H03 Vs H05

[djs]

In California, very few companies write guaranteed replacement cost coverage. There were to many agents getting policies by under-rating the policy to get a premium amount. In the Oakland Hills fires, $1M homes got replaced with $50K in coverage. Not practical.

If Ohio still writes them and its not a HUGE premium to get a guaranteed replacement cost policy, then its usually an okay deal. I say okay, because if the agent did his job, there will be enough coverage anyway. This should be reviewed annually. Most carriers do this automatically with renewals, provided the home information is correct.

Dan

 

[blueblur1984]

I've been on captive and broker sides here in California and am having a tough time sorting out fact from fiction. There is no doubt that HO5 is broader coverage and almost every major insurer here uses a variation of that form as their default (State Farm, Farmers, Allstate, AAA...just about anyone who advertises). From what I've seen the premium difference is typically $75-200 per year depending on the base premium.

What I would like to see to help me make recommendations is:

1. What percentage of total claims are not FULLY covered by an HO3 (again, HO3 covers structures the same, but personal property is limited to named perils). Any documentation, source articles or hard evidence would be appreciated. I have tons of my own claims experience to give me anecdotal evidence but I'm trying to move towards recommendations I can back up with facts.

2. Are there lower justified complaint ratios with companies that typically offer an HO5 vs an HO3? Again any supporting evidence would be greatly appreciated.

3. Does anyone have an idea what the median premium difference is between comparably rated companies on an HO3 vs HO5?

I don't know if there is an easy answer because of the way the insurance industry works. From what I can gather larger insurance companies tend to have better ratings and/or more capital, a captive or semi-captive sales force and lean towards HO5 or equivalent. Smaller companies (or large companies that don't consider P&C insurance their bread & butter) will typically offer up HO3 to the broker channel which, from my anecdotal experience, can cause massive quality control issues. Again this is all my two cents, but I see a lot of unsupported opinions on here. Any hard evidence to make the case one way or the other would be greatly appreciated.

 

[GXR2]

It also can be a bit confusing working with some carriers because ...

Some insurance carriers will have only an HO3, but list endorsements that can be added that make it equal to an HO5.

I ran into this situation once when I was quoting a potential prospects carrier. I explained that my policy was an HO5, and he said his was an HO3. Mine was about he same price for better coverage. The prospect called his agent and was told that it was an HO5. However, his docs said HO3. So I asked him to forward me a copy of his policy.

Well... it was an HO3, but the agent had added endorsements that made it just as strong as an HO5. I guess because they didn't offer a typical HO5.

So when you're considering an HO5, it's not the "name" of the policy that really matters but the coverage provided. But typically if it is labeled HO5 it will have all the perks of a typical HO5.

Some carriers HO5 aren't much more than their HO3. You can be competitive with an HO5 if you're bidding against a prospects HO3, buy quoting yours with a higher deductible, like $2,500 or even $5,000. The higher deductible can lower the cost to compete with the HO3. Just advise and educate the client why it is not to their advantage to make small claims on their home policy.

 

[blueblur1984]

Thanks for the reply GXR2. Absolutely true that you can typically endorse an HO3 to be similar to an HO5, but that is a revelation that each company treats theirs differently. So it sounds like it is nearly impossible to make a true apples to apples comparison? I agree with your higher deductible suggestion on higher coverage...frankly I'd rather be fully covered on a big claim than have a smaller deductible. It seems like the claim frequency to get cancelled by a carrier is fairly low these days.

I'm doing financial planning so I'm not really writing home and auto on a meaningful scale, but in the spirit of being a fiduciary I want to be able to make the best recommendation possible for my clients. The problem I'm having with home owners insurance is the lack of concrete facts to work with. If the typical claim is fully covered under an un-endorsed HO3 the client would be poorly served by spending the extra money for the additional coverage, but I have seen a number of claims during my career that I do not believe would be covered under an HO3 that would be covered by an HO5. I don't really care if I close the sale or not...I'm looking for objective data that would allow me to make the best recommendations I can.

The best I could find was a blurb on the insurance information institute's website. It's not broken down by state, whether or not the claim was fully covered, etc but it does give a rough breakdown of claim severity and frequency. Even this is general though as the third most frequent claim is "other"...whether or not the bulk of this other category is named peril or open peril is unknown.

 

[djs]

Given the almost $0 difference in premium from an HO-3 to an HO-5, its not hard to justify. It would be very hard to justify recommending an HO-3 the first time you have a non-covered loss.

May never happen, but again, the premium difference is very slight, if at all, on a decent home. If you feel differently, then just write a DP-1 and really save them some money.

As a financial planner, you understand the benefit of shifting risk away from yourself and to someone else. I'm not sure why this would be different????

Dan

 

[bps]

I've seen very few companies offer HO5's in NC. Erie, Travelers, Central and others do offer HE7's. Don't mean to complicate this further.

 

[blueblur1984]

I don't disagree on the bulk of your statement DJS. I'm referring most of my home and auto out these days and I do recommend HO5. In fact I carry HO5 on my own home and I do believe, from my anecdotal experience, that it is the smart choice regardless if you feel your personal property is valuable.

I do disagree on the premium difference though. From my experience there is money to be saved in an unendorsed HO3. What I'm trying to discern is whether or not there is strong evidence for recommending more coverage at a slightly higher premium or if it is not a significant enough benefit. I'm trying to set my biases aside to understand what is the best possible recommendation and with evidence to support a decision one way or another you can prove you made the best suggestion for you client.

BPS brings up a good point too...it seems like each state has their own filings depending on the risks present. I don't doubt that California has their own differences.

 

[insurance1822]

Weird...cause I never wrote an HO5 in my career.

 

[djs]

I don't think I've ever had a claim that would be denied on an HO-3 and not on an HO-5 as far as the claim goes.

The big difference is HO-5 includes replacement cost coverage for personal property. HO-3 technically doesn't and offers actual cash value, though a lot of carriers do extend replacement cost coverage automatically. You have to check it out to see if its there or endorse it on.

Obviously, the difference between RCV and ACV is HUGE. If you write an HO-3 and endorse for this, then there may not be a big difference.

Then the other thing to watch for is sublimits on various things, but you really need to check this out anyway and make sure things like jewelry are appropriately covered.

Dan

 

[INSUREGEEK]

Some examples of HO5 covered claims that would not be paid on an ISO HO3:

Spilled a bottle of red wine on the new white carpet
Scorched the new countertop with a pot of boiling water
Wedding ring fell down the drain (without a specific jewelry rider)
Almost anything water related, unless it happens to be accidental discharge

I'll see if I can think of more.