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Chapter 4: Homeowners InsuranceThree basic levels of coverage for home insurance: 1.Basic Coverage is a named perils policy- only those perils listed, such as fire, falling objects, and vandalism are covered. This is the cheapest and the most risky of the three. A Basic Policy is also called a Standard Policy. 2.Broad Coverageprovides all-risks coverage on the buildings and named perils coverage on the contents 3.Comprehensive Coverage- covers the buildings and contents for all-risksthat are not specifically excluded. It is the most expensive of the three and provides the most complete coverage. The Policy as a Contract: A homeowners policy is a contract & establishes the terms of the contract including: That it is an agreement between legally competent parties The consideration, that is, the amount of the premium The intent to do something that is legal The details of exactly what losses are covered and for how much they are covered; and The period of time covered by the contract -Losses covered are either: Direct Losses- damage to or destruction of the building and personal property, or loss of property if theft is also covered, or Indirect Losses- for example, loss of rental income from a tenant or the need to rent other living accommodations while the home is being repaired. -The policy covers the 4 principles of insurance covered earlier: 1.Indemnity-the insured is returned to the same financial position as before the loss, without making a profit. This financial position is defined using one of the following: a)Actual Cash Valueof the market value. It provides compensation to replace what was there in the actual condition it was in at the time of the loss. It is replacement cost less any depreciation arising from its age, use, fair market value, and/or obsolescence. This can also be called its replacement value.b)Replacement Cost, which is the cost to replace what was there without deducting depreciation, that is, to replace it in new condition, and c)Guaranteed Replacement Cost, which is the same as replacement cost but payment is not limited to the amount of the insurance coverage. 2.Insurable Interest-only the homeowner(s) can insure the property. 3.Subrogation- the insurer will pay the insured the amount of the loss and is entitled to recover from a negligent third party who is not the insured, that is, the insurer pays the injured party and then has the right to recover this amount from the person who caused the loss. 4.Reasonable Expectations- the insured is covered for anything that he or she can reasonably expect to be covered for and any exclusion must be specified. -This contract also specifies anything excluded from the coverage, what property of other people is covered, what the insured is required to do in the event of a loss, as well any coinsurancerequirements.
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