Study guide
Property policies pay for direct physical damage to buildings and belongings, and the exam expects you to know which form covers which perils on which basis. This chapter walks through the homeowners program, the simpler dwelling forms, and the commercial property world of package policies, businessowners policies, and specialty coverages like flood and inland marine.
Homeowners Forms and the Perils They Insure Against
The homeowners program, based on forms developed by Insurance Services Office, packages property and liability coverage for owner-occupants, tenants, and condominium unit owners. What distinguishes the forms is how perils are covered. Named peril coverage pays only for causes of loss specifically listed; open peril coverage, often labeled special form, pays for any direct physical loss unless the policy excludes it, which shifts the burden of proof to the insurer. HO-2, the broad form, covers dwelling and personal property on a named peril basis, including fire, lightning, windstorm and hail, theft, vandalism, falling objects, weight of ice and snow, and accidental discharge of water. HO-3, the special form and the most commonly sold, covers the dwelling and other structures on an open peril basis while covering personal property for named perils. HO-5, the comprehensive form, extends open peril coverage to personal property as well. HO-4 is the tenant or renter form, covering personal property on a named peril basis plus liability, with no dwelling coverage since the tenant does not own the building. HO-6 serves condominium unit owners, covering personal property and a modest amount of coverage for the unit's interior elements such as alterations and fixtures, since the association's master policy typically covers the building shell, though how much of the unit interior the master policy covers varies by association. HO-8, the modified form, is designed for older homes whose replacement cost far exceeds market value; it covers a shorter list of perils and settles losses on a functional or market value basis rather than full replacement cost. Across all forms, flood, earth movement, ordinance enforcement, and intentional loss are standard exclusions.
Homeowners Property Coverages A Through D and Special Limits
The property side of a homeowners policy is organized into four coverages. Coverage A, Dwelling, insures the residence itself and structures attached to it, like an attached garage. Coverage B, Other Structures, covers detached structures on the premises, such as a fence, shed, or detached garage, and is typically set at 10 percent of the Coverage A limit. Coverage C, Personal Property, covers the insured's belongings anywhere in the world, usually at 50 percent of Coverage A for owner forms, with settlement at actual cash value unless a replacement cost endorsement is purchased. Coverage D, Loss of Use, pays additional living expenses and fair rental value when a covered loss makes the home uninhabitable, an indirect loss coverage. Within Coverage C, the policy imposes special limits on categories of property that are especially valuable or hard to verify. Typical categories include money and coins, securities and valuable papers, watercraft, trailers, jewelry, watches and furs for loss by theft, firearms for theft, and silverware for theft. The dollar amounts vary by insurer and edition, so learn the categories rather than exact figures. For example, if a burglar takes 15,000 dollars of jewelry from Priya's home, the policy pays only the special theft limit, often a few thousand dollars; to insure the full value she needs a scheduled personal property endorsement, which lists items individually, usually with appraisal support, and typically covers them on an open peril basis without a deductible. Business property and property of tenants are also sublimited, and some property, like animals and motor vehicles, is excluded entirely.
Dwelling Forms DP-1, DP-2, and DP-3
The dwelling program insures residential property that does not qualify for, or does not need, a homeowners policy: rental dwellings, homes held for sale, seasonal residences, or owner-occupied homes where the owner wants property coverage only. Unlike homeowners forms, dwelling forms do not automatically include personal liability or theft coverage, though both can be added by endorsement, and the insured need not occupy the dwelling. DP-1, the basic form, covers a short list of named perils, essentially fire, lightning, and internal explosion, with extended coverage perils, remembered by the acronym WCSHAVVE for windstorm, civil commotion, smoke, hail, aircraft, vehicles, volcanic eruption, and explosion, plus vandalism available as options. DP-1 settles losses at actual cash value. DP-2, the broad form, adds broad form perils similar to the HO-2 list, such as falling objects, weight of ice and snow, accidental water discharge, freezing, and burglary damage, and settles building losses at replacement cost when insurance to value requirements are met. DP-3, the special form, covers the dwelling and other structures on an open peril basis, with personal property remaining named peril, mirroring the HO-3 structure, and also provides replacement cost on buildings. The dwelling coverages parallel homeowners: Coverage A dwelling, Coverage B other structures, Coverage C personal property, Coverage D fair rental value, and Coverage E additional living expense, with Coverage E appearing in DP-2 and DP-3. A landlord like Omar insuring a duplex he rents out would typically choose DP-3 with a liability endorsement or a separate liability policy.
Commercial Property: The Package Policy, BPP, and Time Element Coverage
A commercial package policy, or CPP, lets a business combine two or more coverage parts, such as commercial property, general liability, crime, inland marine, and commercial auto, under common declarations and conditions, often with a package discount. The heart of the property part is the Building and Personal Property coverage form, the BPP. It covers three categories: the building, including permanently installed fixtures and machinery; business personal property, meaning furniture, stock, and equipment the insured owns, generally within the building or within a short distance of the premises; and personal property of others in the insured's care, custody, or control. What perils apply depends on the causes of loss form attached. The basic form covers a named list including fire, lightning, windstorm, hail, smoke, vandalism, sprinkler leakage, and sinkhole collapse. The broad form adds perils such as falling objects, weight of snow, ice or sleet, and water damage. The special form covers direct physical loss on an open peril basis subject to exclusions, the broadest option. Physical damage is only part of a business's exposure. Business income coverage pays the net income the business would have earned plus continuing normal operating expenses, including payroll, during the period of restoration after a covered direct loss shuts operations down. Extra expense coverage pays costs beyond normal operating expenses incurred to avoid or minimize the shutdown, such as renting temporary space or expediting equipment shipment. A bakery that loses its ovens to fire uses business income for lost profits and extra expense for the rush installation of replacement ovens.
BOP, Builders Risk, Inland Marine, Flood, Earthquake, and First-Party Cyber
The businessowners policy, or BOP, packages property and liability coverage for small to medium businesses in one prepriced policy, much as a homeowners policy does for individuals. Eligibility is limited by criteria such as building size, floor area, annual revenues, and class of business; offices, small retail stores, apartments, and similar low-hazard operations typically qualify, while large manufacturers, auto dealers, bars, and banks generally do not, though eligibility rules vary by insurer. A standard BOP includes special form property coverage, business income and extra expense without a specific dollar limit for a stated period, and businessowners liability. Builders risk insurance covers buildings under construction, on a completed value or reporting basis, protecting the owner and often the contractor until the project is finished and accepted. Inland marine floaters cover property that moves: contractors equipment, fine arts, jewelry, cameras, musical instruments, and goods in domestic transit. These policies follow the property rather than a fixed location and are often written on an open peril basis. Flood is excluded by standard property forms; coverage is available primarily through the National Flood Insurance Program in participating communities, with private flood markets growing in some states. NFIP policies carry maximum limits, currently up to 250,000 dollars for a residential building and 100,000 dollars for contents, and new policies are generally subject to a waiting period, commonly 30 days. Earthquake coverage is likewise excluded and must be added by endorsement or separate policy; availability and state programs vary, with California operating a dedicated earthquake authority. First-party cyber coverage pays the insured's own losses from events like data breaches and ransomware, including data restoration, business interruption, and notification costs.
Key terms
- Open peril (special form) coverage
- — Coverage for any direct physical loss except those specifically excluded, placing the burden on the insurer to prove an exclusion applies.
- Named peril coverage
- — Coverage only for causes of loss specifically listed in the policy, placing the burden on the insured to show a listed peril caused the loss.
- HO-3 (special form)
- — The most common homeowners form, covering the dwelling and other structures on an open peril basis and personal property on a named peril basis.
- HO-4 (contents broad form)
- — The homeowners form for tenants, covering personal property and liability with no dwelling coverage.
- HO-6 (unit owners form)
- — The homeowners form for condominium unit owners, covering personal property plus interior alterations and fixtures not covered by the association's master policy.
- Coverage D (Loss of Use)
- — Homeowners coverage paying additional living expenses and fair rental value when a covered loss makes the residence uninhabitable.
- DP-3
- — The special dwelling form covering the dwelling on an open peril basis with replacement cost on buildings; often used by landlords.
- Building and Personal Property (BPP) form
- — The core commercial property form covering buildings, business personal property, and personal property of others at a described premises.
- Causes of loss forms
- — The basic, broad, and special forms attached to commercial property policies that define which perils are covered.
- Business income coverage
- — Time element coverage paying lost net income and continuing expenses during the period of restoration after a covered direct loss suspends operations.
- Businessowners policy (BOP)
- — A packaged property and liability policy for eligible small to medium businesses, including built-in business income and extra expense coverage.
- Inland marine floater
- — A policy covering movable property wherever it goes, such as contractors equipment, jewelry, or fine arts, typically on an open peril basis.
Exam tips
- Tie each HO form to its structure: HO-2 all named peril, HO-3 open peril dwelling with named peril contents, HO-5 open peril on both, HO-4 tenants, HO-6 condo unit owners, HO-8 older homes at modified settlement.
- Know the Coverage A through D framework cold, including the common default percentages for Coverage B and Coverage C, and remember special limits apply per category, not per item.
- Dwelling forms differ from homeowners in two testable ways: no owner-occupancy requirement and no built-in theft or liability coverage.
- For commercial questions, match the loss to the coverage: physical damage is the BPP, lost profits are business income, and costs to keep operating are extra expense.
- Flood and earthquake are excluded from standard property forms; flood is written mainly through the NFIP with a waiting period, and program details and availability vary by state.