Understanding Homeowners Insurance: A Comprehensive Guide for Harvard Employees

What Is It?

As an employee of Harvard, Your homeowners insurance policy is most likely written on a standard form identical to homeowners policies purchased by millions of others. Even if it's not identical, your policy is probably very similar to a standard form of homeowners policy, because insurance companies do not usually create policy forms. Instead, they adopt policy forms created by national organizations or legislative committees. In some cases, insurance companies are required by law to use a standard form for their policies. Most of your homeowners policy consists of preprinted pages that are not tailored to your situation. The information specific to your situation is shown on your policy's Declarations Page. Harvard employees should use this resource as a learning tool, but always read your policy carefully to familiarize yourself with the details of your coverage.

Overview

There are six different types of policy forms for homeowners insurance. The forms offer identical liability coverage but differ with respect to property coverage (basic named perils, broad named perils, or open perils) and dwelling type (house, apartment, condominium, or cooperative). It's easy to determine which policy form you purchased, because each type is identified by a number:

•  HO-1 Basic named perils
•  HO-2 Broad named perils
•  HO-3 Open perils
•  HO-4 Apartments
•  HO-6 Condominiums or cooperatives
•  HO-8 Older homes

Tip:  We recommend that our Harvard employees check their policy. The HO designation should appear on every page of the policy, usually near the bottom right corner.

Although it's not apparent from the above list, HO-1, HO-2, HO-3, and HO-8 all apply to houses, not apartment, condo, or co-op units. HO-4 and HO-6--which do apply to apartment, condo, and co-op units--are based on broad named perils coverage (see Table of Information). Tenants, as well as condo and co-op owners, need different forms because they do not own their residences and therefore cannot purchase dwelling coverage.

Caution:  Harvard employees should note that, a s you will see, open perils coverage is the most extensive type of coverage you can purchase for your house. It is available through Form HO-3, but there's a catch. As written, Form HO-3 offers open perils coverage only for your dwelling and related structures. Personal property is covered for broad named perils (a more restrictive type of coverage) under HO-3, unless you add a Special Personal Property Coverage endorsement to cover your personal property on an open perils basis.

Basic Named Perils Coverage

This coverage is also commonly referred to as 'basic coverage.' The 11 conditions, actions, and events that are included in basic coverage are considered to be 'perils' because they cause financial loss. We'd like our clients from Harvard to note that the 11 perils are:

•  Fire or lightning
•  Windstorm or hail
•  Explosion
•  Riot or civil disturbance
•  Aircraft
•  Vehicles (as long as they're operated by nonresidents)
•  Smoke (not including smoke from fireplaces)
•  Vandalism or malicious mischief
•  Theft
• Broken glass (up to a $100 limit)
•  Volcanic eruption

None of the six policy forms offers less than basic coverage. That's because broad named perils coverage and open perils coverage provide protection for the 11 basic named perils and more. Your policy is most likely not written to provide basic coverage. Basic coverage is provided by Form HO-1, which is rarely used, and Form HO-8, which applies only to special situations.

Tip:  Both basic named perils coverage and broad named perils coverage are called 'named' coverages because perils are specifically listed in the policy. Open perils coverage is considered 'open,' in part, because specific perils are not listed in the policy.

Broad Named Perils Coverage

Another type of coverage we'd like to introduce to our Harvard clients is known as 'Broad Named Perils Coverage' and is also commonly referred to as 'named perils coverage.' It is similar to basic coverage in that certain perils are specifically named or listed in the policy, but it is more expansive. Named perils coverage includes the 11 perils covered by basic coverage and adds 6 more perils:

•  Falling objects
•  Weight of ice, snow, or sleet
•  Accidental discharge or overflow of water
•  Sudden and accidental tearing apart
•  Freezing
•  Artificially generated electrical damage

Named perils coverage also expands coverage for:

•  Smoke (to include smoke from fireplaces)
•  Vehicles (to include damage caused by resident-operated vehicles)
•  Broken glass (to remove the $100 limit on coverage)

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Named perils coverage is the coverage type most frequently featured in the six policy forms. Because the named perils are described in detail, this type of coverage features just a few, straightforward exclusions. If your policy features named perils coverage, you are not covered by property insurance for damage or destruction caused by:

•  Enforcement of building codes and similar laws
•  Earthquakes
•  Flooding
•  Power failures
•  Neglect (meaning your failure to take reasonable steps to protect your property)
•  War
•  Nuclear hazard
•  Intentional acts

Open Perils Coverage

The next type of coverage we'll be going over with Harvard employees is one also known as 'all-risk' coverage. That's because Form HO-3 broadly states that it covers you 'against [all] risk of direct loss to property described in Coverages A [dwelling] and B [other structures].' Instead of naming the perils covered by the policy, the question of what perils are covered is left unanswered or 'open.' But don't let the label fool you. Form HO-3 (the only form to feature open perils coverage) comes complete with a lengthy list of exclusions from coverage to ensure that your insurance company is not liable for every peril under the sun. The starting point for the exclusions from open perils coverage is the eight exclusions most frequently associated with named perils coverage (meaning losses arising from building code enforcement, earthquakes, flooding, etc.). Then there are additional exclusions:

•  Freezing pipes and systems in vacant dwellings
•  Damage to foundations or pavements from ice and water weight
•  Theft from a dwelling under construction
•  Vandalism to vacant dwellings
•  Latent defects, corrosion, industrial smoke, pollution
•  Settling, wear, and tear
•  Pets, other animals, and pests
•  Weather conditions that aggravate other excluded causes of loss
•  Government and association actions
•  Defective construction, design, and maintenance

Tip:  HO-3 does not cover you for the preceding exclusions, but does cover you for ensuing losses that result from excluded events (as long as the ensuing loss is not itself excluded from coverage). This means, for example, that if your fireplace is defectively designed so that flames are blown out into your living room, you're not covered for the fireplace, but you are covered for the fire that destroys your house the first time you use the fireplace.

Choosing Between Coverage Types

As noted, it is unlikely that you will have the option to choose basic coverage. Form HO-1 is not available in most states (which is unfortunate as far as your wallet is concerned, because it's the least expensive policy form), and HO-8 applies only in special situations. Renters, as well as condo and co-op owners, must use Forms HO-4 and HO-6 in all cases.

As an employee of Harvard and homeowner, your real choice is between named perils coverage (HO-2) and open perils coverage (HO-3). Choosing named perils coverage has an advantage, because your premium will be generally 5 percent less than that for open perils coverage. The disadvantage of named perils coverage is that it's less comprehensive than open perils coverage, so there are situations when HO-3 covers you but HO-2 does not. Harvard employees should keep in mind, however, that HO-2 does cover you for many of the most common perils that are out there. It's a tough choice. For Harvard employees looking to save money while obtaining solid coverage, consider purchasing a named perils policy. However, if you're looking for the most protective policy money can buy, consider an open perils policy. Raise the question with your insurance agent when you are shopping around for homeowners insurance, and listen carefully to the answer.

Loss Settlement

Your policy contains a paragraph describing the amount you can expect to receive from your insurance company if a covered loss occurs. There are three options for calculating payment:

•  Actual cash value, meaning the amount necessary to replace or rebuild the property less depreciation
•  Replacement cost, meaning the amount necessary to replace or rebuild the property using similar materials
•  Market value, meaning the value of the property in the real estate market at the time of loss

Payments for Coverages A and B (Dwelling and Other Structures) are typically calculated using a different method than payment for Coverage C (Personal Property). The calculation method also differs depending on the policy form.

Loss Settlement Calculation Methods
Form	Dwelling and Other Structures	Personal Property
HO-2	Replacement cost if coverage amount is at least 80% of replacement cost; otherwise a lesser amount	Personal Property
HO-3	Replacement cost if coverage amount is at least 80% of replacement cost; otherwise a lesser amount	Actual cash value
HO-4	Not applicable	Actual cash value
HO-6	Replacement or repair cost if damage replaced or repaired within a reasonable time; otherwise actual cash value (dwelling only)	Actual cash value
HO-8	Replacement or repair cost if damage replaced or repaired within 180 days; otherwise lesser of actual market value or actual cash value	Actual cash value