HOMEOWNERS PROGRAM UNDERWRITING CONSIDERATIONS

(July 2020)

Coverage under the Insurance Services Office (ISO) Homeowners Program consists of several basic policy forms and a host of optional property and liability endorsements. The choice of base forms depends upon whether the insured occupies an owned or non-owned residence, as well as the type of ownership. The availability of forms also depends on the age of the home and the viability of economically repairing or replacing a home that is damaged or destroyed. The available Homeowner Policy Forms are:

· HO 00 02–Broad Form

· HO 00 03–Special Form.

· HO 00 04–Contents Broad Form

· HO 00 05–Comprehensive Form

· HO 00 06–Unit-Owners Form

· HO 00 08–Modified Coverage Form

Applicant Information

Underwriting a Homeowner application requires careful consideration of several factors, including information on the person applying for coverage. The important items include the following:

· The applicant’s occupation

· Employer information

· Years in occupation and with current (and previous) employer

· Applicant’s marital status

These factors involve stability issues and become more significant when they are combined with other elements or risk characteristics such as residence and structure values. Occupation information may also provide some insight on the use of the home or other structures. Finding out that an applicant is self-employed as a painter or carpenter might raise concerns over how a shed, garage or other structure on the premises is used. It may also indicate a need to check into what materials and equipment may be kept at the described location. Attention should also be paid to the possibility of business use of the premises. This will become a greater concern with the continuing trend of more home-based businesses, telecommuting and independent consultants.

Residence/Structure Information

Typical, structure-related items that are evaluated during the underwriting process include the following:

Construction type of all structures	Age of all structures	Home’s replacement cost and market value
Total number and type of structures at the described location	Security and safety device information	Number of family units in the dwelling and number of household residents
Location's fire protection class	Type of (central and portable) heating	Information on remodeling or renovations
Roof type and general housekeeping	Existence of (in- or above-ground) swimming pools	Existence of attractive nuisances

Other items are also important considerations, such as custom home features, special or unusual equipment (such as elevators, wheelchair lifts, escalators, etc.) or expensive property. Underwriting a homeowner policy is a matter of matching applicants to the market that is desired by the insurer. A standard or preferred carrier has to be careful to write homes having characteristics that fit its rates as well as its ability to meet claim obligations. Unless a property insurer has a large capacity and the expertise to accommodate or target very large, high-valued homes, such properties fall outside the rating norm and need to be avoided.

Example: Modest Mutual and Star-Krossed Stock Insurance companies both write roughly fifteen million dollars in homeowners business in the same state. Modest Mutual strictly avoids homes having a replacement cost exceeding $325,000 while Star-Krossed has written several homes belonging to celebrities who all live in the same neighborhood. The celebrity homes have values ranging from $850,000 to more than $4 million. Both companies are VERY small. In this instance, Modest Mutual’s conservative underwriting increases its chance to make a profit and grow. On the other hand, Star-Krossed has accepted homes with values that are too great for its capacity to handle losses. A total loss to even a single, high-value home may endanger their financial existence. Even without a loss, Star-Krossed has severely restricted its ability to write additional business.

Very low values can often be accommodated, but not if the modest value is due to some undesirable characteristic, such as the following:

· Structures in substandard condition

· Homes in isolated locations, with poor access

· Homes with poor or non-existent fire protection

· Very old homes.

Of course, different characteristics should be considered as a whole in order to determine overall eligibility. Why? Because a single dwelling characteristic that falls outside of an underwriting parameter may be balanced by other considerations.

Example: A higher value home may be acceptable if it is protected by a state-of-the-art security system and is close to superior fire protection and/or it is written with a high deductible.

Example: An older home might not be acceptable on a HO 00 03, Special Form, but what if the applicant is willing to accept restricted coverage under a HO 00 08 form?

Example: On the face of it, a very low valued home may appear unacceptable. From an underwriting standpoint, there is a big difference in the low value being caused by a home that is old and poorly maintained as opposed to being a newer, well-maintained, but compact home.

Example: A home that’s twenty years old, with a moderate value and size, may appear perfectly acceptable. However, acceptability would be re-examined if the same home is in a remote, rural location and is heated entirely by a wood burning stove and portable kerosene heaters.

The last example illustrates another point. Individual company underwriting philosophies may change along with its fortunes. Growth and profitability can, depending upon circumstances, result in a company decision to either expand or restrict its rules on eligibility.

All of the above factors are necessary to determine both rating and underwriting criteria. Each individual insurer sets its own underwriting guidelines for the type of home, other structure, personal property and liability risk that they will cover.

Personal Property Information

Items of particular consideration regarding the personal property exposure are:

· The total value of personal property (in relationship to the residence’s total value)

· The value and types of any high-valued property

· The existence of an additional insured

Typically, the amount of personal property possessed by a homeowner ranges from forty to sixty percent of the value of the residence. Underwriting signals should be tripped whenever applicants request coverage that falls much higher OR lower than this range. A high total value may indicate a hobby, business-related activity or possession of property that should be scheduled. An unusually low amount may indicate a need to look into other areas such as a recent lifestyle change. A request to add an additional insured under the personal property portion of the policy might be due to a significant property rental or leasing arrangement. High values may also indicate a need for scheduled or specialty coverage or other endorsements, especially if some business use is involved. It is in everyone’s best interest to secure explanations for any property coverage amount that appears to be outside the norm. Securing such information can lead to making certain that the risk gets the needed coverage and the carrier obtains the correct premium and exposure anticipated by its rate and rule structure.

Liability Information

The underwriting information that is typically pertinent to the liability portion of a homeowner exposure is a selected combination of the concerns found under the residence/structure and applicant categories. Naturally, some factors are the same that are found under property considerations:

the applicant’s occupation	employer information	applicant’s marital status
structural property’s construction dates	number of structures at the described location	the type of security and safety devices installed in the structure
number of household residents	type of heating (both central and portable)	information on remodeling renovations
general housekeeping	existence of swimming pools and whether they are in ground or above ground	existence of any other attractive nuisances
information on additional insureds	requests for additional coverages	type of structures at the described location

A close study of the above factors can give an underwriter some insight to a particular exposure. For instance, the existence of very old structures may indicate a higher probability of persons being injured on the insured property because of poorer maintenance or general conditions such as old pathways or walks.

Example: An underwriter receives a homeowner application for a home built more than fifty years ago. The underwriter orders an inspection and finds that the residence has a couple of paths constructed of paving stones. The stones, due to decades of settling and wear, are perilously uneven and are a significant trip hazard.

Employer and occupation information may provide clues to unacceptable situations or circumstances that should be carefully monitored. Self-employed persons may have an unacceptable in-home exposure. Celebrities, athletes, or public figures may present higher than desired exposures to liability.

Example: An underwriter is just about to sign off on a homeowner application when she notices that the applicant is a “Computer System Designs” consultant and that the applicant requested a Coverage C amount equaling 80% of the Coverage A limit. On a hunch, the underwriter asks some additional questions and discovers that the consultant builds systems for customers in his home. The unusually high Coverage C - Personal Property limit was needed to cover his inventory of PC parts. The underwriter also discovered that clients often had business appointments at the residence.

Applications that show anything out of the ordinary often bear a closer look. An application accompanied by a request for additional “Other Structures” coverage could indicate unacceptable exposures.

Example: A description on an “Other Structures-Additional Coverage” endorsement is for a $12,000 outdoor playset. An underwriter inquiry discovers that the large playset was on the premises to entertain children for a home daycare operation (that was not disclosed on the application).

Example: A description on an “Other Structures-Additional Coverage” endorsement is for an additional two-car garage. The insurer discovers that it is used as a commercial recording studio and was also rented out to local bands as a practice site.

Hopefully, the above examples illustrate how application information can provide clues that should be evaluated while underwriting requests for homeowner coverage.

Loss History

An applicant’s loss history is of critical importance to the underwriting and evaluation of a homeowner account. In order to get a complete picture, loss history should include the date, time of day, weather conditions, description of the accident or loss, and the final amount of the settlement. Frequency and severity of losses are not always clear-cut indicators of eligibility. Consider the following scenarios:

Situation	Considerations
A severe (catastrophic) loss?	There is a big difference between a freak lightning loss and a fire that started because an applicant failed to properly clean the chimney of a woodburning stove.
Four losses in the last two years?	What if they were for windows being broken by kids’ baseballs as opposed to four grease fires?
A series of small thefts?	What if the losses stopped immediately after the applicant installed high quality locks and a monitored central alarm system?
The applicant had one loss that paid $7,000. It was due to heavy smoke damage from a malfunctioning furnace.	Does it make a difference that, as a result of the loss, the applicant purchased a brand-new furnace?
The homeowner has only had one loss in the last three years.	The loss frequency is acceptable, but does it make a difference that the loss involved a lawsuit over the insured’s in-home business?

The above examples point out that there can be a tremendous amount of uncertainty concerning loss history, so it is important to gather as much detail on the losses as possible.

Other Considerations

While gathering underwriting information is very important, it has to be balanced against the rights of the applicant (new business) and the insured (renewal business). Individual insurers must be certain that their procedures for collecting underwriting information comply with any regulations for securing it. Insurers must stay informed about legal developments concerning individual privacy rights. Further, they must be sure that vendors who provide them with supplemental underwriting information operate in a manner that respects individual privacy.

Tailoring the Homeowner Policy to Restrict, Broaden or Clarify Coverage

The next basic program consideration is the nature of the Homeowner Program. It is in this area that there may be, again, a great deal of variety among different companies. While some companies adopt the complete ISO Homeowner Program, other carriers adopt the basic program and supplement it with a wide variety of derivative or independently developed endorsements.

The Homeowner Program is flexible since it is composed of several basic coverage forms along with a wide variety of endorsements which can modify the policy limits, loss settlement basis, insurable interests, sublimits, covered property, covered activities, etc. Because of this flexibility, the homeowner program is well suited to respond to underwriting requirements. In general, underwriting considerations must include which of the base policy forms are necessary for a specific insured. In some situations, even the HO 00 05 Comprehensive Form may not be broad enough. In such instances, the policy may be endorsed to add wording or eliminate exclusions in order to broaden coverage. This policy activity may result in additional premium at the discretion of the insurer.

Often, technicalities decide many coverage issues. For instance, the age of the home and whether there is adequate fire protection may dictate whether a broad form or special form is most appropriate. An applicant’s use of the home and/or other structures may also require a prudent insured to choose appropriate optional endorsements such as incidental occupancies. The home value and construction type are other factors that may create a need to alter the basic homeowner form. Another important impact upon coverage is the underwriting requirements of specific insurers.

Other endorsements may be used to add additional insureds to the policy, expand the policy’s coverage territory, add more coverage for certain exposures such as theft, earthquake, loss assessment, etc. However, it is important that the insured be made to understand that such changes increase the exposures covered by the policy. This increases the potential for losses and a policy’s loss history creates future premium and underwriting implications.

Deductibles

Deductibles are another critically important topic to consider while underwriting any Homeowner risk. Deductibles may be used to reduce the cost of insurance for consumers and to reduce an insurance company’s exposure to loss. Most insurance companies provide a premium credit based on the size of the deductible. The insured is responsible for the losses that are under the deductible and the insurer will respond only to the portion of loss that exceeds the deductible.

The ISO Homeowner program uses deductibles for the property portions of its basic forms and selected endorsements. Deductibles are usually expressed on a flat dollar basis. However, severe exposures, such as Wind or Hail and Earthquake, may be covered using “percentage” deductibles. Deductibles may be used strictly for underwriting purposes in order to reduce the likelihood of small, frequent claims. Of course, such use of deductibles tends to have an effect on an aggregate (book of business) rather than on an individual basis. The frequency has to involve minor losses in order to be effective. Deductibles under the Homeowner program are too small to either control larger losses or create more attractive accounts, except in instances where a percentage deductible may be used for very high value homes (or as previously mentioned, with wind/hail or earthquake coverage). However, the goal of engineering more acceptable homeowner accounts is typically accomplished by using the more basic coverage forms, modifying the loss settlement provisions or by using underwriting discretion over the use of endorsements to narrow the scope of coverage.

Limit of Insurance

The most the insurer will pay for the total of all damages that result from any one covered accident is the Limit Of Insurance shown in the Declarations. This limit is the maximum amount of coverage available, no matter how many insureds are shown, how many structures are covered, the premium paid, or the number of claims made. Normally, the Homeowner Program uses a flat dollar amount for each coverage section, including liability. Further, the policy is written so that, if other sources of coverage are available, the policy responds to the loss on either an excess or proportional basis.