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					     Homeowner’s Insurance:
18   The Real Estate Attorney’s
     Role



     EDWARD ESHOO, JR.
     MICHAEL CHILDRESS
     CHRISTINA M. PHILLIPS
     Childress Duffy, Ltd.
     Chicago
  I. [18.1] Introduction

 II. [18.2] Homeowner Property and Liability Loss Exposures

     A.   [18.3]    Rebuilding the Dwelling if It Is Totally Destroyed
     B.   [18.4]    Replacing Personal Property if It Is Totally Destroyed
     C.   [18.5]    Ownership of Valuable Items
     D.   [18.6]    Vacant or Unoccupied Dwelling
     E.   [18.7]    Occupying the Dwelling as a Primary or Secondary Residence
     F.   [18.8]    Repair, Construction, Renovation, or Remodeling of the Dwelling
     G.   [18.9]    Flood Damage
     H.   [18.10]    Sewer and Drain Backup and Sump Pump Overflow Damage
     I.   [18.11]    Conducting Business Activities Out of the Dwelling
     J.   [18.12]    Condominium Insurance
     K.   [18.13]    Ownership of Motorized Vehicles, Watercraft, and Aircraft
     L.   [18.14]    Personal Liability Umbrella Protection

III. [18.15] Client Questionnaire

 IV. [18.16] Client Letter

 V. [18.17] Insurance Producer Letter

 VI. [18.18] Homeowner Property and Liability Loss

VII. [18.19] Conclusion

VIII. Appendix

     A.   [18.20]    Sample Cover Letter
     B.   [18.21]    Sample Client Questionnaire
     C.   [18.22]    Sample Client Letter
     D.   [18.23]    Sample Insurance Producer Letter
I. [18.1] INTRODUCTION

    Most real estate attorneys representing purchasers of homes know little about homeowner’s
insurance. However, real estate attorneys can and should play an important and active role in their
clients’ purchase of homeowner’s insurance. Representation needs to include more than just
advising clients that homeowner’s insurance is required by mortgage lenders in order to obtain a
loan to finance the purchase. This can be accomplished simply by understanding the two personal
loss exposures typically faced by homeowners — property loss and liability loss.

    A personal loss exposure exists when a personal asset is subject to a risk that may adversely
affect an individual’s financial condition in the event of a loss. A property loss exposure is the
risk that a property loss could happen. A property loss occurs when real or personal property is
damaged, destroyed, or lost because of the action of a peril or cause (e.g., fire, lightning, hail,
windstorm, etc.). A liability loss is the risk that a liability loss could happen. A liability loss
occurs when an individual’s assets are diminished as a result of a claim for money damages
because of injury or harm to another. Homeowner’s insurance is designed to transfer the financial
consequences of property and liability losses from the individual to the insurer. See generally
Joseph J. Launie et al., PERSONAL INSURANCE (2d ed. 1991).

    Three tools provided at the end of this chapter will allow real estate attorneys to assist
homeowners in identifying and understanding their personal loss exposures, analyzing those
exposures, and deciding how the risk of personal loss should be managed. The first tool is a client
questionnaire that will allow real estate attorneys to identify areas of potential personal loss
exposure their clients may face. See §18.21 below. The second tool is a client letter that addresses
these areas and advises of ways in which insurance can protect against the risks to which the
client is personally exposed. See §18.22 below. The third tool is an insurance producer letter in
which the client’s wants and needs regarding homeowner’s insurance, in order to protect against
the risks of personal loss, are specified in writing to an insurance producer. See §18.23 below.

II. [18.2] HOMEOWNER PROPERTY AND LIABILITY LOSS EXPOSURES

    Real estate attorneys representing purchasers of homes must have an understanding of their
clients’ property and liability loss exposures before they can properly assist them in identifying
and managing such exposures. The primary loss exposures are discussed in §§18.3 – 18.14 below.

A. [18.3] Rebuilding the Dwelling if It Is Totally Destroyed

     A client needs enough insurance to rebuild his or her dwelling at current construction costs in
the event that it is partially or totally destroyed. To accomplish this goal, it is imperative that the
client discuss with the insurance producer the availability of guaranteed replacement cost and
extended replacement cost coverage. Guaranteed replacement cost coverage pays whatever it
costs to repair, replace, or rebuild, even if it exceeds the policy limit of coverage. Extended
replacement cost coverage generally pays 20 to 50 percent over the policy limit to repair, replace,
or rebuild. Although it may be more expensive, guaranteed or extended replacement cost
coverage is the best financial protection for clients, particularly if there is a widespread disaster
that increases the cost of building materials and labor.
     Even if most insurers offer guaranteed replacement cost/extended replacement cost coverage,
this does not cover the increased costs a client may incur if required to repair, replace, or rebuild a
home after a loss and comply with current building, zoning, or land use codes, laws, and
ordinances rather than codes, laws, and ordinances that were in effect when the home was
originally built. See, e.g., Cohen Furniture Co. v. St. Paul Insurance Company of Illinois, 214
Ill.App.3d 408, 573 N.E.2d 851, 158 Ill. Dec. 38 (3d Dist. 1991). Many insurers, however, offer
“code upgrade” or “ordinance or law” coverage that pays a specific amount (typically ten percent
of the dwelling coverage limit) toward the costs necessary to comply with updated laws
regulating the construction, repair, or demolition of a structure. This additional coverage is
extremely important if a client owns an older or historic home, since building, zoning, or land use
codes, laws, and ordinances likely have changed significantly since the home was built.

     Absent guaranteed replacement cost or extended replacement cost coverage, a client will be
reimbursed on a replacement cost basis only up to the policy limit of coverage. Many
homeowners make the mistake of simply purchasing enough home insurance protection to satisfy
the mortgage lender. Others confuse the market value of a home with what it costs to repair,
replace, or rebuild it. Replacement cost, however, is not the market value of a home. It is not the
value of the land, the cost of which usually runs about 25 percent of the average home price, nor
is it the outstanding amount of any mortgage loan. Replacement cost is just that — the cost to
repair, replace, or rebuild damaged or destroyed property with like construction and use.

    An accurate estimate of the cost of rebuilding a client’s home is necessary in order to avoid
having the home underinsured in the event of a loss. In that regard, the amount of insurance at the
time of a loss must be at least 80 percent or more of the full replacement cost of the dwelling
before many insurers will pay the costs to repair, replace, or rebuild. If there is less than 80-
percent insurance to replacement value, then the insurer will pay the greater of (1) the actual cash
value of that part of the structure damaged, or (2) that proportion of the cost to repair or replace
the damage (after deductible and without depreciation) that the amount of insurance on the
dwelling bears to 80 percent of its replacement value, but never for more than the applicable limit
of liability. Additionally, very few insurers pay full replacement cost unless and until the
damaged or destroyed dwelling is actually repaired, replaced, or rebuilt; their liability in the event
of a loss is limited to actual cash value.

     Illinois courts apply a “replacement cost less depreciation” test in determining the actual cash
value of damaged property. See Smith v. Allemannia Fire Insurance Co., 219 Ill.App. 506 (3d
Dist. 1920); C.L. Maddox, Inc. v. Royal Insurance Company of America, 208 Ill.App.3d 1042,
567 N.E.2d 749, 153 Ill.Dec. 791(5th Dist. 1991); General Casualty Co. v. Tracer Industries,
Inc., 285 Ill.App.3d 418, 674 N.E.2d 473, 220 Ill.Dec. 930 (4th Dist. 1996); Carey v. American
Family Brokerage, Inc., 391 Ill. App. 3d 273, 909 N.E.2d 255, 330 Ill. Dec. 542 (1st Dist. 2009).
Under this test, depreciation is deducted from the cost to repair or to replace lost or damaged
property to determine its actual cash value. Depreciation in an insurance context, different than
depreciation in an accounting context, means the decrease in the actual value of property based on
its physical condition, age, wear and tear, deterioration, use, obsolescence, and other factors that
affect the remaining usefulness of the property.

    The 80-percent insurance to replacement value requirement is similar to a coinsurance clause
found in most commercial property insurance policies. For example, if it costs $100,000 to
replace a home and it is insured for $80,000 (80 percent of its replacement value), and a fire
causes $25,000 of damage, then the insurer will pay the full $25,000. However if a $100,000
home is insured for $60,000 (less than 80 percent of its replacement value), and if a $25,000 loss
is suffered, the insurer would pay for only part of the loss, or $18,750.

    Statistics have shown that over 50 percent of all homes nationwide are undervalued for
insurance purposes by an average of 25 percent. Unfortunately, most homeowners learn the hard
way. They do not know whether they have enough insurance to rebuild until after they experience
a devastating loss, and then it is too late to purchase the right amount of coverage. It should go
without saying that clients need to consult with their insurance producer as to the appropriate
amount of insurance coverage for the home. In selecting the appropriate amount of insurance
coverage, important factors homeowners should consider and discuss with their insurance
producer include the following:

    1. local construction costs;

    2. the square footage of the structure;

    3. the type of exterior wall construction (frame, masonry, or veneer);

    4. the style of the house;

    5. the number of bathrooms and other rooms;

    6. the type of roof and materials used;

    7. other structures on the premises (e.g., garage, shed);

    8. fireplaces, trim, molding, and other special or unique features (e.g., arched windows,
       stained glass above doors, ornate plaster work);

    9. whether the house (or part of it) was custom built; and

  10. whether improvements have added value to the home.

    Traditionally, insurers have estimated replacement cost by multiplying the square footage of
the home by local construction costs per square foot. The square footage method, however, does
not always take into account cost differences in building materials, such as plaster versus drywall,
or amenities like hardwood floors. Nor is the square footage method always accurate, especially
for larger, custom-built homes with high end interior finishes. Thus, clients should consider
obtaining an estimated replacement cost from a reputable building contractor. Some insurers offer
a complimentary professional appraisal service to estimate replacement cost.

     Clients should update their coverage amount each year to keep up with current market
conditions. Rising construction costs and property values have increased the cost of repairing,
replacing, or rebuilding a home. Because it is impossible to predict what it will cost to rebuild a
home in the future, clients should ask their insurance producer whether the policy he or she is
considering for them provides an annual adjustment (typically two to five percent) to compensate
for increases in construction costs in their area (including materials and labor costs), or whether
they must purchase an “inflation guard,” “adjusted building cost,” or “property insurance
adjustment” rider or endorsement separately. Even if a policy includes an annual adjustment
increase, clients should still be communicating with their insurance producer to ensure that they
have adequate insurance. This is particularly true if the client has made renovations or performed
remodeling work to the property.

    Most homeowners’ insurance policies cover “other structures” on the residence premises that
are set apart from the dwelling by clear space, such as a detached private garage, a storage unit, a
shed, or a gazebo. However, the insurer’s limit of liability for this coverage is usually not more
than ten percent of the dwelling limit. Thus, payment in the event of loss or damage to an “other
structure” may be affected if the dwelling is underinsured.

     Finally, clients may not be eligible for standard homeowner’s insurance coverage if they are
building a new home. Instead, they may need builders risk insurance, a form of property
insurance that covers property owners and builders for projects under construction, renovation, or
repair. A builders risk policy does not cover losses occurring before construction begins or after
completion of construction. Construction must be in progress for coverage to exist. See Clorox
Co. v. KPK Corp., 1984 U.S.Dist. LEXIS 22417 (N.D.Ill. Oct. 26, 1984). A builders risk policy
also is written for the completed value of the insured building, which should include the value of
all permanent fixtures and decorations that will become part of the building. Like the 80-percent
insurance to replacement value described above, the builders risk form of property insurance
penalizes the insured in the event of a loss if the building is not insured to 100 percent of its
completed value. The builders risk form calls for a reduction in loss payment by the percentage
the insured is underinsured. If, for example, the building has a completed value of $300,000, but
it is insured for only $150,000, then any loss payment will be reduced by 50 percent — thus, the
need for adequate insurance.

B. [18.4] Replacing Personal Property if It Is Totally Destroyed

    Most homeowners’ policies cover physical loss or damage to the insured dwelling. Perils at
this level of coverage are not named; only restrictions on coverage are specified by means of
exclusions, limitations, conditions, and exceptions applying to certain categories of property and
certain causes of loss. Any loss to covered property not reached by one of these restrictions is
covered. This level of coverage, whether by homeowner’s or other property insurance, is now
known as “open perils” coverage. Traditionally, this level of coverage has been referred to in the
insurance industry as “all risks” because coverage agreements formerly insured against “all risks
of physical loss” (other than those subject to an exclusion). Most property insurance policies have
deleted the word “all” from this coverage agreement to avoid creating unreasonable expectations
among insureds that the coverage literally extends to all risks of loss or damage, regardless of
policy exclusions, limitations, and conditions.

    Most homeowners’ policies provide personal property coverage on a specified or enumerated
peril basis. Unlike dwelling coverage in which the scope of covered perils is defined by what is
excluded, the scope of covered perils for personal property is defined by what is listed as a
covered cause of loss. Homeowners’ policies commonly cover physical loss or damage to
personal property caused by

    1. fire or lightning;
    2. windstorm or hail;

    3. explosion;

    4. weight of ice, snow, or sleet that causes damage to property contained in a dwelling;

    5. rain, snow, or sleet that enters the interior of the dwelling through an opening in a roof or
       wall caused by the direct force of wind or hail;

    6. sudden and accidental discharge or overflow of water or steam from within a plumbing or
       heating system, an air conditioning or automatic fire protective sprinkler system, or from
       within a household appliance (but not loss caused by or resulting from continuous or
       repeated seepage or leakage of water that occurs over a period of time);

    7. sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water
       heating system, an air conditioning system, an automatic fire protective sprinkler system,
       or an appliance for heating water;

    8. freezing of a plumbing or heating system, an air conditioning or automatic fire protective
       sprinkler system, or a household appliance;

    9. theft; and

  10. vandalism or malicious mischief.

Specified peril coverage is also subject to exclusions.

    Personal property coverage is typically provided on an actual cash value basis. However,
most insurers offer a replacement cost option for personal property for an additional premium.
The limit of liability for personal property coverage is usually based on 50 to 75 percent of the
dwelling coverage amount. Thus, if the dwelling is underinsured, then the client’s personal
property also will be underinsured.

     Certain categories of personal property usually are subject to special limits of liability. Those
limits do not increase the overall personal property coverage limit but represent sub-limits within
the overall limit. The special limit for each category is the total limit for each loss for all property
in that category. The following are examples of special limits of liability:

       $ 200            On money, bank notes, gold, silver, platinum, coins, and medals
       $1,500           On securities, accounts, deeds, passports, and stamps
                        For theft of jewelry, watches, precious and semiprecious stones, gems, and
       $1,500
                        furs
       $2,500           For the theft of silver and gold flatware and service pieces
       $2,000           For theft of firearms and accessories
       $2,500           For computer equipment and software
       $5,000           For theft of rugs, tapestries, and wall hangings
       $2,500           For theft of tools
    Other categories of personal property generally are not covered under homeowners’ policies.
They include animals, birds, or fish; motor vehicles; aircraft; property of roomers, boarders, and
other tenants not related to an insured person; property rented or held for rental to others off the
residence premises; and satellite dish antennae.

     It is the rare homeowner who knows what is inside his or her home, from tools, furniture,
televisions, stereo equipment, and kitchenware to clothes and appliances. Thus, the practitioner
should recommend that clients inventory their household contents and personal belongings and
determine what it would cost to replace them. Many insurance company Web sites contain
inventory forms that can be downloaded. An inventory should include a description of each item
(make, model, and serial number), where and when it was purchased, what the cost is to replace
it, and the condition of the property at the time of the loss Sales receipts, purchase contracts,
appraisals, and warranty booklets should be attached to the inventory list.

    Not only will an inventory help a client purchase the right amount of insurance, a current
home inventory may assist in getting a future insurance claim settled faster and easier.
Videotaping and/or photographing personal property are excellent ways for clients to document
their possessions. Indeed, insurers and insurance producers routinely encourage homeowners to
prepare such an inventory. Regardless of how it is prepared (written list, photos, or video), the
inventory should be kept in a safe place, such as a safe deposit box or a fire-resistant safe.

C. [18.5] Ownership of Valuable Items

    Certain personal property has its own coverage limit under most homeowners’ insurance
policies. The client questionnaire (see §18.21 below) asks the client to identify and consider the
valuation of items such as fine art, antiques, special computers, furs, jewelry, trading cards,
memorabilia, sports equipment, rugs, hand and power tools, firearms, coins, musical instruments,
stamps, cameras, statuary, wine collections, and other collectibles.

    If a client owns personal property with values in excess of the limit afforded under the
standard homeowner’s policy, then the client should consult with the insurance producer about
broadening the coverage and increasing the limits for these valuable items. “Optional” coverage
that enables an insured to purchase additional protection for certain categories of valuable
personal property (e.g., jewelry, watches, furs, cameras, musical instruments, etc.) is normally
available. While “optional” coverage increases the overall limit of personal property protection,
usually from $1,000 to $25,000, it usually provides a per-item coverage limit of $2,000 to $5,000.

    If a client owns specific personal property items the individual value of which exceeds the
per-item limit or overall limit established under optional coverage, then it is likely that the client
will want to “schedule” such personal property. Scheduled personal property coverage or a
“personal articles floater” is available through most insurers for an increased premium. Covered
losses under scheduled personal property coverage are ordinarily settled on the basis of the least
expensive of the following options: actual cash value; cost to repair or to restore the property to
its pre-loss condition; cost to replace the article with a substantially identical item; or the
applicable insurance limit, which is determined by a current appraisal or sales receipt.

D. [18.6] Vacant or Unoccupied Dwelling
    Most people do not realize that homeowners’ insurance policies often exclude damage caused
by vandalism or malicious mischief (such exclusion may also include ensuing fire damage caused
by an intentional and wrongful act committed in the course of the vandalism or malicious
mischief) as well as excluding damage caused by frozen pipes if the insured dwelling was vacant
and/or unoccupied for 30, 60, or 90 consecutive days immediately preceding the loss. A dwelling
is “vacant” if it is generally empty or deprived of its contents. A dwelling is “unoccupied” when
no one is living in or has actual use or possession of it. See, e.g., Lundquist v. Allstate Insurance
Co., 314 Ill.App.3d 240, 732 N.E.2d 627, 247 Ill.Dec. 572 (2d Dist. 2000); Thompson v. Green
Garden Mutual Insurance Co., 261 Ill.App.3d 286, 633 N.E.2d 1327, 199 Ill.Dec. 336 (3d Dist.
1994).

    A real estate attorney should advise clients that certain losses might not be covered if a home
is vacant or unoccupied for 30 consecutive days or more immediately preceding the loss. If the
client is not moving into the home within 30 days of purchasing it or if the client is going to be
away from the home for more than 30 consecutive days (e.g., an extended vacation), then the
attorney should urge the client to notify the insurance producer. The insurance producer may
recommend that the client obtain vacant property insurance, or may even advise that such
insurance is required in order for the dwelling to be properly insured while away from it. Vacant
property insurance also may be needed when the property is undergoing remodeling or renovation
and is unsuitable for occupancy.

E. [18.7] Occupying the Dwelling as a Primary or Secondary Residence

    Homeowners’ policies normally cover a dwelling on the residence premises shown in the
policy declarations. “Residence premises” is defined in many policies as the dwelling in which
the named insured resides and for which the principal use is as a private residence. A person may
reside in a given location without continuous physical presence and may have more than one
residence at a time. Lundquist v. Allstate Insurance Co., 314 Ill.App.3d 240, 732 N.E.2d 627,
633, 247 Ill.Dec. 572 (2d Dist. 2000). Illinois courts construing the term “resident” have
concluded that its meaning varies with the context and subject matter of the case, but that the term
is “generally understood to include intent and permanency of abode in addition to mere physical
presence.” Webb v. Morgan, 176 Ill.App.3d 378, 531 N.E.2d 36, 41, 125 Ill.Dec. 857 (5th Dist.
1988). The controlling factor is the intent of the party whose residence is in question, and intent is
construed from that person’s actions. FBS Mortgage Corp. v. State Farm Fire and Casualty
Company of Bloomington, Illinois, 833 F.Supp. 688 (N.D.Ill. 1993).

    Many insurers are not willing to cover a secondary residence (guest cottage, vacation, or
seasonal dwelling) on a stand-alone basis, viewing such properties as a higher risk of loss due to
their extended periods of vacancy or occupancy. However, most insurers will provide coverage
for a secondary residence as an extension of coverage for a primary residence, though coverage
may differ for the secondary residence. Additional coverage also may be necessary to protect
outbuildings such as a boathouse, guest cottage, or other structures such as a dock. It is important
to encourage clients to discuss all the facts surrounding their property or properties with their
insurance producer. A client should not assume the insurance producer knows particular facts
about the occupancy of a premises simply because the insurance producer insures another
property. The practitioner should encourage clients to have an open and detailed discussion with
their insurance producer.
F. [18.8] Repair, Construction, Renovation, or Remodeling of the Dwelling

    It is important that clients update their coverage when they renovate, remodel, or otherwise
improve a home. In fact, homeowners are usually required to maintain insurance at full
replacement cost and to report to their insurer within 90 days of the start of any additions,
renovations, or other physical changes that increase the dwelling’s value by five percent or more
as conditions precedent to guaranteed replacement cost and extended replacement cost coverage.

    Homeowners’ policies customarily exclude loss or damage caused by faulty, inadequate, or
defective repair, construction, renovation, or remodeling (defective construction exclusion). The
reason for the exclusion is that it is not the purpose of homeowner’s coverage to respond to
damage that should rightly be covered by the liability insurance covering those performing the
work. However, in many instances, defective construction exclusions contain an express
exception that has the effect of reinstating coverage if loss or damage to covered property, not
excluded or excepted, ensues from defective construction (ensuing loss exception).

     The authors of this chapter submit that an ensuing loss is covered even if defective
construction is a “but for” cause of the loss. In that regard, the intent of the exclusion and
exception is to exclude only that portion of the loss attributable to the defective construction. The
exclusion and exception, read together, operate to eliminate the conduct or defect from
consideration in analyzing the cause of ensuing damage unless, of course, there is no ensuing
damage and the loss consists solely of the conduct or defect itself, in which case coverage does
not apply. Put another way, only the actual physical peril causing the ensuing damage is subject
to the coverage analysis.

EXAMPLE: If a claim was being made to replace a home’s exterior insulation and finish system
(EIFS) wall cladding that was defectively installed, there would be no coverage because there
would be no ensuing damage and the claim would consist solely of defective workmanship.
However, what if a claim was being made to repair ensuing water damage and mold damage in
the interior of the insured dwelling? The defectively installed EIFS is the cause of the loss.
Because this portion of the loss is attributable to conduct or defect, it is eliminated from
consideration in analyzing causation. Thus, to determine if coverage applies, the actual physical
peril causing the ensuing damage, water, must be analyzed.

    In the above example, the source of the interior water damage and mold damage is rain,
melting ice, and melting snow. While homeowners’ policies regularly exclude loss caused by
“water damage,” this exclusion does not exclude all loss caused by water, whatever its nature or
source. Rather, it excludes only loss caused by water from the sources enumerated in the “water
damage” exclusion: flood; surface water; waves; tidal water; overflow of a body of water; water
that backs up or overflows from a sewer, drain, or sump; or water below the surface of the
ground. Rain, melting ice, and melting snow generally are not enumerated water sources excluded
from coverage. Accordingly, the “water damage” exclusion does not defeat coverage for the
interior water damage.

   Homeowners’ policies also regularly exclude loss caused by mold, fungi, or wet or dry rot.
Thus, if mold is the cause of a loss, then the exclusion applies. But if mold is the direct result or
consequence of a loss, and not the cause of it, then coverage must be analyzed for the peril that
caused the mold. If the peril causing the mold is covered, then there is coverage for the mold
damage that was the result of the covered peril. See Fisher v. Certain Interested Underwriters at
Lloyds Subscribing to Contract 242/99, 930 S.2d 756 (2006); Simonetti v. Selective Insurance
Co., 372 N.J.Super. 421, 859 A.2d 694 (2004); Liristis v. American Family Mutual Insurance
Co., 204 Ariz. 140, 61 P.3d 22 (2002). See also Reynolds v. Travelers Indemnity Company of
America, 233 S.W.3d 197 (Ky.App. 2007); DeLaurentis v. United Services Automobile Ass’n,
162 S.W.3d 714 (Tex.App. 2005); Home Insurance Co. v. McClain, 2000 Tex.App. LEXIS 969
(Feb. 10, 2000). Stated differently, if the mold results from a covered cause of loss, such as
covered water damage, then the resulting mold infestation will trigger coverage. As explained
above, if rain, melting ice, and melting snow are not excluded sources of water, then the “water
damage” exclusion does not apply. Because it is the result of water that is not excluded or
excepted, the mold damage in the interior of the insured dwelling in the example discussed above
is covered.

    Cases in which courts have interpreted the ensuing loss exception in this manner include:
Phillips v. United Services Automobile Ass’n, 146 S.W.3d 629 (Tenn.App. 2004); Arnold v.
Cincinnati Insurance Co., 276 Wis.2d 762, 688 N.W.2d 708 (Wis.App. 2004); Eckstein v.
Cincinnati Insurance Co., 469 F.Supp.2d 444 (W.D.Ky. 2007); Dawson Farms, L.L.C. v. Millers
Mutual Fire Insurance Co., 794 So.2d 949 (2d Cir. 2001); Buscher v. Economy Premier
Assurance Co., 2006 U.S.Dist. LEXIS 19181 (D.Minn. April 12, 2006); Smith v. Westfield
Insurance Co., 2007 U.S.Dist. LEXIS 87348 (E.D.Pa. Nov. 27, 2007); Tento International, Inc. v.
State Farm Fire & Casualty Co., 222 F.3d 660 (9th Cir. 2000); and Blaine Construction Corp. v.
Insurance Company of North America, 171 F.3d 343 (6th Cir. 1999).

     As a result of the overwhelming number of mold-related claims, many insurers have rewritten
their homeowners’ policies to clearly express their intent to exclude property and liability
coverage arising out of, aggravated by, or resulting from mold. See DeVore v. American Family
Mut. Ins. Co., 383 Ill. App. 3d 266 (2d Dist. 2008). Other insurers have introduced endorsements
that provide limited property and liability coverage for loss due to mold-related damage.

     Homeowners’ policies frequently provide additional coverage in the form of physical loss or
damage to covered property caused by “collapse” of a dwelling or any part thereof if (1) the
collapse is caused by the use of defective materials or methods in construction, remodeling, or
renovation; and (2) the collapse occurs during the course of the construction, remodeling, or
renovation. In the majority of jurisdictions, including Illinois, absent it being defined otherwise, a
“collapse” occurs when there is a substantial impairment of the structural integrity of the insured
dwelling. See, e.g., Indiana Insurance Co. v. Liaskos, 297 Ill.App.3d 569, 697 N.E.2d 398, 231
Ill.Dec. 844 (1st Dist. 1998).
G. [18.9] Flood Damage

    Virtually all homeowners’ policies exclude loss or damage caused by flood, surface water,
waves, tidal water, or overflow of a body of water. See, e.g., Whitt v. State Farm Fire & Casualty
Co., 315 Ill.App.3d 658, 734 N.E.2d 911, 248 Ill.Dec. 620 (2d Dist. 2000); Wallis v. Country
Mutual Insurance Co., 309 Ill.App.3d 566, 723 N.E.2d 376, 243 Ill.Dec. 344 (2d Dist. 2000).
However, property that is located in a community that participates in the National Flood
Insurance Program (NFIP) can be insured with an NFIP flood insurance policy. A “flood” or
“flooding” is broadly defined by the NFIP as a general and temporary condition of partial or
complete inundation of two or more acres of normally dry land area or of two or more properties
from overflow of inland or tidal waters, unusual and rapid accumulation or runoff of surface
waters from any source, mudflow; or collapse or subsidence of land along the shore of a lake or
similar body of water as a result of erosion or undermining caused by waves or currents of water
exceeding anticipated cyclical levels that result in a flood. 44 C.F.R. §59.1.

    Many homeowners’ property insurers participate in the NFIP, which is administered by the
Federal Emergency Management Agency (FEMA). The NFIP, created by Congress in 1968 in
response to the rising cost of taxpayer-funded relief for flood victims and the increasing amount
of damage caused by floods, offers a dwelling flood insurance policy that insures one-to-four-
family residential structures up to $250,000. The NFIP also offers a preferred risk policy, a lower-
cost option for residential properties in low to moderate risk areas. For as little as $112 a year, a
homeowner can purchase a minimum of $20,000 dwelling coverage and $8,000 personal property
coverage. Regardless of the type of policy chosen, there is a standard 30-day waiting period from
the date of purchase before a new flood insurance policy goes into effect.

    Clients do not have to live near water to be at risk of flooding. It has been reported that 25
percent of all flood insurance claims come from low to moderate risk communities. A real estate
attorney should therefore advise clients that flood insurance is the best protection against the
devastating financial losses that floods cause, especially if they live in an area prone to flooding.
There are questions clients should pose to the insurance producer, the answers to which will help
them make an informed decision as to whether to purchase flood insurance:

    1. Does my community participate in the in the NFIP?

    2. Can you confirm which flood zone I live in?

    3. What is covered in case of flood damage?

    4. How much will flood insurance cost me?

H. [18.10] Sewer and Drain Backup and Sump Pump Overflow Damage

     Sewer, drain, and septic system backups and sump pump overflows cause millions of dollars
in residential property damage each year. Heavy rains as well as sewer pipe blockage can trigger
a backup. A storm sewer or a sanitary sewer that backs up usually comes into a home through
floor drains, sewer cleanouts, and washtubs or toilets in the basement. However, the damage can
happen anywhere in a home. Sump pump failures normally occur from power outages during a
bad storm.

     Although sewer and drain backups and sump pump overflows are common occurrences,
homeowners’ policies routinely exclude loss or damage caused by or resulting from (1) water that
backs up through sewers or drains; (2) water that overflows or is discharged from a sump, sump
pump, or other related equipment; and (3) water below the surface of the ground, including water
that exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation,
swimming pool, or other structure. See Brown v. Farmers Automobile Insurance Ass’n, 106
Ill.App.2d 360, 245 N.E.2d 260 (2d Dist. 1969). Most homeowners’ property insurers, however,
offer an endorsement or a rider that provides sewer or drain backup and sump pump overflow
coverage for an additional premium.
     A real estate attorney should advise clients to consult with their insurance producer regarding
the availability of sewer backup and sump pump overflow coverage, especially if they have a
finished basement or will use their basement area for storage. Clients need to make sure that the
amount of coverage is sufficient to cover damage they may sustain as a result of a backup or
overflow, as some endorsements and riders have a maximum of only $5,000 of insurance
coverage. At a minimum, a practitioner should suggest that clients explore ways to minimize the
risk of backup or overflow damage, such as by installing back-flow prevention devices and
backup sump pumps.

I.   [18.11] Conducting Business Activities Out of the Dwelling

     A dwelling with incidental business occupancy is eligible for homeowner’s coverage if the
premises are occupied principally as a dwelling and, except for incidental occupancy, no other
business is conducted on the premises. Permitted incidental occupancies include, but are not
limited to, a business or professional office as well as private schools or studios that provide
instruction in music, dance, or photography.

     Insurance coverage for loss or damage to personal property on a residence premises used at
any time or in any manner for any “business” purpose or intended for use in a “business” is often
limited to $2,500, though the limit can be increased with the purchase of optional coverage.
However, “business” data, including such data stored in books of account and computers and
related equipment, ordinarily is not covered. Liability for bodily injury or property damage
arising out of or in connection with a “business” engaged in by an insured is also excluded. A
typical homeowner’s policy defines a "business" either as a trade, profession, or occupation
engaged in on a full-time, part-time, or occasional basis, or as any other activity engaged in for
money or other compensation.

    If a client owns a business conducted on the residence premises, then the property and
liability loss exposures arising out of that business need to be insured. Recognizing that the
number of home-based businesses in this country is rapidly increasing, many insurers offer
separate home business policies or endorsements to the homeowner’s policy designed to meet the
needs of the insured who primarily works out of the home. Coverage for a home day care
business also is available to a homeowner under an endorsement. The effects of adding these
endorsements are (1) to remove the $2,500 limit that applies to business personal property on the
residence premise and allow the full personal property coverage limit to apply, and (2) to “add
back” premises liability coverage for losses arising out of or connected to the business.

J. [18.12] Condominium Insurance

    Many of the aforementioned principles and recommendations apply equally to a client who is
purchasing a condominium rather than a single family home. However, particular attention
should be paid to the client who is purchasing a condominium. In advance of the closing, the
practitioner should receive a copy of the condominium’s declarations. These declarations should
be reviewed in detail as they explicitly state what elements are insured by the condominium
association’s insurance policy and what particular components the client is responsible for
insuring. One particular area the practitioner should pay attention to is coverage for glass or
safety glazing materials, otherwise known as windows and sliding glass doors. The declarations
for a condominium should provide that windows and sliding glass doors constitute building
fixtures and that the association is responsible for providing insurance coverage for building
fixtures. In the event the declarations do not provide for such coverage, clients can obtain
coverage for windows and sliding glass doors. The ISO Homeowners 6 Unit-Owners Form
expressly provides coverage for the breakage of glass or safety glazing material. These particular
requirements should be discussed by the client with the insurance producer. Additionally, and
particularly if the property is located in Chicago, if the client is purchasing a condominium that is
or has a garden or sub-ground unit, the practitioner should review the condominium declarations
to determine if the association maintains adequate flood insurance. This should also be discussed
between the client and the insurance producer.

K. [18.13] Ownership of Motorized Vehicles, Watercraft, and Aircraft

    Most homeowners’ policies do not cover loss or damage either to an “aircraft” (defined as
any contrivance used or designed for flight except model or hobby aircraft) or to a “motor
vehicle” (defined as a self-propelled land or amphibious vehicle or any trailer or semi-trailer that
is being carried on, towed by, or hitched for towing by such a vehicle).

    Loss or damage to “watercraft” (defined as a craft principally designed to be propelled on or
in water by wind, engine power, or electric motor), including their trailers, furnishings,
equipment, and outboard engines or motors, is generally limited to $1,500 under many
homeowners’ policies.

    Subject to certain exceptions, homeowners’ insurance policies typically exclude liability for
bodily injury or property damage arising out of the ownership, maintenance, use, loading, or
unloading of any aircraft, motor vehicle, or watercraft owned or operated by any insured.

    Liability coverage for off-premises use of golf carts, snowmobiles, and certain other
recreational vehicles not subject to motor vehicle registration and capable of traveling at no more
than 15 m.p.h. is commonly available as an endorsement to homeowners’ policies. Liability
coverage for snowmobiles and incidental motor vehicles may also be added with an endorsement.

    Endorsements are also usually available that amend the liability exclusions of homeowners’
forms so that bodily injury or property damage arising out of the ownership, maintenance, use,
loading, or unloading of the described watercraft is covered. However, the prudent course of
action for a homeowner is to purchase a boat owner’s policy if full property and liability coverage
is desired.
L. [18.14] Personal Liability Umbrella Protection

   In addition to property coverage, homeowners’ policies provide “personal liability” and
“medical payments to others” coverage.

    Personal liability coverage provides protection if an insured (defined as the named insured as
well as residents of the named insured’s household who are relatives) is legally obligated to pay
damages due to bodily injury (defined as bodily harm, sickness, or disease, including required
care, loss of service, and death that results) or property damage (defined as physical injury to,
destruction of, or loss of use of tangible property) caused by a covered occurrence. Situations that
may trigger personal liability coverage include examples such as the insured’s dog mauls a
neighbor’s child, the insured injures someone while golfing, or a neighbor’s child drowns in the
insured’s swimming pool. Excluded from personal liability coverage is bodily injury or property
damage that is expected or intended by an insured or that arises out of the rendering of or failure
to render professional services.

    Coverage for medical payments to others provides protection for accidents that occur on the
residence premises or as a result of an action by the insured at any location. Excluded from
coverage is an accident to the named insured’s family.

     The standard homeowner’s policy provides a basic limit of liability of $100,000, which may
be increased for an additional premium. If a client is sued, the lawsuit could result in a judgment
in excess of the client’s liability limit. If the client does not have enough liability coverage to pay
a judgment, then the person bringing the action might pursue the client’s home or other assets to
satisfy the judgment. That is when a personal liability umbrella policy can protect the client.

    An umbrella policy supplements the basic personal liability coverage provided by a
homeowner’s policy. It provides excess liability insurance over a homeowner’s policy. It pays
only after the limits of the homeowner’s policy are exhausted. It also typically covers certain
losses that are not covered by the homeowner’s policy, such as libel, slander, defamation of
character, false arrest, false imprisonment, and damages caused by use of non-owned property in
the insured’s care, custody, or control (e.g., injury or damage caused while using a neighbor's
lawn mower or snow blower). These losses are insured on a primary basis by the umbrella policy.

    Most insurers require a minimum of $300,000 in personal liability protection in order to
obtain umbrella coverage. If the insured fails to maintain the required amount of underlying
liability insurance, then the umbrella insurer pays only that amount it would have been required to
pay if the underlying amount had been in force.

    Although the protection is substantial (worldwide coverage for an entire family in amounts
usually written in increments of $1 million), the cost is very reasonable. Premiums are typically
$150 to $300 a year for $1 million of umbrella coverage.

    A real estate attorney should encourage clients to consider purchasing a personal umbrella
liability policy to cover catastrophic liability loss exposures associated with their home,
automobiles, watercraft, recreational vehicles, sports, and other personal activities. The
practitioner can start by asking the clients to analyze their personal loss exposures through the
following questions:

       Do you own a dog or any other pet that could injury someone?

       Do you have a swimming pool, hot tub, trampoline, or swing in your yard?

       Is there a pond, lake, or other body of water on your premises?

       Do you hunt?

       Do you have frequent visitors and guests to your home?

       Do you travel?
       Do you own and operate recreational vehicles?

       Do you make statements to the press?

Also ask clients to identify current and future assets they have at risk. The greater their personal
net worth, the more they stand to lose. Remember, umbrella insurance is for anyone who has
assets that might be at risk if they are legally responsible for a claim causing bodily injury or
property damage to a third party.

III. [18.15] CLIENT QUESTIONNAIRE

    For most people, purchasing a home is the biggest investment they will ever make.
Homeowner’s insurance protects that investment. Despite being the most expensive asset they
possess, homeowners habitually put off purchasing insurance until the last minute. It is not
uncommon for a purchaser to call an insurance producer one or two days before closing and
request insurance for a new home.

    Because it can take weeks for an insurer to issue a policy, most homeowners never see their
insurance policies until after closing. Instead, the only evidence of insurance provided to them
prior to closing is a “binder,” which is “a written instrument providing for insurance temporarily
from the time application to an insurance agent for insurance is made until a policy is issued or
the risk is passed upon and declined by the company whose representative has issued the
‘binder.’ ” Jacobs v. Atlas Insurance Co., 148 Ill.App. 325 (1st Dist. 1909). A typical insurance
binder provides the following information: name of the insured; policy period; description of
property covered; amount of insurance coverage; mortgage lender; deductible; and premium.
Similar information may also be contained within the “declaration page” to a policy. The
“binder” and “declaration page” do not constitute the policy. Even when they receive it,
homeowners rarely read their insurance policy. Thus, it is not surprising that many homeowners
are shocked and dismayed to learn after a loss that they lack adequate insurance coverage.
Accordingly, a client should be encouraged to read their policy when they receive it and contact
their broker with any questions they have about the coverage provided under the policy.

     If a client is truly serious about protecting the financial investment in his or her newly
acquired home and personal belongings and if the client is interested in avoiding the unpleasant
experience of finding after a loss that there is inadequate coverage, the insurance process needs to
start as soon as the client signs the purchase contract. A real estate attorney can help in this
process by sending a client questionnaire or loss exposure survey (see §§18.20, 18.21 below) and
encouraging the client to answer the questionnaire immediately. While it does pose over 50
questions, the authors of this chapter recommend that the practitioner discuss the answers to the
following questions with the client:

       Do you know what it will cost to rebuild your dwelling if it is totally destroyed?

     Do you know what it will cost to replace the contents of your dwelling if they are totally
destroyed?

       Do you own valuable items such as jewelry, silver or gold flatware, furs, firearms, etc.?

       Will you occupy your dwelling as your primary or secondary residence?
       Will your dwelling be vacant or unoccupied for any extended length of time?

     Will you construct an addition or repair, renovate, or remodel your dwelling within the
next 12 months?

       Do you know what your flood risk is?

       Are there sewer drains and sump pumps located within your dwelling?

       Will you conduct any business activities out of your dwelling?

       Do you own or do you plan to own any motorized vehicles, watercraft, and/or aircraft?

     What will happen to you if you are the subject of a liability suit seeking in excess of a
million dollars?

    If appropriate, the client should provide the attorney with the current homeowner’s insurance
policy forms and endorsements. At a minimum, the attorney should ask for the current
homeowner’s policy declaration pages, as they will set forth the applicable coverage, limits,
forms, options, and endorsements. Some of the answers to the questions in the client
questionnaire (see §18.21 below) may lie within the current homeowner’s coverage.


IV. [18.16] CLIENT LETTER

    A client letter (see §18.22 below) should be prepared after the real estate attorney has
received, reviewed, and thoroughly analyzed the client questionnaire (see §18.21 below).
Generally, the letter should highlight the primary property and liability loss exposures the client
faces as a homeowner and advise the client of ways in which insurance can protect against the
risks to which he or she is exposed personally. After discussing the letter with the client, the
attorney will be able to prepare the insurance producer letter (see §18.23 below), as the client will
have given direction in terms of the types and amounts of coverage wanted and needed.


V. [18.17] INSURANCE PRODUCER LETTER

    The Illinois Insurance Code, 215 ILCS 5/1, et seq., defines an “insurance producer” as a
person licensed to “sell” insurance (defined as exchanging a “contract of insurance by any means,
for money or its equivalent, on behalf of an insurance company”); to “solicit” insurance (defined
as “attempting to sell insurance or asking or urging a person to apply for a particular kind of
insurance from a particular company”); or to “negotiate” insurance (defined as “conferring
directly with or offering advice directly to a purchaser or prospective purchaser of a particular
insurance contract of insurance concerning any of the substantive benefits, terms, or conditions of
the contract, provided that the person engaged in that act either sells insurance or obtains
insurance from insurers for purchasers”). 215 ILCS 5/500-10. This includes insurance agents who
work exclusively for one insurance company, commonly referred to as “captive” agents (e.g., an
Allstate or State Farm agent). It also includes independent insurance agents or brokers who
represent several insurance companies and use their knowledge of risks and the insurance market
to find and arrange suitable insurance policies for their clients.

     An insurance producer licensed in Illinois is under a statutory duty to “exercise ordinary care
and skill in renewing, procuring, binding, or placing the coverage requested by the insured or
proposed insured.” 735 ILCS 5/2-2201. The scope of this duty, however, is difficult to define and
far from universally accepted. At a minimum, an insurance producer should be (a) experienced
with regard to risks facing homeowners, (b) knowledgeable about homeowners’ insurance
policies, (c) willing to provide thoughtful advice and counsel about clients’ personal exposures
and insurance needs, (d) familiar with various insurance markets and able to offer clients
competitive choices with respect to pricing and coverage terms, and (e) responsive to clients’
changing needs. While any insurance producer can help arrange the purchase of specific
coverage, most homeowners require advice and support that goes beyond the simple placement of
coverage. By selecting an insurance producer with the above characteristics, clients will get the
help they truly need.

    An insurance producer letter (see §18.23 below) can be sent either by the client’s attorney or
by the client to the insurance producer. The letter will need to be modified depending on the
answers provided by the client questionnaire. Generally, the letter should request the insurance
producer to provide a quote for insurance coverage. It should also request the insurance producer
to provide specific information and to make recommendations about coverage. With the letter, the
attorney also should send the client’s questionnaire, the current homeowner’s insurance policy,
and a request that the insurance producer review all of the material. The more information
provided, the better the insurance producer can do in tailoring a homeowner’s policy to cover the
client’s personal loss exposures.

    Suffice it to say, most homeowners place their insurance producer on the same footing as
their real estate attorney — as trusted and respected professional advisors who will seek to
understand their exposures and direct their purchases toward insurance products that meet their
needs. Unfortunately, many insurance producers view themselves as nothing more than insurance
salespeople, merely interested in making a sale, and not concerned with whether the insurance
product fits the client’s situation (i.e., an “order taker”).

     Unless they are asked to provide insurance advice, most insurance producers decline to go
beyond the basic and narrow duty of obtaining the specific coverage requested by the insured.
The importance of an insurance producer letter is that it imposes a heightened duty on an
insurance producer by essentially requiring him or her to act as a risk manager. Not only will such
a letter help a client select a competent and trustworthy insurance advisor, but it also will ensure
that the selected insurance producer earns his or her commissions by forcing the producer to give
the client valuable assistance and quality homeowners’ insurance products. If the reader takes
nothing else from this chapter, it should be an understanding of the need for the insurance
producer letter.

VI. [18.18] HOMEOWNER PROPERTY AND LIABILITY LOSS

    While it provides protection against the financial consequences of personal loss,
homeowner’s insurance cannot prevent a loss. When a loss does occur, it is not uncommon for
clients to first call their insurance producer and then their real estate attorney. In case of loss or
damage or an accident or occurrence, homeowners’ policies impose certain duties on the insured.
Real estate attorneys should be prepared to counsel their clients about those duties.

    For a property loss, the duties normally range from giving prompt notice to the insurer,
notifying the police in case of loss by theft, and protecting the property from further damage to
providing records and documents, submitting to an examination under oath, and sending to the
insurer within 60 days, after its request, a signed, sworn statement in proof of loss. For a detailed
discussion of the insured’s duties after a property loss, see Chapters 4 and 5 of PROPERTY
INSURANCE (IICLE, 1998) (no longer in print but may be available in certain law libraries).

    For a liability loss, the insured’s duties routinely include (a) giving written notice to the
insurer as soon as is practical; (b) promptly forwarding to the insurer every notice, demand,
summons, or other process relating to the accident or occurrence; (c) assisting the insurer (at its
request) in making settlement or enforcing any right of contribution or indemnity against any
person or organization who might be liable to an insured; and (d) assisting the insurer with the
conduct of suits by attending hearings and trials and by securing and giving evidence and
obtaining the attendance of witnesses.

    The aforementioned are just some of the duties imposed upon an insured after a property
and/or liability loss. Failure to comply with the post-loss duties required under an insurance
policy can have a preclusive effect on the insured and the insured’s right to coverage.
Accordingly, in the event the real estate attorney is contacted by the client after a property or
liability loss, he or she should recommended that the client retain an attorney who concentrates
his or her practice in property and/or casualty insurance losses.


VII.   [18.19] CONCLUSION

    Risk management is a problem-solving process for identifying, analyzing, and treating loss
exposures and choosing an appropriate technique for treating the exposure. The household unit,
whether it is an individual or a family, faces many personal loss exposures that could devastate
the unit financially if not handled properly. The uncertainty about the possibility of financial loss
diminishes a client’s peace of mind and threatens a client’s financial security. Homeowner’s
insurance serves the primary function of reducing the uncertainty of exposures to loss. See Barry
D. Smith et al., PROPERTY AND LIABILITY INSURANCE PRINCIPLES, pp. 241 – 263 (1st
ed. 1987).

    A real estate attorney representing a purchaser of a home needs to play an important role in
the risk management process. The techniques described in this chapter, the client questionnaire
(see §§18.20, 18.21 below), the client letter (see §18.21 below), and the insurance producer letter
(see §18.23 below), provide a systematic framework for real estate attorneys to assist their
homeowner clients in identifying and understanding their personal loss exposures, analyzing
those exposures, and deciding how the risk of personal loss can and should be managed with
homeowner’s insurance.



VIII. APPENDIX
A. [18.20] Sample Cover Letter

To: [Client]

Re: [property address]

Dear [Client]:

    Thank you for providing me with the opportunity to represent you in the purchase of
your new home. As you probably are aware, your lender will require that you obtain
homeowner’s insurance in order to effect the mortgage. In order to fully assist you in
obtaining adequate insurance protection, I have enclosed a Client Questionnaire that will
help identify your personal risk factors.

    This Client Questionnaire will allow me to properly advise you as to the primary
property loss and liability exposures you face as a homeowner so that you, or I, can discuss
these exposures with your insurance producer and obtain adequate and appropriate
homeowner’s coverage.

In order to ensure that we have sufficient time to speak with your insurance producer and
to obtain the appropriate coverage, please complete the enclosed Client Questionnaire and
return it to me along with a copy of your current homeowner’s declarations and insurance
policy forms and endorsements within the next [seven] days.

                                              Very truly yours,

                                              [real estate practitioner]

Enclosure

B. [18.21] Sample Client Questionnaire

                               CLIENT QUESTIONNAIRE

    What are your personal risk factors? What insurance protection do you need? This
survey or checklist helps you identify areas where you may face property and liability loss
exposures and may address these areas with a licensed insurance producer. For purposes of
this Questionnaire, “home,” “house,” “dwelling,” “residence premises,” or “premises”
means the property you are purchasing.

Identity Theft                                                             YES      NO

Do you or a family member use the Internet for personal business?                  

Does any third party (accountant, attorney, banker, domestic
employee, etc.) have access to your personal information?                          
Do you utilize an up-to-date antivirus and anti-spyware
program on all computers in your home?                                   

Do you utilize wireless technology (laptop, phone, camera, etc.)?        

Does your current homeowner’s policy include coverage for
identity theft?                                                          

Do you know the appropriate steps to take if you are a victim
of identity theft?                                                       

Travel                                                              YES   NO

Do you or any family members travel outside the United States?           

Do you travel domestically or internationally more than
three times per year?                                                    

Do you have medical evacuation coverage if you become
injured or ill overseas?                                                 

Does someone reside at or check daily on your residence
while you are traveling?                                                 

Is your home protected by a central station burglar alarm?               

Personal Liability                                                  YES   NO

Do you have a residence employee?                                        

Do you employ domestic staff such as a housekeeper or nanny?             

Do you serve as a director, officer, or member of the board for a
public, private, and/or a nonprofit organization?                        

Do you or will you conduct any business activities from your home?       

Do you or will you regularly receive “business” clients
at your home?                                                            

Do you make statements to the press?                                     

Are you engaged in publishing a club, society, or hobbyist
newsletter?                                                              

Does your current homeowner’s policy provide personal
injury coverage (libel, slander, defamation)?                            
Do you know how much personal liability coverage is offered
under your current homeowner’s policy?                                   

Have you updated your personal liability coverage limit
regularly to reflect your personal net worth?                            

Do you currently have an umbrella or personal excess policy?             

Is there or will there be in-home care (child care or senior care)?      

Do you care for any foster children?                                     

Do you or your children do any babysitting on the premises?              

Will you have frequent visitors or guests to your home?                  

Is there a lawn sprinkler system on the premises?                        

Is there a fire sprinkler system in the home?                            

Is there a swimming pool on the premises?                                

Is there a hot tub on the premises?                                      

Is there a sauna on the premises?                                        

Is there a trampoline on the premises?                                   

Is there a swing set or other playground equipment
on the premises?                                                         

Is there a basketball hoop or basketball court on the premises?          

Is there a pond, lake, or other body of water on or adjacent to
the premises?                                                            

Is the dwelling located on a golf course?                                

Is or will there be an outdoor gas grill on the premises?                

Is or will there be a campfire pit on the premises?                      

Are there any other conditions on the premises that create
either an unusual or serious liability exposure?                         
Describe:__________________

Are the premises fenced?                                                 
Do you own a dog?                                                     

Do you own other pets that could injure someone?                      
Describe:__________________

Do you hunt?                                                          

Do you golf?                                                          

Do you snow ski?                                                      

Do you engage in a hobby or activity that could subject you to
a higher risk of liability loss?                                      
Describe:__________________


Personal Security                                                YES   NO

Do you have children?                                                 

Are your children at home?                                            

Are children away at school?                                          

Do you worry about personal security risks such as home
invasion, child abduction, or carjacking?                             

Do you currently have insurance coverage for personal security
threats to you or your family?                                        

Motorized Vehicles                                               YES   NO

Do you own a snowmobile?                                              

Do you own an all-terrain vehicle?                                    

Do you own a go-kart?                                                 

Do you own a dune buggy?                                              

Do you own a golf cart?                                               

Do you own a moped, motorbike, or motorized scooter?                  

Do you own a self-propelled snow blower?                              

Do you own a self-propelled lawn mower?                               
Do you own a motorized wheelchair?                                      

Watercraft                                                         YES   NO

Do you own a boat/yacht?                                                
Sail length:__________                                                  
Power length:________
Horsepower:_________

Is it used for water skiing?                                            

Is it rented to others who are not members of your household?           

Is it loaned to others who are not members of your household?           

Principal [operator’s age] [operators’ ages]:____________

Do you own a personal water craft (PWC)?                                

Is it rented to others?                                                 

Principal [operator’s age] [operators’ ages]:_____________

Aircraft                                                           YES   NO

Do you own an aircraft?                                                 
How titled:__________
How used:___________

Is it rented to others who are not members of your household?           

Personal Residence                                                 YES   NO

Do you know what it would cost to rebuild your dwelling at
current construction costs if it was totally destroyed?                 

Has your dwelling been appraised for its insurance
replacement value?                                                      

Do you know the amount your current homeowner’s insurer
will pay for a total loss to your current home?                         

Do you anticipate constructing any major additions or performing
remodeling or renovations to your home in the next 12 months?           

Will you occupy your dwelling as your primary residence?                

Will you occupy your dwelling as your secondary residence?              
Is there a detached deck or patio on the premises?                       

Is your garage finished?                                                 

Is there a detached garage on the premises?                              

Is there a storage unit or utility shed on the premises?                 

Is there a gazebo on the premises?                                       

Is there a pole barn on the premises?                                    

Is there a tree house on the premises?                                   

Is there a detached carport on the premises?                             

Is there a detached playhouse on the premises?                           

Do you have a boathouse on the premises?                                 

Is there a sattelite dish attached to the home?                          

Will your dwelling be vacant or unoccupied for more than 30
consecutive days?                                                        

Will you be using your basement area for storage?                        

Is your basement finished?                                               

Do you know what the flood risk is for your dwelling?                    

Are there sump pumps located in your dwelling?                           

Are there floor drains and/or sewer cleanouts in your basement?          

Does your current homeowner’s policy provide sewer and drain
backup and sump pump overflow coverage?                                  
Limits:________________

Personal Property                                                   YES   NO

Do you know what it would cost to replace all of your personal
property if it was totally destroyed?                                    

Do you have a current inventory of your personal property?               

If you own the following personal property, provide the value for
all property in that category.                                       VALUE

   Coin or stamp collection                                          ________

   Jewelry (wedding rings, pendants, bracelets,                      ________
   precious and semiprecious stones, etc.)

   Watches                                                           ________

   Furs (real fur garments and garments                              ________
   trimmed with real fur)

   Guns                                                              ________

   Silver, gold, or pewter flatware and serving pieces               ________

   Antiques                                                          ________

   Fine arts (paintings, sculptures, etchings, vases, etc.)          ________

   Memorabilia                                                       ________

   Rare or unique items                                              ________

   Stamp, coin, or other collections                                 ________

   Hand or power tools                                               ________
   Professional usage?                                               ________

   Oriental rugs                                                     ________

   Tapestries                                                        ________

   Computers or other electronics                                    ________
   Professional usage?                                               ________

   Sports equipment (golf clubs, fishing gear, hunting gear, etc.)   ________

   Cameras (including camcorders)                                    ________
   Professional usage?                                               ________

   Musical Instruments                                               ________
   Professional usage?                                               ________

   Manuscripts and books                                             ________

   Valuable papers                                                   ________
    Accounts receivable                                                 ________

    Other (indicate)                                                    ________

Do you currently have either scheduled personal property coverage
or a personal articles floater for your valuable personal property?                    

Do you have a fire-resistant safe on the premises?                                     

Personal Risk Management                                               YES             NO

Do you review your homeowner’s insurance coverage
with a licensed insurance producer on an annual basis?                                 

In the event of a loss, do you know how a claim is reported?                           

C. [18.22] Sample Client Letter

To: [Client]

Re: Homeowner’s Insurance

Dear [Client]:

    Based on your answers to the Client Questionnaire and my review of your current
homeowner’s insurance coverage, I have highlighted the primary property loss and liability
exposures you face as a homeowner. I have suggested ways in which homeowner’s
insurance can protect against the risks to which you are personally exposed.
    Replacement Cost Coverage for Your Dwelling. You should purchase enough insurance
to rebuild your dwelling at current construction costs in the event that it is totally
destroyed. This may be accomplished by purchasing guaranteed replacement cost coverage
that pays whatever it costs to repair, replace, or rebuild, even if the cost exceeds your policy
limits. Or it may be accomplished by purchasing extended replacement cost coverage that
generally pays 20 percent to 50 percent over the policy limit to repair, replace, or rebuild.
Replacement cost, guaranteed replacement, and extended replacement cost coverage may
not cover any increased costs you incur if, in the event of a loss, you have to rebuild your
home and comply with current building, zoning, or land use codes, laws, or ordinances. If
available, “code upgrade” or “ordinance or law” coverage would pay a percentage
(typically 10 percent of the dwelling coverage limit) toward the cost to comply with updated
codes, laws, or ordinances. An accurate estimate of the cost of rebuilding the home is
necessary in order to avoid being underinsured in the event of a loss. In that regard, the
amount of insurance at the time of a loss must be at least 80 percent or more of the full
replacement cost of the dwelling before many insurers will pay the cost to repair, replace, or
rebuild. If there is less than 80 percent insurance to replacement value, then the insurer will
pay the greater of (a) the actual cash value of the part of the structure damaged, or (b) that
portion of the cost to repair or to replace the damage (after deductible and without
depreciation) that the amount of insurance on the dwelling bears to 80 percent of its
replacement value, but never more than the applicable limit of liability. “Actual cash value”
is defined as repair or replacement cost less depreciation. Traditionally insurers have
estimated replacement cost by multiplying the square footage of the home by local
construction costs per square foot. The square footage method, however, does not always
take into account cost difference in building materials, such as plaster versus drywall, or
amenities like hardwood floors. Nor does the square footage method take into account the
fact that your home is custom built. You should discuss with your insurance producer how
replacement cost is determined. You may want to retain an appraiser or a reputable
building contractor to determine the replacement value of your home.

    Replacement Cost Coverage for Other Structures. Homeowners’ policies typically limit
coverage for “other structures” (e.g., detached private garage, storage unit, pole barn, shed,
or gazebo) to 10 percent of the dwelling limit. You should obtain enough coverage for your
dwelling so that other structures on the premises are adequately insured.

    Increasing Replacement Cost Limits. You should update your coverage amount each
year to keep up with current market conditions. Rising construction costs and property
values increase the cost of repairing, replacing, or rebuilding a home. Because it is
impossible to predict what it will cost to rebuild your home in the future, you should ask
your insurance producer whether the policy he or she is considering provides an annual
adjustment (typically 2 to 5 percent) to compensate for increases in construction costs in the
area, including materials and labor costs. If not, you should discuss with your insurance
producer the availability of an “inflation guard,” “adjusted building cost,” or “property
insurance adjustment” rider or endorsement.

    Replacement Cost Coverage for Personal Property. You should purchase coverage for
your personal property on a replacement cost basis. It is important that you request
replacement cost coverage, as many homeowners’ policies only provide coverage on an
actual cash value basis (i.e., replacement cost less depreciation). Replacement cost coverage
comes with an additional premium, but it is the best financial protection for you in the event
of loss or damage to your personal property. Most homeowner insurers set the limit of
liability for personal property coverage based on 50 percent to 70 percent of the dwelling
coverage amount. In order to determine whether that percentage is an appropriate amount
of coverage, you should inventory all of your personal property and obtain current pricing
to replace it. The inventory should include a description of the item (make, model, serial
number), where it was purchased, when it was purchased, and the cost to replace it. Attach
to the inventory list sales receipts, purchase contracts, appraisals, and warranty booklets.
Videotaping and/or photographing your personal property is an excellent way for you to
document your possessions. Once you have completed the inventory, you should keep it in a
safe place, such as a safe deposit box or a fire-resistant safe.

    Valuable Personal Property. Homeowners’ policies usually limit the amount of coverage
for “valuable” items such as art, jewelry, rugs, coins, etc. In order for your valuable
personal property to be adequately covered, you should discuss with your insurance
producer the availability of “optional” coverage that would increase the overall limit of
personal property protection. While “optional” coverage increases the overall limit of
personal property, usually from $1,000 to $25,000, it often provides a per-item coverage
limit of $2,000 to $5,000. For those specific items with values in excess of $2,000 per item,
you should discuss with your insurance producer the possibility of “scheduling” such
personal property, which would protect the item against physical loss or damage up to its
actual cash value.

    Vacant or Unoccupied Dwelling. If you will not be moving into your new dwelling
within 30 days of its purchase, you need to discuss with your insurance producer whether
coverage will be affected. Homeowners’ policies routinely exclude loss or damage occurring
while a home is vacant (i.e., devoid of contents) or unoccupied (i.e., no one is living there)
for more than 30 consecutive days immediately before the loss.

    Construction, Renovation, or Remodeling. It is important that you update your
coverage when you renovate, remodel, or otherwise improve your home. Additionally,
homeowners are regularly required to maintain insurance at full replacement cost and to
report to their insurer within 90 days of the start of any addition, renovation, or other
physical changes that increase the dwelling’s value by 5 percent or more as conditions
precedent to guaranteed replacement cost and extended replacement cost coverage.
Homeowners’ policies customarily exclude loss or damage caused by faulty, inadequate, or
defective repair, construction, renovation, or remodeling. You should discuss with your
insurance producer whether the policy he or she is considering has as an ensuing loss
exception, which has the effect of reinstating coverage if loss or damage to covered property
ensues from defective construction. Homeowners’ policies regularly provide additional
coverage in the form of physical loss or damage to covered property caused by the
“collapse” of a dwelling or any part thereof if (a) the collapse is caused by the use of
defective materials or methods in construction, remodeling, or renovation; and (b) the
collapse occurs during the course of the construction, remodeling, or renovation. You
should confirm with your insurance producer that the policy he or she is considering
provides “collapse” coverage.

    Secondary Residence. You need to advise your insurance producer that the new home
you are purchasing will not be your primary residence. Homeowners’ policies are designed
for the owner-occupants of one or two family dwellings used primarily for residential
purposes.

    Flood Insurance. Homeowners’ policies rarely, if ever, cover damage caused by a flood
(essentially an excess of water on land that is normally dry). You should discuss with your
insurance producer the possibility of obtaining flood insurance through the National Flood
Insurance Program (NFIP). Specifically, you should ask your insurance producer the
following questions:

      Does my community participate in the National Flood Insurance Program?

      Do I live in a flood zone?

      What does flood insurance cover?

      How much does flood insurance cost?

   Sewer and Drain Backup and Sump Pump Overflow Coverage. Homeowners’ policies
generally exclude loss or damage caused by or resulting from (a) water that backs up
through sewers or drains, and (b) water that overflows or is discharged from a sump, sump
pump, or other related equipment. Most insurers offer an endorsement or rider for sewer
or drain backup and sump pump overflow coverage. You should discuss this additional
sewer backup and sump pump overflow coverage with your insurance producer, especially
since you [have a finished basement] or [intend to use the basement for storage]. You need to
make sure that the amount of coverage is sufficient to cover damage you may sustain as a
result of a backup or overflow, as some endorsements and riders have a maximum of only
$5,000 of insurance coverage.

    Home Business. Homeowners’ policies ordinarily (a) limit coverage for loss or damage
to personal property used for any “business” purpose, and (b) exclude liability for bodily
injury or damage arising out of or in connection with a “business” engaged in by a
homeowner. Because you will be working out of your home, you will need to discuss with
your insurance producer obtaining property and liability insurance for your home-based
business.

    Motorized Vehicles/Watercraft/Aircraft Coverage. Homeowners’ policies provide
limited property and liability coverage for motorized land vehicles, trailers, aircraft, and
watercraft. You should discuss with your insurance producer ways to protect your property
and liability loss exposures arising out of your ownership, use, and maintenance of
motorized vehicles, aircrafts, and watercrafts.
    Personal Liability Umbrella Protection. Most homeowners’ policies do not afford more
than $1 million in liability coverage if a claim is made or suit is brought against a
homeowner for bodily injury or property damage caused by a covered occurrence. An
umbrella policy supplements the basic personal liability coverage provided by a
homeowner’s policy. It provides excess liability over a homeowner’s policy. It pays only
after the limits of the homeowner’s policy are exhausted. It also covers certain losses that
ordinarily are not covered by the homeowner’s policy, such as libel, slander, or defamation
of character. You should discuss with your insurance producer the possibility of obtaining a
personal liability umbrella policy to cover catastrophic liability loss exposure. You do not
need to be a millionaire to be sued like one.

    Please contact me after you have reviewed this letter to discuss what you want and what
you need regarding your homeowner’s insurance. I will then prepare a letter that either you
or I can send to your insurance producer requesting a quote for homeowner’s insurance
coverage.

                                              Very truly yours,

                                              Real Estate Practitioner

Enclosures

D. [18.23] Sample Insurance Producer Letter

To: [Insurance Producer]

Re: [Property Address]
Dear [Insurance Producer]:

    I am purchasing a single-family residence. Its address is __________. The closing is
scheduled for __________, 20__. I am requesting a quote for homeowner’s coverage.

    To assist you in the quote process, I am enclosing a Client Questionnaire, prepared by
my real estate attorney, which is essentially a personal risk profile. I also am enclosing my
current homeowner’s insurance coverage. Please review and make appropriate
recommendations in view of my personal risk factors. Also, please answer the following
questions:

    1. I would like to obtain replacement cost coverage for my new home. I need enough
insurance to rebuild my dwelling at current construction costs in the event that it is totally
destroyed.

      How does [insurer] define replacement cost?

      How does [insurer] determine the dwelling replacement cost?
      Do I need to retain an appraiser or building contractor to determine the
       replacement value of my home?

      Is guaranteed replacement cost or extended replacement cost coverage available?

      Do I need to report to [insurer] within 90 days of the start of any additions,
       renovations, or other physical changes to my home?

      Does [insurer] homeowner’s policy provide an annual adjustment to compensate for
       increases in construction costs?

      Do I need to separately purchase an “inflation guard,” “adjusted building cost,” or
       “property insurance adjustment” rider or endorsement?

      Is “code upgrade” or “ordinance and law” coverage available?

      What are the additional premium costs associated with these types of coverage?

    2. I would like to obtain replacement cost coverage for my [detached private garage]
[detached storage unit] [shed] [gazebo] [pole barn]. Under [insurer’s] homeowner’s policy:

      Is the limit of liability for this coverage no more than 10 percent of the dwelling
       limit? If so, can the limit for this coverage be increased?

      What is the additional premium cost?

   3. I would like to obtain replacement cost coverage for my personal property.
      Does the [insurer’s] homeowner’s policy provide worldwide coverage for personal
       property?

      Does the policy provide “all-risk” coverage, or is coverage afforded on a named or
       specified peril basis?

      Is “all-risk” coverage for personal property available in the insurance market?

      Is the limit of liability for personal property coverage based on a percentage of the
       dwelling coverage amount? If so, can the limit be increased?

      What is the additional premium cost?

   4. As you can see from the Client Questionnaire, I own a number of valuable items.

      Are any of these categories of property excluded by [insurer’s] homeowner’s policy?

      Are any of these categories of property subject to special limits of liability under
       [insurer’s] homeowner’s policy? If so, what categories and what are the limits?
      Can I broaden the coverage and increase the limits for these valuable items?

      What is the additional premium cost?

   5. [My family will not be moving into our new home within (30) days of purchasing it.]
      [Our new home purchase is a vacation dwelling. We will only be occupying it for a few
      months out of the year.] [My family will be traveling on an extended (European) vacation
      this summer, and will be gone for (3 months).]

      Is my home considered “vacant” or “unoccupied” during these periods while we are
       away from it?

      How does (insurer’s) homeowner’s policy define “vacancy” and “unoccupancy”?

      Does [insurer’s] homeowner’s policy exclude loss or damage while we are away from
       the dwelling for 30 consecutive days or more immediately before a loss? If so, please
       recommend the appropriate policy for extended periods of vacancy or unoccupancy.

   6. I will be [constructing an addition to my dwelling] [renovating my dwelling] [remodeling
my dwelling] within the next 12 months.

      If part of my dwelling “collapses” during the course of construction, renovation, or
       remodeling, is coverage afforded under [insurer’s] homeowner’s policy?

      If water damage and/or mold damage to the interior of my dwelling ensues from
       defective construction, renovation, or remodeling, is coverage afforded under
       [insurer’s] homeowner’s policy? If not, please recommend an appropriate policy.
    If the contractor performing the construction, renovation, or remodeling causes
     bodily injury or property damage to a third party, does [insurer’s] homeowner’s
     policy cover my liability exposure?

    Are there any steps I should take with the contractor in terms of [his] [her] liability
     insurance coverage, such as being added as an additional insured?

 7. I live in an area prone to flooding.

    Does [insurer’s] homeowner’s policy provide coverage for flood damage?

    Does my community participate in the National Flood Insurance Program?

    Can you confirm which flood zone I live in?

    Can I purchase flood insurance?

    What coverage is afforded by a flood insurance policy?

    How much will flood insurance cost me?

 8. I have floor drains and sump pumps in my finished basement.

    Does [insurer’s] homeowner’s policy cover sewer and drain backup and/or sump
     pump overflow damage?

    Does [insurer] offer sewer and drain backup and sump pump overflow coverage? If
     so, what coverage is afforded?

    What is the maximum limit of insurance offered?

    What is the additional premium cost?

 9. I will be primarily working out of my new home.

    Does [insurer’s] homeowner’s policy cover my business personal property? If so,
     what does it cover? Are there limits to such coverage?

    Is liability coverage afforded under [insurer’s] homeowner’s policy for the business
     activities that will be performed out of my home?

10. I own a private jet.

    Does [insurer’s] homeowner’s policy provide property and/or liability coverage for
     my aircraft? If so, what is the extent of the coverage?

    If [insurer’s] homeowner’s policy does not provide property and/or liability
     coverage, please recommend an appropriate policy.
  11. I own a [snowmobile] [all-terrain vehicle] [go-kart] [dune buggy] [golf cart] [moped]
[motor bike] [motorized scooter] [riding law mower].

      Does [insurer’s] homeowner’s policy provide property and/or liability coverage for
       my motorized [vehicle] [vehicles]? If so, what is the extent of the coverage?

      If [insurer’s] homeowner’s policy does not provide property and/or liability coverage
       for my motorized [vehicle] [vehicles], please recommend an appropriate policy.

  12. I own a [yacht] [sailboat] [speedboat] [personal water craft (PWC)].

      Does [insurer’s] homeowner’s policy provide property and/or liability coverage for
       my watercraft? If so, what is the extent of coverage?

      If [insurer’s] homeowner’s policy does not provide property and/or liability coverage
       for my watercraft, please recommend an appropriate policy.

  13. I have other, general questions about personal liability coverage. I would like to
obtain a personal liability umbrella policy.

      What is the minimum and what is the maximum amount of personal liability
       coverage afforded under [insurer’s] homeowner’s policy?

      What is the premium cost for the minimum amount and the premium cost for the
       maximum amount?

      What is the minimum amount of underlying liability insurance required for an
       umbrella policy?

      What is the extent of the coverage?

      What are the increments in which coverage is written?

      What is the premium cost?

    Please contact me if you need additional information or have any questions. I look
forward to receiving your written proposal for homeowner’s insurance. Also, I would
appreciate receiving, prior to closing, a sample of the forms and endorsement that comprise
[insurer’s] homeowner’s insurance policy and personal liability umbrella policy.

                                               Sincerely,

                                               [Prospective Insured]

Enclosures

				
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