loss is random this limit is sufficient. In areas of widespread destruction then
the limit sometimes is insufficient where there is a waitlist with contractors and construction.
Tenant Relocation
For those clients who had multiple family homes, dwelling properties or commercial policies
where tenant relocation has been added … it doesn’t matter as it does NOT apply.
The coverage endorsement states:
This endorsement is required by Massachusetts law.
This policy provides "relocation expense" benefits as follows:
1. Relocation Expense
When a "rented living quarters" in a building covered by this policy is made
uninhabitable as a result of a loss by fire, this policy covers "relocation expense"
incurred by the tenant or lawful occupant to relocate to other living quarters in the
shortest possible time.
Remember … replacement cost coverage "assumes" that the property is repaired or
replaced
The insured cannot expect an immediate check for the total replacement cost loss amount.
Companies generally "work with" the insured and the contractors. The insured CAN expect an
ACV payout and then as repairs are made … more is paid out.
e. You may disregard the replacement cost loss settlement provisions and make claim
under this policy for loss to buildings on an actual cash value basis. You may then make
claim for any additional liability according to the provisions of this Condition C. Loss
Settlement, provided you notify us of your intent to do so within 180 days after the date
of loss.
This also applies to the replacement cost endorsement for contents. Replacement cost is only
paid when the article is actually repaired or replaced. ACV can be paid allowing money for the
insured to make purchases and, as purchases are made, the "difference" between ACV and RC
will be paid.
Some mention that banks are holding repair cost checks hostage. Just adds insult to injury,
doesn't it!
ISO 2002 Dwelling Policy DP-3
The 1-4 family house
Loss settlement is similar to the HO policy. Loss is paid on a R/C basis IF the structure is insured
to a minimum of 80% of the building replacement value immediately prior to the loss. Hopefully,
the values are current and accurate.
Other Structures
Other Structures are provided 10% of the building limit and this is additional insurance for the
DP-2 and DP-3. It is NOT additional under the DP-1
1. Other Structures
You may use up to 10% of the Coverage A limit of liability for loss by a Peril Insured
Against to other structures described in Coverage B.
This coverage is additional insurance.
If more was necessary then it additional limit must be shown on the declarations page.
TECH TALK—PAGE 7 June 2011
Loss of Rental Income
5. Rental Value And Additional Living Expense
You may use up to 20% of the Coverage A limit of liability for loss of both fair rental value
as described in Coverage D and additional living expense as described in Coverage E.
This coverage is additional insurance.
Under the DP2002 there is 20% of the Coverage A limit available. If this is not sufficient to cover
lack of rental income after a large loss, then additional coverage should have been purchased on
the declarations page. Under the prior edition there was only 10% available.
Under the DP-2 and DP-3 forms this is ADDITIONAL insurance. Under the DP-1 it is not.
Debris Removal
2. Debris Removal
We will pay your reasonable expense for the removal of:
a. Debris of covered property if a Peril Insured Against causes the loss; or
b. Ash, dust or particles from a volcanic eruption that has caused direct loss to a building
or property contained in a building.
This expense is included in the limit of liability that applies to the damaged property.
Loss for damaged property and debris removal is subject to the limit of insurance applicable to
the property. There is NO additional limit available. The only way to get more is to buy more
property coverage.
Ordinance or Law
Like the ISO HO policy, there is an additional coverage of 10% Coverage A for ordinance or law
issues. The language is very similar to the HO language. Will it be sufficient?
Contents
There is none for free. If the insured wanted it, then there had better be a limit of insurance on
the declarations page. However, we DO want to remember that building and premises
maintenance and outdoor equipment IS covered under Coverage A Dwelling.
c. If not otherwise covered in this policy, building equipment and outdoor equipment
used for the service of and located on the Described Location.
Landscaping and the DP Policy
This is even more of a problem than under the HO policy … not that the HO policy provided much
coverage! Like the HO policy there is an additional coverage for trees, shrubs and plants. And,
unfortunately, like the HO policy these items have limited peril coverage and wind is NOT one of
them.
Unlike the HO policy there is NO debris removal limit for removal of trees from the premises.
Commercial Policies ...
Well, I've run out of space … but
CP 00 10 Building and Business Personal Property Form
1) Coinsurance is an issue … is the limit of insurance adequate to meet the coinsurance %
requirement? It is generally 80%, but % is shown on declarations page.
TECH TALK—PAGE 7 June 2011
2) Review the list of "property not covered" — there are many aspects of "real property" that
are excluded (fences and paved surfaces among others).
3) Debris removal is not as broad as in personal lines. The insured doesn't get "the rest of
the policy" limit after the damages are paid. Debris removal is paid as 25% of the "loss
payment + deductible" — ASSUMING there is limit left. When the limit is not sufficient to
pay the loss and debris removal, a whopping additional $10,000 is available.
4) Ordinance or law is really limited. ONLY increased cost of construction is paid, and that is
limited to $10,000.
5) Signs are limited in $ value.
6) Trees and landscaping are NOT covered for damage by wind.
7) There is NO loss of business income or extra expense … unless a business income coverage
form is attached.
ISO BOP
1) Insurance to value language (similar to HO) for BOTH building and contents. Limits shown
must be at least 80% of the replacement cost immediately before the loss or the insurance
to value provision applies.
2) Shorter list of property not covered than CP … but you should review.
3) Debris removal is the SAME as the CP form … so beware.
4) Ordinance or law coverage (or lack thereof) is the same as the CP form … depending on
the BOP edition, one will only get $5,000 or $10,000 extra.
5) Business income and extra expense is included at "actual loss sustained" for 12 months.
****
Good luck. If I can be of service to you, please call me, Irene Morrill, Vice President of Technical
Affairs at 800.870.7091 or email me at imorrill@massagent.com.
This article has been developed expressly for the members of MAIA. Reprint by other than
members without the express permission of the author is not permitted.