Chapter 23 - Property Insurance

I. The Purpose and Roles in Property Insurance

The primary purpose of property insurance is to protect the homeowner and the lender against financial loss due to physical damage or legal liability. While the homeowner wants to protect their equity, the lender requires insurance to protect their collateral (the house).

Who Sells Insurance?

• Independent Agents: Work for multiple insurance companies and can "shop" for the best rates.

• Insurance Brokers: Represent the insured (the buyer) rather than the insurance company.

• Direct Writers: Employees of a single insurance company (e.g., State Farm or GEICO).

II. Types of Policies

Insurance policies are generally classified as either Monoline (covering only one thing, like liability) or Package (combining property and liability into one "Homeowners" policy).

The NY Homeowners (HO) Series:

• HO-1 (Basic): Limited coverage for 10 specific "named perils" (fire, lightning, wind, etc.). Very rare today.

• HO-2 (Broad): Covers HO-1 perils plus 6 more, such as falling objects and weight of ice/snow.

• HO-3 (Special): The most common policy. It is an "Open Peril" policy for the structure, meaning it covers everything except what is specifically excluded (like flood or earthquake).

• HO-4 (Tenants/Co-ops): Covers personal property (contents) and liability, but not the structure itself.

• HO-5 (Comprehensive): The highest level of coverage. Unlike HO-3, it provides "open peril" coverage for both the structure and personal belongings.

• HO-6 (Condominiums): Known as "walls-in" coverage. It covers the interior of the unit and the owner's liability.

• HO-8 (Market Value): Used for older homes where the cost to rebuild (replacement cost) is much higher than the market value.

III. Coverage Amounts: ACV vs. Replacement Cost

• Actual Cash Value (ACV): Replacement Cost minus Depreciation. If a 10-year-old roof is destroyed, ACV pays only what a 10-year-old roof is worth today.

• Replacement Cost: Pays the cost to rebuild or replace with new materials of like kind and quality, without deducting for depreciation.

• The 80% Rule: Most lenders require the home to be insured for at least 80% of its replacement value. If coverage drops below this, the owner may face a "co-insurance" penalty where they must pay a portion of partial losses themselves.

IV. NY Specifics and High-Risk Areas

• NYPIUA (New York Property Insurance Underwriting Association): The "pool" of last resort for people who cannot get insurance in the private market (often due to high risk or past claims).

• National Flood Insurance Program (NFIP): Standard homeowners policies never cover flooding. This must be purchased separately through the NFIP.

• Windstorm Deductibles: In coastal areas, NY law requires insurers to disclose if a policy has a separate, higher deductible for windstorm or hurricane damage (often 1%–5% of the home's value).

• Cancellations: In NY, an insurer can cancel a new policy for almost any reason within the first 60 days. After 60 days, they can only cancel for specific reasons like non-payment of premium or fraud.

V. The Real Estate Agent's Role

• Lender Requirements: Agents must remind buyers that the lender will require a Paid Receipt and an Insurance Binder prior to closing.

• Escrow Accounts: Most lenders collect 1/12th of the annual insurance premium each month as part of the PITI payment.

• Umbrella Policy: An agent should mention that for high-net-worth clients, an Umbrella Policy provides extra liability coverage (usually $1M+) above and beyond the standard HO limits.

⚠️ EXAM ALERT: QUICK FACTS

• Flood vs. Water Damage: If a pipe bursts, it's covered by HO-3. If a river overflows and enters the house, it is a Flood and is ONLY covered if the owner has a separate NFIP policy.

• Deductibles: A higher deductible usually leads to a lower premium.

• Liability Coverage: This protects the owner if a guest trips on a loose rug and sues. It also covers the owner if they accidentally damage someone else's property (e.g., hitting a golf ball through a neighbor's window).

• The "Lender's Interest": The lender is listed as a "Loss Payee" on the policy to ensure they get paid first if the house burns down.

KEY TERMS

Actual Cash Value: A method of valuing insured property that calculates the replacement cost of an item minus its physical depreciation. 

Deductible: The specified amount of money that the insured party must pay out-of-pocket for covered losses before the insurance company begins to pay a claim. 

Liability Insurance: Coverage that protects the insured against financial loss resulting from legal responsibility for bodily injury or property damage to others. 

Package Policy: An insurance policy that combines two or more different types of coverage into a single contract, such as combining property and liability insurance in a homeowner's policy. 

Property Insurance: A type of insurance that provides financial protection against most risks to property, such as fire, theft, or weather damage. 

Replacement Cost: The amount of money it would take to replace or rebuild a damaged or destroyed structure with materials of like kind and quality at current market prices, without deducting for depreciation. 

Umbrella Policy: An excess liability insurance policy that provides additional coverage limits above the primary limits of a standard homeowner's or auto policy, offering broader protection against major claims.