Personal Lines Insurance Coverage Gaps: Analysis

and Resolution

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InsightsInsurance and Risk Management Perspectives Available Only from IRMI

PERSONAL LINES INSURANCECOVERAGE GAPS:

ANALYSIS AND RESOLUTION

By Robin K. Olson, CPCU, CRIS, ARM, ARP August 2019

ersonal lines consumers have awealth ofinsurance products and options to choose

About the Author

Rob Olson is the author and principal research

analyst for IRMI’s reference service PersonalRisk Management and Insurance. Mr. Olson

earned a bachelor of arts degree, cum laude, in

economics and a master of liberal arts degree,both from Southern Methodist University in Dal-

las. He is a Chartered Property Casualty Under-

writer (CPCU) and holds the Associate in RiskManagement (ARM) and the Construction Risk

and Insurance Specialist (CRIS) designations.

He has been recognized twice by the InsuranceInstitute of America (IIA) for his outstanding

scholarly achievements in its programs. Mr.

Olson is also an active member of the CPCUSociety, having held a number of chairmanships

and offices, including president of the Dallas

Chapter, and is currently serving as the chair-man of the Personal Lines Interest Group. In

addition, Mr. Olson also serves as an adjunct

professor at the University of North Texas,where he teaches risk management classes.

fromintheUnitedStates.Yet,manyofthesepolicies contain myriad exclusions andresultingcoveragegapsthatcanbedifficulttofindandtounderstand.Theseuncoveredexposures are oftennot effectively commu-nicatedtoinsuranceconsumers.Thesegaps,appearing after a loss occurs, may causeconsumersunduefinancialburdens.Inaddi-tion,thesegapscanresultinunwantedpub-licityforagentsandinsurers,whichcanulti-matelyharmthereputationof thepropertyand casualty (P&C) insurance industry ifignored.Duetocompetitivepressuresandatendencyto concentrate on commission-earningendeavors, personal lines agents have agreater incentiveto focustheirattentiononincreasing insurance sales volume ratherthan providing good risk managementadvice to their clients.Theabovementionedcoverage gaps illustrate the need for animportant paradigm shift for personal linesinsurers and agents alike, particularly for

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agents with wealthier clientele who havecomplex loss exposures. In effect, agentsneed to become their clients’ riskmanager.

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To do so effectively, the personal lines riskmanager shouldnot only understand insur-ance coverages but also be familiar withother riskmanagement techniques, such aslosscontrol,riskavoidance,contractualrisktransfer,andretention.Forward-thinking insurers can assist agentsin this riskmanagement process by becom-ing aware of important coverage gaps. Pro-vidingbroaderpoliciesorofferingpremium-bearing endorsements would be two possi-bilities to resolve the gaps. Also, armingunderwriters and evenmarketing represen-tatives with information for agents on thefollowing risk management techniques iscrucial.• Riskavoidance;• Risk mitigation via sound loss controlrecommendations• Contractual risk transfer, particularlywhen the insurer cannot provide theneededcoverageInsurers can champion this endeavor andgain a reputation (among the insuranceagency and consumer community) of beingproblemsolvers,notonlythroughthesaleofpoliciesandadditionalendorsementsbutalsothroughtimelyadvicefromunderwritersandmarketing representatives to their agencyforce on a host of risk management tech-niques and solutions. On the same theme,agencies can gain a reputation in their com-munityofbeingholisticriskmanagers,ratherthaninsuranceordertakers.Thus,thispaperwill look at a variety of pertinent personallines exposures and corresponding coveragegaps and explore ideas to resolve the gaps.

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The coverage gaps that will be addressedincludethefollowing.• Home ownership transferred to a trustandotherentities• Inadequatedwellinglimits• Condominiumcoverage• Sewerbackuplosses• Domesticworkers• Contractor’sinjuriesataninsured’shome• Improper coordination of overall insur-anceprogramNote that this certainly is not an exhaustivelist; itwouldbeeasy todoubleoreven triplethislistofimportantcoveragegaps.Thislistissimply meant to illustrate some of the morecommoncoveragegaps.HomeOwnershipTransferredtoa

TrustandOtherEntities

Moreandmorefamilies(notsimplyrichfami-lies) are transferring the ownership of theirhomes, and valuables such as jewelry andboats,tootherentities,suchastrusts, limitedliabilitycompanies(LLCs),andlimitedliabilitypartnerships. Since a trust is the most likelyentitytoattainthistypeofownership,andduetospaceconstraintsinthisarticle,thefocusinthissectionwillbeontrusts.Thatsaid,manyof these comments also apply to these othertypesofentitiesaswell.Individualsandfamiliesareincreasinglylearn-ingthevalueofpersonaltrustsandusingthese

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toavoidprobate,reducetaxes,andpassprop-erty on to their heirs. For example, probatetakestimeandcancostupto5percentofthevalue of the estate; probatematters are alsoopen to the public.1 Thus, a trust providesassurancethatprobatewillbeeliminatedanda person can thus preserve the estate, avoidlegal delays, cut taxes, and maintain privacy.Thesefeaturesmaymaketrustsascommonaswillsinthefuture.Itseems,however,thatattorneysandaccoun-tantswhocreatethesetrustsareoftenoblivi-ous about the insurance implications createdby the trust. For example, one online bookadvisesthefollowing.Don’t bother notifying your homeowner’sinsurer that you placed your home in atrust.Knowthatforaslongasyoulive,forallreal-worldpurposesincludingtheIRS&homesteadrights,thatyouaretheownerofyour home. But if you tell your insurance1NOLOLegalEncyclopedia, www.nolo.com/legal-encyclopedia/why-avoid-probate-29861.html (July 31,2019).

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Personal Risk Mand Insu

Personal Risk Management and Insuranceinformation and competitive strategies numerous other personal lines insuranceannotates the latest ISO policies and all of tclaims and loss examples are used throughage intent and loss ramifications.

Published & Regularly U

company about the transfer, they mightraise problems and questions that you’llhave to waste time answering. Don’t riskthehassles.2This advice,written by an attorneywho spe-cializes in trusts and estate planning, clearlyillustrates the need to arm insurance agentswithinformationtoconveyto insuredsof therisk management and insurance implicationsofplacingahomeorotherpersonalpropertyin the name of a trust.Whatmany attorneysmaynotrealizeisthatthehomeownerspolicywas developed with individuals—not enti-ties—inmindastheownersofhomes.Atradi-tionalhomeownerspolicydoesnotconveyanycontractualbenefitstoanypartyotherthanaperson.Forexample,suchcoverageappliesto“you” (the named insured and residentspouse) and “familymembers.” If the trust isnot a natural person, then it cannot have aspouse or family members. If the trust nowownsthehome,andnoadjustmentsaremade2DenisClifford,MakeYourOwnLivingTrust (Berkeley,CA:NOLOPublishing,March2019).

anagement

rance

is the most comprehensive source offor homeowners, personal auto, and policies. This practitioner’s referencehe countrywide endorsements. Real-lifeout to help you fully understand cover-

pdated: Since 2001

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to coverage, the unfortunate and unintendedconsequence is that the insurance coveragemay now be inadequate. A look at a typicaltrustwillmakethispointapparent.Assume that John and Mary Doe, a marriedcouple in their 60s, take the advice of theirattorney and transfer their $3million home(as well as much of their valuable personalproperty, suchas jewelryanda small yacht)into a trust. John andMary thusbecome thegrantorunderthetrust(sometimescalledthe“settler”).TheyappointMary’sbrother,AlanWhite, as trustee of the trust. (The trusteecould be an individual or even a qualifiedtrust company such as a bank, which holdsandmanagesthepropertyinthetrust.) JohnandMary continue to live in thehome;Alanlivesinanothercity.Alan,asthetrustee,thusholdsthelegalownershiporlegaltitletothehome. John and Mary hold the equitable/beneficial ownership. The basic principle

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underlying the trust is that it separates thelegaltitletoproperty,whichcarriestherighttodisposeofit,fromtheequitableorbenefi-cial title which carries the right to use andderivebenefitsfromtheproperty.Atthetimeof the death of both John and Mary, theirdaughterSusan(thebeneficiary)receivestheassetsofthetrust.NowassumethatJohnandMarydonotnotifytheir agent or insurer about this change inownership. Thus, there is no change regard-ing the named insured listed in their home-owners, watercraft, and personal umbrellapolicies.Threemonthslater,thehomeburnstothegroundduetoafaultyelectricalcircuit.Could the insurer, uponasking for a copy ofthetitleandfindingitinthenameofAlan,astrustee of the trust, decline dwelling cover-age? This scenario is a distinct possibility.Although,legalresearchandinterviewshaveturned up no major indications of deniedclaimsormajorlawsuits,thisisstillanevolv-ing and growing concern. Could the insurerarguethatneitherthetrustnortrustee isan“insured”undertheunendorsedhomeownerspolicy?Even in thebest-caseoutcome, therecouldbenumeroushasslesinsortingitalloutalongtheway.Now let’s assume that John and Mary had ahouseguestwhowasbadlyinjuredinthefire.If the guest files a negligence suit, it surelywould be directed to the owner of the prop-erty; thus, the trust would be named in thesuit. An argument could be made that theinsurer would be under no obligation toextendcoveragetoanentitynotnamedinthehomeowners declaration page. An onlinesearch yields no court rulings in which theinsurer is required to extend coverage to anentitynotnamedonthepolicy.

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Somemajorinsurersarewaryaboutwritingahomeownerspolicyifthehomeisinthenameofthetrust,particularlyacorporatetrust.Thisisbecausethesituationisviewedasmoreofabusiness-typeexposure.But,ifitisapersonalratherthancorporatetrust,theyaremoreapttoconsiderit.Someinsurerscontendthatthenamedinsuredneedstobeahumanbeing,notalegalentity.Thus,ifthehomeisinthenameofthetrust,theseinsurerswillonlycoveritviaa dwelling policy—which typically offers lesscoverage than a typical homeowners policy.The trustwould thenneed toaddapremisesliabilityendorsementtothedwellingpolicytoprotect its interests; the grantor/occupant(s)wouldneedtoprocureahomeownerstenantsorcontents(HO4)formaswelltoprotecthisorher interests.Thus, theoverall costs couldbehigher(withmorerestrictivecoverage)forthegrantor/occupant(s)thanwithsimplyonehomeownersform.One approach that some insurers take is tosimplyaddthetrustasanadditionalinsuredunder the homeowners policy, with nochangestothenamedinsured.Problemscanresult for the trust, however, because theadditional insured is provided no coverageforpersonalproperty,lossofuse,ormedicalpayments. Thus, if the trust owns some ofthe jewelry or if there is a rental exposure(tenants or roomers), coverage gaps canresult.3Accordingtosomeexperts,abetterapproachto protect the exposures of the grantor/resi-dentand thepropertyand liabilityexposuresofthetrustandtrusteeis to listallpartiesasco-namedinsuredsonboththeunderlyingand3JillGidge,“InsuringWillsandTrusts,”INSURE-EDWebi-narsponsoredbyCPCUSociety(2009),p.8.

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umbrella policies.4 For example, the declara-tionscouldlistthenamedinsuredas“JohnandMaryDoeandAlanWhite,asTrusteeoftheJohnandMaryDoeTrustdatedSeptember6,2019.”Thisapproach,though,canresultinunintendedexposures for the insurer. If a family trust islisted as a named insured, personal propertylossestotrustpropertyinotherstatesmaynothavebeenanticipatedandunderwrittenbytheunderwriter. In addition, any business-relatedloss exposures of the trust are a concern forinsurers. For these reasons, some insurers donot like this approach, having legitimate con-cernsthattheymaypickupotherliabilityexpo-suresof the trustunrelated to thehome itself.Carewouldneed tobe taken toproperly limitthelossexposuressurroundingthetrusttotheresidencepremises.Toaddressthisconcern,aninsurer-developed manuscript endorsement,suchasthefollowing,couldbeused.Ifthe“trustee”doesnotregularlyresideontheresidencepremises,thepersonalliabili-tyandmedicalpaymentscoverageonlyap-plies with respect to bodily injury andpropertydamagearisingoutoftheowner-ship,maintenance,oruseofthe“residencepremises.”Inaddition,thereisnocoverageunder this policy for any resident of the“trustee’shousehold.”In 2017, the Insurance Services Office, Inc.(ISO),developedthetrustendorsement(HO0615)toavoidsomeoftheseaforementionedchallenges.4JackHungelmann,“RiskManagement:ProtectingAssetsWhen Home Ownership is Transferred to a Trust,”www.IRMI.comExpertCommentary (Dallas,TX: Inter-national Risk Management Institute, Inc., December2007).

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This endorsement allows the policy to beissued in thenameof thegrantorof the trustinstead of in the name of the trust. Researchintotrustsindicatesthatthepartyestablishingthe trust (i.e., grantor) is often (a) the partyrequesting the policy and the partywho for-merlyowned thepropertynowbeingheld intrust,(b)thepartywhocontinuestoresideinthehome,and(c)thepartydesignatedasthetrustee.Asaresult,thepolicycouldbeissuedin the name of the grantor of the trust (whowould be the named insured) rather than inthenameofthetrust.A scenario will illustrate how this endorse-mentworks. Let us return to the above sce-nario of John and Mary Doe, who are thegrantors of the trust. Further assume thatJohnandMaryarealsothetrustees.WiththeHO 06 15 endorsement attached, John andMarywillstillbelistedasthenamedinsuredunder their homeowners policy as thegrantor. The trustee (John and Mary) holdsthelegalownershiporlegaltitletothehome,andJohnandMary(asthegrantors)holdtheequitable/beneficialownership.ButJohnandMary are still fully protected under theirhomeownerspolicy,astheyarestill listedasthenamedinsured.Theendorsementamendsthedefinitionofan“insured”toincludethetrust(butonlyifitisrecognizedundertheapplicablestatelawasalegalentitywiththerighttosueorbesuedinacourtof law)and ifnamed in thescheduleas an insured. Note, however, that the trustitselfisaninsuredonlyforthefollowingcov-erages.• CoverageA—dwelling• CoverageB—otherstructures

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• CoverageE—personalliability/CoverageF—medicalpaymentsbutonlyforbodilyinjury andpropertydamage arisingoutoftheownership,maintenance,oruseofaninsuredlocationThe trustee designated in the endorsementscheduleisaninsuredforthesamecoverages,but this status is limitedonlywith respect tothe trustee’sdutiesasa trustee.Forexample,assume the grantor’s bank is listed as thetrustee.Thisendorsementwouldnotprovideany property or liability coverage for any ofthe bank’s other loss exposures; coveragewouldapplyonlytoitsdutiesasatrusteeforthehousebeingcoveredunderthepolicy.The “business” definition under the endorse-ment is amended to stipulate that any of thetrustee’sactivitiesinconnectionwiththistrustarenotconsidered“business”activitiesinthispolicy and are thus covered. In contrast, the“business” definition does encompass homesharinghostactivities.There is no consensus on this complex issue.What complicates matters is that there is no“standard” trust agreement. An underwriterwould find it difficult to analyze every trustagreementtofullyunderstandexactlywhohaswhatinsurableinterestsandliabilityexposures.The growing popularity of trusts, however,means that insurers should anticipate the daywhen theuseof trustswill spread throughouttheirhomeownersbookofbusiness.Tosystematicallyhandlethesepotential trustexposures,insurersshoulddevelopaseriesofquestions that will efficiently identify trustarrangements that pose extraordinary risks.With this approach, these risks can bereviewed for special underwriting attention.

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Examples of pertinent questions include thefollowing.• Whoarethepartiestothetrust(grantor,trustee,beneficiary)?Whatistheirrela-tionshiptoeachother?• Whoislivinginthehome?• Howisthetrustworded?Isitapersonaltrust?• What tangible property does the trusthold(house,jewelry,boats,autos)?• Isthereanybusinessuseofanypropertyheldbythetrust?• Whatrightshasthegrantorreservedre-gardingthepropertyheldintrust?5Thebottomlineisthatifaninsurerplanstodis-puteanyclaimsforhomeownerslossesbecausethenamed insured in thedeclarations isaper-son,butthehome(orpersonalproperty)istitledinthenameofthetrust,thisconcernshouldbeproactively and clearly communicated to itsagencyforcealongwithalogicalplantoproperlycoveranypotentialcoveragegapsthroughaspe-cialized policy or an endorsement. In addition,agents should work with their underwriter tofind the best method of insuring this risk andproperlydocumentthisagreedapproach.InadequateDwellingLimits

The Californiawildfires in 2018 vividly illus-tratethemajorproblemsofunderinsurancein5TimO’BrienandMichaelMarkiewicz,“PropertyandCa-sualty Insurance Solutions for Entity Owners,”www.markspaneth.com/assets/images/insights/420.292.Finance_Markiewicz.pdf(July16,2019).

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thehomeownerslineofbusiness.Insomefire-ravaged communities in the state, almost 70percent of homeowners contended that theydid not have enough insurance to replace orrebuildtheirhomes,accordingtoasurveybyUnited Policyholders.6 Nationwide InsuranceCompanyreportedthatabouttwooutofeverythreehomesinthecountryareunderinsured.It estimated that the average underinsuranceamount is about 22 percent, though somehomes are underinsured by 60 percent ormore.7CoreLogic,aleadingpropertyanalyticscompany,identified110,000SouthernCalifor-niaproperties inveryhigh toextremeriskofwildfire.Withaveragereconstructioncostsatapproximately$400,000,theriskismorethan$46 billion. CoreLogic reported that thisamount is much higher than in years pastbecause of significant increases in labor andbuildingmaterialcosts.Ifjust1percentoftheat-riskhomessufferedatotal loss,theunder-valuation of that 1 percent could be $25mil-lionifinsurancelimitswerenotkeptcurrent.8There are numerous reasons why so manyhome owners are perilously underinsured.First, insurance agents and brokers areinvolvedinadownwardspiralracetobeultra-competitiveinordertowinaccounts.Insomecases, agents have admitted under oath thatthey decreased insurance limits to reduce6Swindell, Bill, “Insurance Shortfalls Hamper SonomaCountyFireVictims’AbilitytoRebuild,”ThePressDem-ocrat, www.pressdemocrat.com/business/8117171-181/insurance-shortfalls-hamper-sonoma-county(March24,2018).7Nationwide Insurance, “Make Sure YourHome is Cov-eredforAllIt’sWorth,”www.nationwide.com/underinsurance.jsp(2018).8Olick, Diana, “Millions of Homes are UnderinsuredAgainst Natural Disasters as Construction Costs KeepRising,” CNBC Markets, www.cnbc.com/2019/05/03/millions-of-homes-are-underinsured-against-natural-disasters.html(May3,2019).

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premium quotes in order to win business.9Writinganewclient’shomeownersinsurancewith$400,000limitsversus$480,000maybejust enough of a premium credit to earn thebusiness. Home owners share in the blamesince they oftenplace toomuch emphasis onthelowestpremiumandlookpastthepossibleunderinsuredvaluesandothercoveragegaps.Second,manyagentsandbrokersusebasicorlow-costappraisal software,oftenallowedbythe insurer. In fact, some insurers that offerhomeowners quotes online use a simplereplacement cost calculator that asks only afew questions about the home and then pro-vide a bare-bones estimate of the home’sreplacementcost.Oneonlineinsurer’scalcula-torasks,“Whatisyourrisktolerance?”Itthenthrowsthatresponseintothemix.EvenlargerhomevaluationcompaniessuchasCoreLogic’sMarshall Swift products and e2Value offerlower-costreplacementcostestimators.Someoftheseproductsarevirtualonly,withnoin-person or drive-by property inspection andrelatively few questions about the intricaciesofthehome.Manyoftheseproductspromotethemselvesbyadvertisinghowquickandeasythe product is. That sounds good on the sur-face, but what happens when a total lossoccurs? Based on past studies, these are thetypesof scenarios inwhichhugeunderinsur-ancegapsbecomeapparent.In fairness to CoreLogic and e2Value, thesecompanies also offer more in-depth homereplacement cost calculators. These expansiveproductsutilizecomponent-basedreplacement9Adriano, Lyle, “Wildfire Victims are Largely Underin-sured,” Insurance Business, www.insurancebusiness-mag.com/us/news/catastrophe/wildfire-victims-are-largely-underinsured-116580.aspx (November 19,2018).

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cost techniques to improve valuations ofhomes. In contrast to the simpler “cost persquare foot” techniques, component-basedtechniquesworkthewayacontractorbuildsahome,fromthegroundup,takingintoconsid-eration all the individual characteristics ofeachuniquehome.According to e2Value, an evaluation of thehome’s architectural style and shape is essen-tial.Forexample,ahomewithaVictorianstylemayrequirespecializedlumberwithacustom-ized approach. A Frank Lloyd Wright-stylehomewouldbeanexampleofevengreatercus-tomizedmaterials andworkmanship and thushigher per-square-foot replacement cost con-siderations.Incontrast,aranch-stylehomewillrequirelessspecializedknowledgeandrequirefewer custom-building materials. E2Value’ssophisticated software program contains over150distinctarchitecturalstyles.10Thee2Valuesoftwarepackagealsodelvesintovery specific aspects of the home, such as thetypes,manufacturers,andnumberoflights,anddetailedinformationonkitchenappliances.For-tunately, many property valuation companiessuchase2ValueandMarshallSwifthavemorequestions and require more information onhigher-value homes. This detailed approach isnecessarytoavoidsomeofthemajorinsurance-to-value (ITV) problems associatedwith largecatastrophes. A cookie-cutter approach todeveloping proper ITV is a recipe for failure,particularlywhenitcomestohigh-endhomes.Third,stricterordinancesorlawspertainingtoresidential building codes are growing more10E2Value,“ArchitecturalStyles,”https://evs.e2value.com/evs/est/InteractiveHelpAdmin/content.as-px?groupid=12(July2019).

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common. If a home is badly damaged, theinsuredmayberequiredtorebuildthestruc-turetomeetnew(andnearlyalwaysstricter)buildingcodes.Buildingcodesaresetsofregu-lations governing the design, construction,alteration, and maintenance of structures.Electrical codes are ones that are regularlyupdated. For example, older homes often donot have ground fault circuit interrupters(GFCIs) in areaswhere there are likely to besmallappliancesandwherewaterispresent.Ifa kitchen fire results, the municipal buildingcode would likely require new GFCIs in thekitchenwhentherebuildingbegins.Often,amunicipalitymaychangecodesfollow-ing significant catastrophes, such as hurri-canes,earthquakes,andfires.Attimes,thecostofcodeupgradescanrun15to20percentormoreof theunderlying loss.YettheISOordi-nanceorlawcoveragelimitinitshomeownerspolicyisonly10percentofthedwellinglimit;thus,coveragegapsinthisareacanarise.ISOdoes allow this limit to be increased via itsordinanceorlawincreasedamountofcov-erage(HO0477)endorsementupto100per-centofthedwellinglimit.Thus, insurersandagentsshouldbeawareofthebuildingcoderequirementsinthecitiesinwhichtheywritebusiness.Althoughelectricalupgrades (e.g., out-of-date electrical breakerboxes) are the most common, other upgradeexamplesincludeplumbingfixturesandmate-rials,sprinklersystems,insulation,mechanicaldevices, roofingmaterials, andsmokealarms.Often, this information is available throughremodelingassociations.Learningthebuildingcodes will provide insurers and agents goodclues as to the minimum ordinance and lawcoverage limits toprovide their customers toreducecoveragegaps.

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Fourth, some communities have demolitioncodes,requiringahometobedemolishedandrebuiltif,say,50or75percentofthehomeisdestroyed.11Insomecoastalcommunities,theelevationof thehomehas toberaisedbeforerebuilding canbegin.This typeofbuildingorordinance lawcouldresult inapainfulcover-agegapfortheinsured.Fifth,constructioncostsoften“surge”followinglargecatastrophes,suchashurricanesandwild-fires, often exacerbating this underinsuranceproblem.“Demandsurge”isthe“increaseinthecostofrepairorreplacementofdamagedprop-erty that may occur following a large-scaledisasterwhenmany individuals andorganiza-tionsvieforalimitedsupplyoflaborandmate-rials needed for repair.”12 This phenomenonshould encourage insurers to develop anendorsementthatwould increasethedwellinglimit bya certainpercentage in theeventof acatastrophe-related loss.This is often referredtoasextendedreplacementcostcoverage.Guaranteed replacement cost is anotheroptiontoconsider.Underthispropertyinsur-ancevaluationoption, thepolicypaysthefullcostofreplacingthehomeevenifthisamountexceeds the policy limits. This valuationmethod fully indemnifies the insuredwithoutany depreciation and without a maximumreconstruction payment. The provision helpsthe insured avoid being underinsured in theeventofatotalloss.Animportantcaveattypi-cally applies to this provision—the homeowner must allow the insurer to set thereplacementcostandautomaticallyincreaseit11Mierzwav.FloridaWindstormUnderwriting,877So.2d774(Fla.2004).12International Risk Management Institute, Inc., “De-mandSurge,”IRMIGlossaryofInsuranceandRiskMan-agement,www.irmi.com/glossary(2019).

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asneeded.Note thatguaranteed replacementcost coverage approaches can vary by stateand are not available in every state or fromeveryinsurer.Obviously, greater effort is needed to bettergaugethereplacementcostvalueofhomestoavoid these types of situations in the future.Thequestionastowhoisultimatelyresponsi-ble forselectingthecorrect limithasbeenanissueinmanylegaldisputes.Inmostcases,theCalifornia courts have ruled that the homeowner has the primary responsibility forensuringthatheorshehastheproperdwell-inglimits,withsomeexceptions.Insurers that do not provide guaranteedreplacementcostcoverage(themajoritydoesnot)andthatencourageorallowtheiragentstouseshortandquickversionsof residentialreplacementcostestimatorsmayhavealargeswath of insureds with underinsured homes.This situation is particularly onerous in thecaseforhighervaluedwellings.Followingaresomegeneraltipsforagentsandinsurers to reduce the problem of underin-suredhomes.• Avoid quick and easy replacement costcalculators, especially for mid- to high-value homes. The more sophisticatedcomponent-basedreplacementcostesti-matorsshouldbeusedforhomesnearorinthehigh-endrange.Aphysicalinspec-tionofthesehomesisessential.• Offer guaranteed replacement cost (orguaranteed rebuild) coverage; an alter-nativewouldbetooffera30to50per-cent cushion above the dwelling limit(extendedreplacementcostcoverage).

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• Develop an endorsement increasing thedwellinglimitintheeventofacatastro-phe due to ensuing spikes in buildingcosts.• Increase the ordinance or law coverage(10percentofCoverageAundertheISOHO 3) to a higher percentage of cover-age. Note that this recommendation isparticularlyimportantforolderhomes.• Proactively communicate with insuredsabout the need to keep their insuranceagent informed about any remodeling,since remodeling can dramatically in-creasetheneedforhigherdwellinglim-its.• Periodically reinspect existing homes(particularlyhigh-endones)toascertainifdwellinglimitsareadequate.• Insuranceagents, customerservicerep-resentatives, and underwriters shouldunderstand construction value con-cepts.Californiastateregulatorsnowre-quire insurance agents to take a courseinconstructionvalueconcepts tobetteradvisepolicyholders.Someadvocatesbelievethatabetterapproachin the future would be the elimination ofdwellingandpersonalpropertylimitsentirelywithapurereplacementcostclause inwhichthepolicywouldguaranteethatthedestroyedstructure and personal property would bereplacedasitwasbeforethelosswithappro-priate code updates.13 This approach wouldmean the home owner would be truly pro-tected, and the insurers could get adequatepremium.Ofcourse,thisideacouldonlyworkif accurate component-based valuation

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methods of replacement cost were used inconjunctionwith a thorough physical inspec-tionoftheproperty.Thisapproachwouldhelpensureadequateratesfortheinsurerandgoodprotection for the insured.Efforts to improvethese valuations may entail large upfrontcosts,butthelong-termbenefitsmayoutweightheseexpenses.One final idea to reduce coverage gaps forhomeownerssufferingmajor lossesconcernsthelosssettlementprovisionofthehomeown-erspolicy.Somehomeownerspoliciesagreetorebuild the homeusing “materials andwork-manshipofsimilarquality.”Thislanguagecon-trasts unfavorably to policieswhose loss set-tlementprovisionsagreetorebuildusing“likekindandquality”materialsandworkmanship.Thedifferenceinthesetwoapproachesfoundin this often-neglected policy provision isimmense. To reduce coverage gaps, agentsshouldseekout(andinsurersshouldprovide)coverage granting the “like kind and quality”provisions,particularlyforolderhomes.InadequateCondominium

Coverage

Acondominiumcanbedefinedasasinglerealestate unit in a multiunit development inwhich a person has both separate ownershipofaunitandacommoninterest,alongwiththedevelopment’s other owners, in the commonareas.14 Although this definition is fairlystraightforward, arranging the insurance for13Paul Nielander, “Valuing a Home Correctly: How toAvoidUnderinsurance,”PersonalRiskManagementandInsurance,www.irmi.com/online/prmi/ch016/1l16g000.aspx(Dallas,TX:InternationalRiskManage-mentInstitute,Inc.,August2017).14Black’s Law Dictionary, 9th ed. (St. Paul, MN: WestGroup,2009).

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condos is often not so easy. In fact, properlyplacingtheinsuranceforapersonallinesclientwhoownsacondominiumislikecompletingalargeandcomplexpuzzle—ittakessomedili-gentworkandeffort.And, it startsbycloselyreviewing the condominium association’s“declaration” document, which details whatrealpropertytheunitownerisresponsibleforinsuringseparately.Condominium association rules and cove-nantsaffectinsurancelossexposuresbydeter-mining what categories of building propertyare owned by the association—and thus areinsured under the association’s master pol-icy—andwhatpropertyisindividuallyownedby the unit owners—and thus should beinsuredundertheunitowners’policy,suchastheISOH06form.Duringthelast30years,therewasatrendawayfrominsuringassociations’realpropertyundera“barewalls”basistoa“singleentity”basis.1515Investopedia, “All-In Coverage,” https://www.investo-pedia.com/terms/a/allin-coverage.asp(March2018).

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Under a “bare walls” approach, the condo-minium association insures only the barestructure(s) of the individual condo build-ing(s); thestructure, fixtures,and furnishingsof collectively owned areas; and the collec-tivelyownedpersonalpropertyoftheassocia-tion. Under thismethodology, individual unitowners are responsible for insuring buildingpropertytheyownanduseexclusively,suchassinks, built-in cabinets, appliances, flooring,andwallpaperintheirindividualunits.Incertainpartsofthecountry,themorecom-mon insuring approach now is the “singleentity”basis,inwhichthecondominiumasso-ciationmaster policy covers virtually all realproperty in a residential condo structure,includingfixturesinindividualunits.Onewaytolookatitisthat,iftheindividualunitownercould turn the condoupsidedownandshakeit,heorshewouldneedtoinsureunderaunitowners policy whatever property would fallout.Whilethistrendhastheeffectofshifting lossexposuresfromthepersonalunitownerpolicyto the associationmaster policy, there is onenoteworthycountertrend:theever-increasingassociation master policy deductible. Thisdevelopment causes many coverage gaps todevelopfortheunitownersincepoliciessuchastheunendorsedISOHomeowners6—Unit-Owners Form (HO 6) only provide $1,000 inlossassessmentlimits.Associationmasterpoliciesoftenarewrittenwith$5,000,$10,000,or$25,000deductibles,but condos in hurricane-exposed coastalareas may have deductibles ranging from$50,000to$100,000.Somedeductiblesareaset percentage (e.g., 1 or 2 percent of thedwellinglimit).

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Association documents usually include provi-sions allowing the association to allocate thedeductible in variousways, and it is possiblethattheentiredeductiblecouldbeassignedtoa single unit owner that the associationbelieves is responsible for the loss. Assumethis latter example is the case, and furtherassumetheassociationdeductible is$10,000.If the condo unit owner negligently starts akitchenfire,andthelossis$27,000,thecondo-miniumassociationpolicywouldpay$17,000($27,000 less the $10,000 deductible). Thenegligent unit owner might be assessed theentire$10,000deductible.TheHO6onlyprovides$1,000forlossassess-mentsarisingoutofamasterpolicydeductibleunless the supplemental loss assessmentcoverage (HO 04 35) endorsement isattached.Thus,agentsshouldrecommendthisendorsement (ora similarone) for theircon-dominiumclients.Agentsandbrokersshouldcarefullyreviewtheinsurance specifications in the association’s“declarations” document, obtain an accurateestimate of the replacement cost of the realpropertyforwhichtheunitownerisresponsi-ble(oftenincludinganyimprovementsandbet-terments),andselectthisamountasthedwell-inglimit.Bumpingupthestandardassessmentlimit,includingassessmentsarisingfromahighmaster policy deductible (the latter oftenrequiring a negotiated manuscript endorse-ment) and expanding coverage from namedperils to all risks, are highly recommendedactions. Another possible solution concerningthehighassociationdeductiblesmaybe foundin the association documents. If these docu-mentsmaketheunitownerresponsibleforthedeductible,manyinsurerswillusethedwellinglimit to pay the deductible. As a result, the

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dwellinglimitwouldneedtobeincreasedintheamountofthedeductible.Becauseof thesecomplexitiesand thechanceof coverage gaps, some agentswill notwritecondominiumpoliciesexceptonanaccommo-dation basis for valued clients. In addition,theymayonlyissueaunitownerspolicywithdwellinglimitsandpersonalpropertylimitsofat least,say,$40,000each,bothwithreplace-mentcostcoverage.Thefollowingaresometipsforinsurancepro-fessionalstoimprovetheinsuranceprotectionfor individual condominium unit owners toavoidanylargecoveragegaps.• Theinsuredshouldrequestacopyoftheassociation’s “declaration” documentandprovideittohisorherpersonallinesagent.Thisdocumentwill indicatewhatcoveragestheunitowner isresponsiblefor individually insuring. This will helpthe agent determine the correct insur-ancelimitforthecondo.• Theinsuredandinsuranceagentshouldwork together to evaluate the propertyinsurance limitappropriate for thecon-dominium. For example, if the insuredhas performed any remodeling work,damage to these updates will typicallynotbecoveredunder thecondominiummaster policy, and the dwelling limitsundertheunitownerspolicymaybein-adequate as a result. Replacement costestimator software packages are oftenhelpfulinthisarea.• Insuranceagentsshouldconsiderpoten-tialassessments fromtheassociationtoindividual unit owners designed to

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reimbursetheassociationfordeductiblesit incurs followinga losscoveredby theassociation’s master policy. This situa-tion is particularly problematic for unitowners when the assessment is due tohigh property deductibles increasinglyfound under associations’ master poli-cies.Areviewof theassociation’sdecla-rationdocumentwillindicatetheamountofthedeductible.Theunitownerspolicyprobably provides a limited amount ofcoverage for this assessment, but thislimitcanusuallybeincreasedifthereisapossibility of being assessed more thantheassessmentcoveragelimit.• Anotherareainwhichcoveragegapsof-ten appear (e.g., water damage from aleaky roof) concerns the perils coveredbytheunitownerspolicy.Dependingonthe form currently in place, it may bebeneficialtoexpandnamedperilscover-age to an open perils or “risk of directphysicalloss”basis.• Theagentandinsuredshouldreviewthepersonal property limit under the unitowner’spolicy.Thislimitmayneedtobeadjustedbasedonanymajorpurchasesmadesincethelastreview.• Lossofusecoverageisofteninadequatebecausethiscoverageisoftenbasedonapercentageofthepersonalpropertylim-it.Agentsshouldpursuelossofusecov-erage that containsnodollar limitation,particularly for clients with high-endcondominiums.1616Hess,Allison,“UnderstandingCondoInsurance;LossofUse Coverage,” Insuramatch, www.insuramatch.com/learning-center/understanding-condo-insurance-loss-use-coverage(November8,2018).

IRMI® Insights

• Sewerbackupcoverageishighlyrecom-mendedfortheunitownerspolicyto(a)provide coverage for direct damage totheunitand(b)broadenlossassessmentcoverage to include assessments fromthisperil.SewerBackupLosses

The danger of sewage backup and sewageoverflow is one that becomes a nightmarishreality for many home owners every year. Acommunity in Florida was impacted, withabout26sewagespillsinPinellascountycaus-ingdamagetohundredsofhomesintheafter-mathofHurricaneIrma.Largeswathsoftheseproperty owners were unprotected due tounendorsed homeowners policies.17 Thesetypesofnonindemnifiedlosseshaveoccurredthroughout the country, with insurers oftenrefusing topaydue toexclusionsandrestric-tionsinthehomeownerspolicy.These losses are often caused by the city’ssewage system. Typically, these losses causetensofthousandsofdollars(orevensix-figurelosses) indamage andmake thehouseunliv-able.Acommonculprit isablockage inacitysanitary main. What often makes the matterworseisthatwaterbackuplossescausedbyacity-ownedandmaintainedsewagesystemareoftennotevenrecoverablefromthecity.Manycities and/or states have laws granting themgovernmental immunity from reimbursinghome owners for city-caused sewer backupdamageintoresidents’homes.Thereisalsonocoverageforthislossunderafloodpolicy.17SWTSP Staff, “Homes Flooded with Sewage DuringIRMA,”www.wtsp.com/article/weather/irma/home-flooded-with-neighbors-sewage-during-irma/477982444(September22,2017).

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Thehomeownerwouldhavetorelyonhisorher ownhomeowners policywith the limitedwaterback-upandsumpdischargeorover-flowcoverage(HO0495)orrelatedendorse-mentforwaterbackupcoverage.Thebasiclimitunderthisendorsementis$5,000,whichcanbeincreased to $10,000, $15,000, $20,000, or$25,000.Unfortunately,inmanycases,eventhe$25,000 limit may be inadequate, particularlywithextensivedamagetohigh-endhomes.Other cities may not be so strict concerningtotalimmunity,butbewareofotherlawsthatlimit their responsibility. For example, somecities will only reimburse home owners forlossescausedbycity-ownedsewerlinesifthecitywasawareofaproblemandfailedtotakeproper steps to resolve it in a reasonableperiodof time. In otherwords, if themunici-palitywere unaware of the problem, it couldlegallydenyliability.Or,ifitisdeterminedthatacombinationofcity-ownedandhomeowner-ownedtreerootscausedthesewerbackup,thecitymayonlybewillingtopaypartoftheloss.Inaddition,mosthomeownersdonotrealizethat they are typically responsible for main-taining their house or sewer lateral,which isthe main pipeline between the city sanitarysewermain(locatedunderthestreet)andthehome. Ineffect, thepropertyownermayownthesewerlateral, includinganypartthatmayextendintothestreetoralleyway.Unfortunately, most home owners are notawarethattheirhomeownersinsurancepolicydoes not cover such damage. Just as coastalhome owners learned after hurricanes thattheirpoliciesdidnotcover flooddamage,oth-ers are learning that thepolicyonwhich theyhavereliedforso longdoesnotcoverdamagefromsewerbackup.Forthesereasons,insurers

IRMI® Insights

shouldeitherbuildthiscoverageintothehome-ownersformormakeavailableawaterbackuporoverflowendorsement (withhigh limits) tothe homeowners or dwelling policy. Theendorsement should cover water damage,includingremediationandcleanupcosts.Oneofthecommonproblemsisthattheinsurerendorsements often contain a fairly low limit,such as $10,000, although some insurers mayprovide higher limits for a higher premium.Sewer backup damage typically costs a homeowner anywhere from $20,000 to $50,000. Toreducecoveragegaps, insuredsshouldprocureprotection of at least $50,000. Some insurerscateringtohigh-endhomesprovidethiscover-agewithnolimitaspartoftheirstandardpolicy.In addition, agents should recommend thattheir homeowners clients adopt several losscontrol techniques concerning this loss expo-sure,suchasthefollowing.• Peopleshouldnotputgrease,papertow-els,diapers,orotherrefusedowntoiletsor sinks. Avoiding this action will helpprevent clogs in the pipes that connectthehometothesewer.Notethatgreasebuildupinthelinesisacommoncauseofwaterandsewagebackuplosses.• If a sumppump, Frenchdrain, or otherfloodcontrolsystemisconnectedtothesewermain, a licensed plumber shouldremove that connection. Typically, suchanarrangementisillegal.• Insureds should consider getting a li-censed plumber to install a backflowprevention device. This valve allowssewagetogooutbutnottocomebackin.

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The investment of between $500 and$5,000 will go a long way toward pro-tectingthehome.• Ifthereisamajorsewerordrainbackupinto the home, a specialist should becalled in to deal with the aftermath ofthis type of loss. The use of an experi-enced professional will help to preventdiseaseandreducefurtherdamagefrommoldandmildew.DomesticWorkers

Therearemorethan2.5milliondomesticwork-ers across theUnited States, and this figure isexpectedtogrowoverthenextdecade.18Butadefinitivecountisnearlyimpossiblesincemanyoftheseworkersareinthecountryillegally,andmany collect income that goes unreported ontaxes.Thus,thisnumbermaybeonthelowend.There are many insurance implications forhomeownersinthehiringofdomesticworkers.So, what are the chief homeowners coveragegapsassociatedwiththisexposureforthehomeowner/employer?Standard homeowners policies typicallyexclude bodily injury losses under the per-sonal liability andmedical payments sectionstoanypersonseligibletoreceiveanybenefitsvoluntarily provided, or required to be pro-vided, by an “insured” under the WorkersCompensation Act. State workers compensa-tion laws can vary on this requirement. Inmanystates,domesticemployeesarenotcov-ered by the Act. However, in a number of18Calfas,Jennifer,“ThereisaRealCrisis:DomesticWork-ersareinHighDemand,buttheJobshaveFewProtec-tionsandLittlePay,”MoneyMagazine, http://money.com/money/longform/domestic-workers-crisis/(April4,2019).

IRMI® Insights

states, employers of domestic employees aresubjecttotheActiftheyemploytheseworkersformorethanaspecifiednumberofhoursperweek or if the employee is paidmore than aspecifiedsumoveracertainperiodoftime.Intwo states, New Hampshire and New Jersey,not only are domestic employees coveredunder the Act, regardless of the pay or thenumberofhoursworked,butallhomeownerspolicies must provide workers compensationcoveragefortheseworkers.19Insurersandagentsneedtobeawareoftheselaws for their clients who are apt to hiredomesticworkers. For example, assume JohnandMaryWilson,residentsofthewealthysub-urbofChevyChase,Maryland,directlyemployadomesticworkerwhoworks8hours everyMondayfor$12perhour.Theworker,whohasno health insurance, suffers a serious headinjurywhenshefallsfromaladdersheisusingtocleanthetopshelfofabookcaseattheWil-sons’home.AssumefurtherthattheWilsonshaveahome-owners policy but no workers compensationpolicyforthisworker.Marylandlawstipulatesthat domestic workers who earn less than$1,000perquarterareexcluded fromtheActbut the worker in this loss scenario earnsabout $1,200 per quarter. Thus, the Wilsonsarerequiredby lawtoprocureworkerscom-pensation for thisworker but fail to do so—perhapsbecausetheyareunawareofthislaw.The Wilsons’ homeowners policy, however,excludesbodilyinjurytodomesticemployeesif19RobinOlson, “StateWorkersCompensationLawsandDomesticWorkers,”PersonalRiskManagementandIn-surance,www.irmi.com/online/prmi/ch016/1l16f000.aspx(Dallas,TX: InternationalRiskManage-mentInstitute,Inc.,December2018).

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the insured is required to procure workerscompensation (which is thecase in thisexam-ple). As a result of this serious injury, thedomestic worker’s husband files a lawsuitagainsttheWilsons.Unfortunately,theWilsonsarenowlookingatahugeliabilitycoveragegap.Insurance agents and home owners shouldbecome knowledgeable about workers com-pensation laws concerningdomestics in theirstateandanyotherpertinentstates.Equippedwith this information, agents should thenproperlyeducate their staff and clientsaboutanypotentialgapsinhomeownerscoverage.Insome cases, agents should recommend thattheirclientspurchaseaseparateworkerscom-pensationpolicy.The following tips canassisthomeowners inmitigating the risks of employing domesticworkers and for ensuring that theseworkershavetheproperprotection.• If hiring a domesticworker directly, thehomeowner shouldorderabackgroundcheckonpotentialdomesticstoseeifthey(a)areU.S.citizens,(b)haveahistoryoffiling lawsuits, (c) have credit problems,or (d)have criminal records. If using anemployment agency, the insured shouldverify the above steps are performed.Prospective domestics with major con-cernsofthesetypesshouldnotbehired.• Insurance agents should work closelywithhomeownerstoseeifworkerscom-pensation insurance should be procuredfordomesticworkers.Agentsneedtobefamiliar with state laws concerning do-mestic employees. In many cases, homeowners may choose to voluntarily pro-vide workers compensation coverage.

IRMI® Insights

Although the homeowners policy coversinjuries to domestic employees inmanycases,thepolicylimitcouldbegrosslyin-adequate in the event of serious injury,permanent disability, or death. The ad-vantageofworkerscompensationcover-ageisthatitprovidesbroaderprotection(e.g.,disabilitypayments)thanthetypicalhomeowners policy, including unlimitedmedicalexpensesinmoststates.So,evenifnotrequiredbylaw,itisagoodideatoconsider voluntarily providing this im-portantcoverage.• Ifanoutsidefirmoragencyisusedtohirethedomestic,theemployer/homeownershould verify that theworkerhaswork-ers compensation coverage. The homeownershouldobtainacertificateofinsur-ancefromtheemploymentagencyonanannualbasisshowingthiscoverage.• Thehomeownersshouldprepareawell-organized and documented human re-sourcefileforeverydomesticemployee.In addition, an employment applicationshould be completed and the employeeshouldbegivenanemploymentmanualor handbook. This manual will reducethe chances of an employment-relatedlawsuitbecauseitcanincludeprotectiveprovisions detailing the home owner’sopposition to any employee mistreat-ment. An employee manual written orrevisedbyanexperiencedattorneyisanevenmoreeffective risk control recom-mendation.• Anemploymentpracticesliabilitypolicyshouldbestronglyconsidered.Thiscov-eragecanprotectthehomeownerfroma wide variety of lawsuits, including

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allegations of discrimination, wrongfultermination, harassment, and slander.Manyinsurersservingthehigh-endmar-ketplace often provide this coverage asanendorsementtotheirumbrellaorex-cessliabilitypolicy.Apersonalinjuryen-dorsementattachedtothehomeownerspolicyisalsorecommended.• Theinsuranceagentshoulddiscusswiththe home owner the possibility of in-creasingthepersonalliabilityandmedi-calpaymentslimitsunderthehomeown-erspolicytothehighestavailablelimits,particularly if workers compensationbenefitsarenotrequiredorpurchased.Apersonal umbrella policy is also recom-mended.• The home owner should verify that hisor her employment practices complywith federal requirements, such as thewithholdingofpayrolltaxesandproofofcitizenship. Home owners should avoidpaying domestics “under the table” dueto thepotentiallyburdensome legal/taximplicationsoftakingthisrisk.Contractor’sInjuriesatInsured’s HomeA Chartered Property Casualty Underwriter(CPCU)friendofminefromtheSouthwesttoldmeofaliability-relatedlossafewyearsagoathishome.Hehiredageneralcontractor(GC)toremodelhishome.Heobtainedthenecessarycertificates of insurance (COIs) indicating theGC had current general liability andworkerscompensation coverage. He also thoroughlyread and understood the construction con-tract. (It helped that hewas in the insurancebusiness.)

IRMI® Insights

Aftertheremodelingbegan,hereceivedacallfrom his GC who said that a hired electricalsubcontractor’s employee had collapsed anddiedinmyfriend’sattic.TheGClaterfoundoutthatthesubcontractordidnothaveaworkerscompensation policy. The GC procured thiscoverageforhisown10employeesbutdidnotrequireCOIsproving this coverage foranyofhis subcontractors. More recently, my friendhasreceivedinquiriesfromthedeceasedfam-ily’sattorneyaboutthisdeath.There are typically two homeowners liabilityexclusions that could pertain to this situation.The first is the contractual liability exclusionthatprovidesabroadexceptiongrantingcover-ageforalossconcerningan“insuredlocation.”So, this exclusion does not apply to the lossdescribed above. The other exclusion pertainstobodilyinjurytoanypersoneligibletoreceiveany benefits voluntarily provided, or requiredtobeprovided,byan“insured”underanywork-erscompensationlaw.Sincethesubcontractorisnotan“insured”undermyfriend’shomeown-erspolicy,thisexclusionwouldnotapplyeither.Thus,itisprettyclearthatthehomeownerslia-bilitycoveragewouldapply.Butwhatifmyfriendwasinfactconsideredanemployer? In a California case, the insuredhome owner hired a neighbor (an unlicensedanduninsuredroofer)toreplacetheroofonhishouse.20Onthefirstdayofthejob,theneighborfell from the roof and broke his leg. He latersued the home owner, seeking damages. TheCalifornia appellate court ruled that the homeownerwasindeedanemployer,statingthatanypersonwhohiresanunlicensedpersontoper-formdutiesthatrequiredalicenseis,infact,an20Mendozav.Brodeur,142Cal.App.4th72,8WCABRptr.10255(2006).

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“employer.”The court further ruled that, onceanemploymentrelationshipiscreated,thehir-ingindividualmaybesuedforanyinjuriessus-tainedon the job.My friendclearlywouldnotbeviewedasanemployersincetheGChehiredwasbothlicensedandinsured.The issue often comes up as to whether aworkerisa“casual”employeeornot.Ifaworkeris casual, many states do not require theemployer to procure workers compensation.However, in one New Jersey case, the courtfound theemploymentwasnotcasualbecausethe work was not, in the court’s decision, by“accidentorbychance.”21There,aworker,with-outaformalcontract,hadpaintedasummercot-tage, later applied a water sealant to anotherpart of the residence, and was subsequentlyinjured.Althoughthisrulingwaslaterreversedbytheappellatecourt, itpointstotheneedforhome owners to be careful in their hiring ofuninsuredcontractorstoworkontheirhomes.Thus, several factors come into play as towhether or not a homeowners policy wouldcover or exclude a contractor-related loss inthehome.• Thewordingofvarioushomeownerslia-bility exclusions and the court’s inter-pretation• State workers compensation laws con-cerning independent contractors andcoveredemployments• Whetherornottheworkerisconsideredan “independent contractor”oran “em-ployee”21Martinv.Pollard, 638A.2d 1380, 271N.J. Super. 551(N.J.Super.App.Div.1994).

IRMI® Insights

• Whether or not the “employee” is con-sidereda“casual”employeeThis potentially explosive liability situationcan be avoided through several key steps,which are particularly important if a majorhome renovation or the building of a swim-mingpoolisimminent.1. Some home owners may inadvertentlybecome a de-facto GC by hiring “con-structionmanagers”insteadofaGC.Theconstructionmanager typicallysubcon-tractsout100percentof theworkandoftencarrieslessinsurance(ornoinsur-ance), relying instead on the subs pro-vidingtheliabilityandworkerscompen-sation insurance. Utilizing a GC ratherthan a construction manager will typi-cally result in better insurance protec-tionfortheproject.2. Thehomeownershouldverify that thecontractor is licensed for theworkandisbonded.Inaddition,heorsheshouldask for COIs from the contractor forworkers compensation and general lia-bility.(Contractorswhocannotprovideevidence of this coverage should beavoided.)IftheGCusessubcontractors,COIs for thesesubsshouldalsobepro-vided.3. Thehomeownershouldobtainacopyoftheproposedcontract. (This isvital forlargerprojects,suchasmajorhomeren-ovations.) The written agreementshouldconfirmanindependentcontrac-tor relationship. Ideally, it should in-clude a hold harmless clause in the in-sured’s favor, particularly for majorwork, such as when heavy equipment

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will be used to construct a swimmingpool.4. The insured should also secure addi-tionalinsuredstatusforhimselforher-self in the contractor’s general liabilitypolicy.5. Anexperiencedattorneyshouldreviewthe more complex contracts for majorrenovationsorprojects.ProperCoordinationofOverall

InsuranceProgramAssocietygrowsmorecomplex,personallinesloss exposures grow more complex as well.This phenomenon is particularly true forwealthier individuals with many unique lossexposures. A recent court case points to thisgrowingcomplexity.Thiscaseprovidesawor-risomeexampleofwhatcanhappenwhenaninsured (theownerofmanysmallbusinesseswithavarietyofbusinessnames)attemptstoinsure multifaceted personal and businessrisksunderadiscordantgroupofpoliciesfrommultipleinsurersandmultiplebrokers.ThisNewYorkcourtcaseconcernedaliabilityloss suffered by a wealthy insured/entrepre-neurwithapatchworkofuncoordinatedinsur-ancepolicies.22There,theinsured’sguestwasinjuredonavacant,undevelopedpieceoflandownedbyoneoftheinsured’sbusinesses.Theinsurednotifiednumerousinsurersoftheloss,and all declined coverage. As a result, theinsuredandtwoofhisbusinessessuedfivedif-ferent insurers and three different brokers.The insurers prevailed in nearly all of the22Picone v. Great Northern Ins. Co., 2008 N.Y. Slip Op.33029(N.Y.Sup.Ct.,Nov.3,2008).

IRMI® Insights

motions to dismiss the case, leaving theinsuredwithnoinsurancecoverage.This case points to the need for insuranceagents and brokers to gravitate from beingsimply insurance salespersons into riskman-agers,particularlyfortheirmoreaffluentper-sonal linesclients.Oneoftheimportantwaystodo this is for agents tomake sureall theirclients’policiesareproperlyharmonized.Thefollowing tips for insuranceprofessionals aredesignedtoassistinsuredsinproperlycoordi-nating their various exposures and policies,thusmitigatingmanypotentialcoveragegaps.• The named insured including spouse,along with any trusts or similar inter-ests, should be specifically and consis-tently co-named in all of the insurancepolicies.Consistency isnecessaryforallinsurance policies covering these par-ties. Ifmarried,both spouses shouldbelisted as named insureds under all oftheir insurance policies. If a trust ownsthehome,make sure that all applicableparties are listed as co-named insuredson both the underlying and umbrellapolicies. This approach helps to elimi-nate coverage gaps. Alternatively, con-sider attaching the trustendorsement(HO0615)orasimilarone,particularlyif the grantor of the trust lives in thehomeandisalsothetrustee.23IfanLLCownspropertyforwhichtheinsuredhasa financial interest, the insured shouldworkwithaskilledattorneyexperiencedinbusinessorganizationsonthismatter.

23International Risk Management Institute, Inc., “TrustEndorsement,” Personal RiskManagement and Insur-ance, www.irmi.com/online/prmi/ch013/1l13f100/al004070.aspx(Dallas,TX:InternationalRiskManage-mentInstitute,Inc.,2017).

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• Selecting the proper umbrella policy isimportantsincethesepoliciesmaycoverimportantgapsintheunderlyingcover-age. Ideally, the same insurer shouldprovidetheunderlyingcoverageandtheexcess coverage—again to reduce anygapsandtoavoidbickeringbetweentwoseparateinsurersintheeventofamajorliabilityloss.• Insuredsshouldretainproposals for in-surance thatoutlineexposuresandrec-ommended coverage. These proposalsshould be kept for at least 3 years. Ifchangesaremadetotheseproposalsorreviews, the insured should receive theupdates.• Insuredsshouldkeepoldcopiesofinsur-ance policies indefinitely, particularlythose with liability coverages. The in-suredshouldscanthesedocumentsandretain them electronically with dupli-catesstoredatadifferentlocation.• Insuranceagents shouldprovide an an-nual reviewof coverage affordedor ar-eas that may be uninsured or underin-sured, particularly for wealthier clientswithmyriad lossexposures.Aschangesare discussed and implemented, theagent should provide the insured a re-visedreview.• Agents should regularly provide losscontrolandcontractualrisktransferrec-ommendationstotheirclients.Thispro-cessshouldalsobepartoftheannualre-view of coverage for new exposures.Various other risk management tech-niques, as necessary, should be ex-plainedtotheinsuredaswell.

IRMI® Insights

• If the insured isalsoanownerofoneormorebusinesses,theagentshouldverifythatpropercoverageisinplaceforthesebusinesses.Theinsuredshouldworkwithaminimalnumberofagentsandbrokersto ensure that all the loss exposures ofeachbusinessareproperlycovered,with-in eithera combined insuranceprogramorseparateones.Carefulattentionshouldbepaidtothespecificnamesofeachbusi-nessandthespecificpartieswhoarelist-ed as named insured and additional in-sureds under the policies covering thebusinesses. Coverage gaps between per-sonal versus corporate activities shouldbe thoroughly explored and resolved af-terconsideringavarietyofriskmanage-menttechniques.Forexample,specialat-tention shouldbepaid to company cars,excessliabilitylimitsovercompanycars,andrestrictionsonfamilymembers(e.g.,teenagers)drivingacompanycar.• Insuranceagentsshouldexplainthesua-bility factor to their clients. Suability isdeterminedbythesizeofanysavingsac-count and stock portfolio, real estateholdings, the insured’s profile in thecommunity, and current and potentialfamily income. Agents and brokersshouldrecommendapersonalumbrellapolicy for their clients with moderatesuabilityfactors($1millionto$2millionlimits)andhighsuabilityfactors($5mil-lionto$10millionlimits).Astrongargu-mentcouldbemadethatevenmiddle-orlower-income persons should procuresuchapolicy.• Agentsshouldadvisetheirinsuredstobewaryofpurchasingsomeoftheircoverage

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(e.g.,personalautopolicy)fromtheInter-net and the rest through a traditionalagent.Theinsuredmayunknowinglypro-cureauto liability limits (orboat ormo-torcycle liability limits) well below theminimum limits required by their um-brellapolicy.Gapsof$100,000orbeyondarenotuncommoninthesescenarios.24Thebottom line is that forward-thinkingper-sonallinesinsuranceagentsandbrokersneedtoevolveintoriskmanagers,particularlywiththegrowingcomplexityofpersonallossexpo-suresandthearrayofriskmanagementtech-niques to consider. This value-added activitywill surely pay big dividends for agents andbrokers down the road, particularly in theirclientsatisfactionandretentionrates.Conclusion—PersonalRisk

Management

The premise of the best-selling book Freako-nomicsisthatpeopleshouldchallengeconven-tional wisdom when making day-to-day deci-sionsandtrytoanalyzethehiddensideofthevariousoptionsinlife.25Forexample,onechap-ter concerns the issue of parents’ ability toassess the various risks facing their children.Theauthorsclaimthatparentsareoftenafraidofthewrongperils.Inoneexample,an8-year-old girl named Molly has two close friends.Molly’s parents learned that one friend’s par-ents owned a gun. Thus, they have forbiddenMolly to play there. Instead, Molly spends agreat deal of time at the other friend’s house,which has a swimming pool in the backyard.24O’Brien,peerreviewcomment(Oct.18,2009).25StevenLevittandStephenDubner,Freakonomics(NewYork:HarperCollinsBooks,2006),pp.149–154.

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This publication does not give legal accounting, orother professional advice. If such advice is needed,consult with your attorney, accountant, or other qual-ified adviser.

Copyright 2019. All Rights Reserved.International Risk Management Institute, Inc.

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Molly’s parents believe they have made gooddecisionsaboutwhereMollyspendshertime.Butisthistrulyawisedecision?Notaccordingtothedatainthebook.Theauthorsarguethatthis is actually a poor decision. On an annualbasis,thereisonedrowningofachildforevery11,000 residential pools in this country. Thus,about 550 children under age 10 drown eachyear.Conversely, there isonechildkilledbyagun for every 1 million-plus guns. Since theUnitedStateshasroughly200millionguns,thismeans approximately 175 children under age10dieeachyearfromguns.Thechanceofdeathbydrowning(1outof11,000)versusdeathbygun(1in1million-plus)isnotevenclose.Anothertheorybehindthisphenomenoncon-cernstheimmediacyofapotential loss.Thus,manypeoplefearterroristattacksmuchmorethandevelopinghighcholesterolandresultingheartdisease.Fearseemstothrivebestinthepresent tense. While a terrorist attack isviewedasadistinctpossibilitynow,deathbyheart disease (annual U.S. deaths exceeding600,000) is often seen as a slowly evolving,distant, and quiet catastrophe. As Levitt andDubner describe it, “terrorist acts lie beyondourcontrol;Frenchfriesdonot.”26Insuranceandriskmanagementprofessionalsalso need to challenge the conventional wis-domconcerning risk assessment for their cli-ents. A detailed exposure survey, particularly26Ibid,p.152.

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for their wealthier clients with myriad lossexposures, is the first step in this process. Inaddition, the conventional wisdom that per-sonallinesagentsandbrokersfocusonsellingmore insurance, rather than serving their cli-ents as forward-thinking risk managers,shouldalsobechallengedandchanged.Agents have a smorgasbord of techniques attheirdisposaltodealwiththeseassortedrisks,such as contractual risk transfer, risk avoid-ance,and losscontrol.Withagentsservingasriskmanagersratherthansimplyasinsurancesalespeople, clientswill be better served andbetter protected. This risk managementapproachwillresultinfewercoveragegaps—gaps that can wreak financial havoc on per-sonallinesinsuranceconsumersandgapsthatcangiveinsurersandagentsalikeablackeyeinthepublic’smind.