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Tom Mrachek
Posted on Thursday, July 26, 2001 - 12:54 am:   

First things first - reject the proof!
Lenny Wenrick
Posted on Wednesday, July 25, 2001 - 6:32 pm:   

I foolishly answered the question wrong. I am and have worked both side of the fence. Ashamed to say as an adjuster after answering the question, but proud to say as a builder.

Jim if you look in the Uniform Building Code (U.B.C.) which evrey state, county and city must comply to these mininum set of standards or supper seed them, I think you will find Certificate of Occupancy requirments which forces the issuing of this document to all governing agencies inforcing the building regulations. I am in the field and do not have my book (U.B.C.) with me so I'm working from memory. I believe this will answer the question regarding C of O requirements.

I would like to say however, (I do not know the lending requirements for every state) I just denied a claim on an HO-3 that was active during the construction time frame and with construction financing (not a mortgage) on an owner/builder project. This project was performed under a home owner's policy and carried construction financing form a local bank. I denied the claim based on the policy language, Living there, Temporairly Living there and Completed and Occupied. This claim is in a rual part of Virginia, less than 30 day's ago. The insureds agent called me wanting to know why I had denied the claim, of which I told him and he agreed. He informed me, he has provided the policy to other insureds while under construction as owner/builders.

I have no answers for you here, as I am just stating the facts. I do know, where I come from this would never happen. The lending companies are not set up to provide a mortage for a home under contruction. They do set up an owner/builder construction loan that converts to a mortgage once a C of O has been issued by the local governing agency.
Posted on Wednesday, July 25, 2001 - 11:46 am:   

I think Linda's question as to what qualifies is a residence is also a good one. DOES one night spent in the house mean the owner is "living" in it? Fireplace could provide heat and cooking in the winter. We know with ice storms that people certainly CAN live without electricity. But I feel fairly certain in this case that Sue wasn't living in the house because she was 17 and her parents wouldn't let her get married til she graduated high school. I can't imagine they'd allow their precious to "live" in the house without the benefit of marriage. We all know that no matter what our teenager might say ("oh NO Daddy, Joe won't be coming over") the truth is sometimes a bit different.

I would imagine that the definition of "living" in a house would be addressed in court where this claim would most probably be concluded.
Jim Flynt (Jimflynt)
Posted on Wednesday, July 25, 2001 - 11:04 am:   

One more afterthought for those who would elect to ignore the policy language as well as the exclusions created by definitional problems with "residence premises" of the HO-3 in the present circumstance.

Since you would argue that there exists coverage for replacement of the "dwelling" (as you would no doubt call it), what approach would you take to Coverage D (Additional Living Expenses) in handling this claim?

For to argue or accept the argument that Coverage A exists hangs Coverage D around your own neck like an albatross.
Jim Flynt (Jimflynt)
Posted on Wednesday, July 25, 2001 - 10:25 am:   

Many thanks to my good friend Linda Asberry for bringing some facts, calmness, and reason back to this discussion, and I understand and agree with everything she has said.

Like Linda, Ghostbuster and many others, I am too am having to do a little research on the number of localities which use and enforce building codes. Once I have completed that research the findings will be posted here.

From my initial research, it would appear that Alabama, Mississippi and Texas are among the 16 states in the US which do not have broad based state building codes. The other 34 states do.

There are different building codes used within the US due to differences which occur in temperature and climatic differences. In several Texas counties, building inspections are now mandatory for new construction if the homeowner intends to obtain wind coverage from the Texas Windpool but these are only in the counties of greatest risk.

Recent surveys suggest that almost 60% of the American population lives within 100 miles of our national coastal areas. Most munincipalities within these areas are concerned with building techinques and standards to insure compliance with wind resistance construction standards due to hurricane exposures and most utilize building codes and code enforcement. Expect to find Certificate of Occupancy or Certificate of Completion requirements as a rule and not an exception in most of these coastal communitities, counties and states.

Further, the ADA (Americans with Disabilities Act) a Federal Law passed by Congress is imposed on commercial construction and construction of buildings for public use, and there is ever growing pressure for the localities and states to incorporate the ADA into their codes. Texas was the 2nd state in the US to adopt this (Washington State was 1st). The ADA was passed to insure barrier free access for the handicapped, and it is a requirement of all new construction in every US location designed for public access regardless of whether there is a local or state building code in place.

In the instant example as provided, the poster informs us that there was a construction loan made and then he goes further in a second post, to inform us that banks never lend money without Proof of Insurance. I have asked and await his answer on which policy form is typically used to cover construction loan exposures.

Given all the comments which Linda has shared as well about more informal lending practices, I am curious if she has knowledge of how the informal lending institutions cover their exposure during a construction phase? Linda, please share whatever you can regarding construction exposure.

While currently living in an urbanized location, my roots are in the country where I grew up on a tobacco farm so pole barn, shed, hog pen, chicken house, and informal construction practices are not foreign to me. However, the world is a vastly changing place, and most of the insurance classes which I have took and continue to take, were designed to educate me to handling claims ANYWHERE in the US.

One of the lessons which I value every single day in adjusting, is to not only handle the claim as presented, but to ask myself how the agent could have better served the insured with either more coverage or more effective coverage through a different policy or with endorsements added. We should all be able to communicate effectively with an insured with regard to not only the coverages they have but what they should have as well.

I still suggest that generally speaking, the instant situation is a builder's risk exposure and should have been treated as such by the agent. Since there is a construction loan in place with what I can only assume to be a lender who is in compliance with FDIC and other national banking laws and practices, it would be the "rule" and not the "exception" to expect builder's risk coverage for such an exposure.

In "most" settings, a home is constructed by a builder (and in "many" locations licensing may be required of builders) who obtains the building permits and may also obtain the construction loan while the buyer is responsible for the "takeout" or permanent loan. The instant situation is clouded by a less than arm's length relationship between Joe and his builder Dad Bob. But if you think about it in a scenario of another builder who is arm's length away from Joe, he too as well as perhaps his subcontractors has suffered a loss here as well as the bank. The arm length's builder (and his subcontractors) has suffered loss of overhead and profit and they would look somewhere for recovery of their own interests. That is why sophisticated builders follow the customary practice of using builder's risk insurance to protect their exposure.
Jim Flynt (Jimflynt)
Posted on Wednesday, July 25, 2001 - 10:20 am:   

Contained within the provisions of the typical builder's risk policies are process and policy language differences which provide more coverage for the nuances of construction exposures as well as a greater degree of flexibility in resolving claims when there is loss. No other policy form provides the same protection nor understanding of the particular nature of a construction exposure which is increasing with each value added addition made by the various subcontractors.

In the instant example, there are many factors which certainly deserve research and understanding by adjusters: laws regarding minors entering contracts, insurable interests, handling of arson claims, insurance fraud in the application process, various estates in real estate ownership, as well as the innocent insured problem. A whole day could be spent in a seminar discussing any one of these topics with an informed speaker. Variations in state laws and local practices would by nature lend themselves to differing standards of accountability and response for similar circumstances in two differing jurisdictions.

I do especially agree with Linda with regard to the ease with which a house could be built for $50,000.00 which could be worth $100,000.00 when completed. As we all know or should know, determination of a policy limit for coverage by an agent is generally based on a quick and simple formula which is square footage based and which follows Marshall and Swift.

While I have promulgated the more widespread use and perhaps misunderstanding of the expression "Certificate of Occupancy," in some locales this is also known as a Certificate of Completion. And I ask you to think about construction as it relates especially to new houses in that sense: completion.

Ponder if you will the problems attached to understanding "when" a home is completed. Is a home completed when the power is turned on? Does a new homeowner have any right to decline to accept a newly constructed home when materials or designs are not as specified or expected? Without a building code or building code inspection how does a home buyer in Alabama or Mississippi or some parts of Texas and various other states know that the home has been tested for radon gas or that lead based paint or asbestos was not used in the construction process and that GFI's have been installed in bathrooms? How does an Alabama home buyer know that lead pipes are not being used to provide the water supply? How do lenders in these areas insure that the money they lend and which is taken down in various construction draws was actually used on this and not some other building project? At what point in time does the local utility company remove the "soft service" (temporary construction electrical hookup) and convert power over to a permanent connection in these code free areas? Does the utility company recognize "completion" as being the removal of the soft service? What bearing if any would that have in a legal environment? What process or inspections do the local property tax officials use to revise the property tax valuations to account for and include new additions, alterations and new construction for county and/or local property tax rolls?

These are just a few things which are shared for you to think about. Perhaps the original poster could amend or revise the example to move past the issues which are arguably debated, but I do think it is both beneficial and necessary for those from a few states to understand how and why things may be done vastly differently in most states. And as national catastrophe adjusters, we are all called to serve on a moment's notice when there are earthquakes in LA, hurricanes in Miami, Charleston, and Orlando, ice dams in New Jersey, and floods in Chicago. And interestingly enough, in all of those places named, agents, builders, adjusters, lenders, and building code enforcement officials would understand builder's risk exposures and covers and would in reading the "how to's of adjusting" which I have posted "get it."
Posted on Wednesday, July 25, 2001 - 8:06 am:   

Don't yall just love arguing with attorneys!! Almost as much fun as jumping in a swimming pool holding a Tomcat. Everything gets shredded. At the very least, a county administrator, and I'm talking Pender Co. N.C, Seven Springs, and that is way back in the woods, will go out, inspect the plumbing, a 2 holer dont count no mo' GB, and issue a certificate to occupy the risk. In 1996 it was $30 to apply and another $20 to inspect and issue.
Linda Asberry (Linda)
Posted on Wednesday, July 25, 2001 - 8:01 am:   

Okay, here are a few Texas facts.

1. County Commissioners have little authority over building regulations in the counties. Mainly due to the heavy Developer lobby with the legislature. The more regs--the less profit. Easy math.

2. There is no Certificate of Occupancy in the counties UNLESS the property falls with the ETJ (Extra Territorial Jurisdiction) of a municipality.

Having said that, no one has commented on whether anyone ever spent the night in the house. If they did, then it just may now be a residence regardless of the status of the loan. Ever seen a new homeowner so excited over their new home that they slept there as soon as the roof went on? albeit in their sleeping bag? I have. Does this qualify as a residence?
Linda Asberry (Linda)
Posted on Wednesday, July 25, 2001 - 7:37 am:   

I suppose it is time to throw in my two cents. Some of you are absolutely correct in many of your responses.

1. Some counties don't even have a building inspector. The most your may have is a state electrical inspector. No other inspections are required and if you do the electrical work yourself--no licensed electrician necessary.

2. The loan may only be for $25,000 to build the house. The other $25,000 is against the land itself. Many bankers who deal with customers on a daily basis will extend loans without the hoopla you would expect on normal construction projects.

3. It is most certainly possible for anyone to build a $100,000 house for $50,000. Labor and profits account for a great deal of the cost.

4. Until only the last few years, some counties did not have health regulations in place for sewage systems. This is within spitting distance of one of the largest metroplex areas of the country--not the boonies of Alabama. Many counties still do not have one.

5. The banker will go out on "property inspection" to insure that the last draw on the construction loan was actually spent on the construction. Many of them don't have a clue what they are looking for.

6. When I have more time, I will do some research and make further comments. Unfortunately, there are virtual slums in some areas due to a lack of inspection process in place.

7. Sorry for getting away from some of the facts but from reading all these posts, there is validity in each of your replies.

8. There is no deed for the house--only the land it sits on.
Posted on Tuesday, July 24, 2001 - 11:14 pm:   

C.O. aside, the policies will state that the definition of residence premises is "where you reside". No one was living in this house at the time of the loss. As Jim said, the policy might be rescinded if it could be shown that false statements had been made on the application.

Joe & Sue took out a $50,000 construction loan and spent $50,000 to build the house. Why would the agent (assuming he isn't a builder) decide that the structure is worth $100,000? The agent's company would certainly wonder since the house subsequently burned.

The construction loan had not been converted to a regular mortgage. A builders risk policy must still be in effect. The bank would certainly get their money. And they most certainly would go after Joe and his assets. Sue, being a party to the construction loan, might possibily have some exposure to the company with the builders risk policy. Since Sue is a minor and living at home with Mommy and Daddy then Mommy and Daddy are definitely at risk for having suit filed against them as well. Whether they could collect is an altogether different matter, but, as Alan knows, throw all the names on the suit. SOMEone might have some money.

The policies will normally state that if any insured directly causes or arranges for a loss to covered property in order to obtain insurance benefits, the policy is void. And it states that "we will not pay you or any other insured for this loss."

We know Joe didn't burn the house to collect the money. Would this exclusion still apply? Get him in front of a jury with a mean old city lawyer and there would be no doubt in anyone's mind that Joe burned the house for the insurance money he thought he would get.

Sue is co-owner of the land. She is co-owner of a loan to build the house. She hasn't contributed a dime to anything (not even the insurance premium which has nothing to do with the rest of this comment - just had to point that out). They haven't taken out a conventional mtg and there is no deed to this house because it isn't completed. I state this because Alan said in the first post that the house hadn't yet been inspected. She and Joe aren't married so, if this is a community property state, she doesn't own half of the house that Joe built unless her name is on something other than the construction loan (Jim will correct me if I'm wrong about this!). Sue would, therefore, have no insurable interest in the house. Wow. And she's engaged to Joe and must know him well enough to know what he would do if he caught her with Bubba. So now Joe is going to jail and Sue gets the insurance money, she owns the land and now she can build a house for herself and get rid of both Joe AND Bubba.

Reality sucks sweet Sue!
Ghostbuster (Ghostbuster)
Posted on Tuesday, July 24, 2001 - 11:12 pm:   

Aw, doggone it! Tomorrow I WAS gonna wash and wax the truck then go get a 'small bowl special' haircut. But, NOOO! Now I'm gonna spend the whole dab-blasted day researching this Certificate of Occupancy thing. I get to call: 1) the city building codes departments, 2) the county building codes folks, 3) the state fire marshall office, 4) a REAL, CPCU, type insurance agent, 5) a reputable builder of houses in rural areas, 6) a knowledgeable real estate lawyer, 7) a real estate title insurance company. And maybe some others I can't think of, right now.

Thank you Massa Flynt, for making my day.
Jim Flynt (Jimflynt)
Posted on Tuesday, July 24, 2001 - 10:43 pm:   

John since you and Alan seem to believe that the average cat adjuster only works in the backwoods of Alabama, Mississippi or some other Gawd fersaken backwoods state, perhaps each of you can share the name of one county of your own choosing in a state of your choice so I can do my "homework" and report back here with the results. I will be more than happy to call a few insurance agents, real estate lawyers, new construction builders in the areas you are alleging and see whether they agree with your viewpoints on two different ways of doing business in America. I have and will continue to suggest the right way, and for those adjusters out there who never work in urbanized America which utilize such fancy things as indoor plumbing and building codes, perhaps you should hitch your stars to Alan and John's point of view. I would recommend upping your E&O coverge in the meantime in case you are called upon to handle claims in the vast majority of the rest of the country.

For the rest of you who want to avoid a claim against your E&O coverage, stay out of court, and not see your names in lights in the FC&S Bulletin case studies, you may rest assured that following the position I have outlined previously works in 99% of the localities in America. The other areas we can feel comfortable are in good hands with Alan and John.

For every "exception" which Alan or John can name which does not have a building code, code enforcement, and utilization of Certificates of Occupancy or Certificate of Completion, I can name several fold that do. The vast majority of counties, cities and states in the United States ultiilize procedures as I have outlined.

It seems to me that we should be careful in not suggesting a "rule" for what can only be the very small set of "exceptions" which you seem to suggest are out there.

Adjusters should use policy knowledge for general purposes to include what works in the greatest number of circumstances and environments.

Even Alan has suggested in his earlier post today, that lenders never loan money without insurance in place. Since he also concedes in his initial post that the insureds Joe and Susie obtained a construction loan, perhaps he can share with us what type of insurance policy the lender required prior to a release of the construction loan funds. Remember, that at the time of the initial construction loan release of funds, there would have been absolutely nothing on the vacant tract but raw earth and how do you insure for that? The lender would have required protection for it's cash loan asset and even in Alabama and Mississippi I guarantee the sophisticated lenders use Builder's Risk exclusively for such exposure and protection.

And they say that ignorance is bliss.
John McMennamy
Posted on Tuesday, July 24, 2001 - 10:03 pm:   

Jim with all due repect to you and your great knowledge, we aint talking city here. With two acres the risk is probably in the country and does not require a C.O. unless required by the county. I know because I live in the country. Normally if you live inside the city limits you would be required a C.O. The risk was built with sweat equity from freinds to keep the cost of labor down. Thats how they built a $100,000 home for $50,000.
Jim I do not disagree with you very often and repect the vast knowledge you have shared with all the good people on this great site. I think I'll stand firm on this one and if I'm wrong I'll admit it. Either way we will all learn some thing and thats what this site is for.
Just my oppinion.
Stay cool and work safe.
Johnny Mac
Alvarado, Texas
alan jackson (Ajackson)
Posted on Tuesday, July 24, 2001 - 5:21 pm:   


Please come on down to Alabama, Mississippi etc.. out here in the country and tell these people that. For example out in alot of counties there is no inspections made by any goverment entity period. None, the only inspection done on some of these new homes is done by the real estate appr. or repersenative of mtg. co. People been living in them and making payments on them for years. Without a certificate of occupancy from anyone.

So Jim,we do have HO-3 out here in the country and yes we have coverage.
Jim Flynt (Jimflynt)
Posted on Tuesday, July 24, 2001 - 4:32 pm:   

(1) "Proof of Insurance" is not in fact required when a purchaser at a real estate closing pays cash.

(2) There is no "dwelling", "residence", "house" or "home" until an initial Certificate of Occupancy is issued.

By definition, there is again ABSOLUTELY POSITIVELY NO COVERAGE A COVERAGE WHATSOEVER available here in this instance from an HO-3.

The fact that an insured has prepaid for a policy, the agent has inspected it, or the status of conversion from a construction loan to a permanent loan is totally irrelevant. Until a Certificate of Occupancy is issued, all this or any insured would have would be the loss of "personal property" (Coverage C) which would be impossible to have without Coverage A which would be impossible to have without first having a dwelling which meets the policy definition for "residence premises."

Until such time as the initial Certifcate of Occupancy is issued by the county, city or state Code Enforcement body, all anyone could ever consider a "loss" by fire would be lumber, wires, fixtures, pipes, roofing materials, and other miscellaneous building components which would be treated by any insurance policy as "personal property."

Alan can add all the details and twists and turns he wants to this example, but given all the facts presented, there will NEVER be any coverage available under an HO-3 for what was at the time of loss a Builder's Risk exposure and which could never be anything else but a Builder's Risk exposure which can never be indemnified by anything other than a CPP Endorsed or Inland Marine Monoline Builder's Risk policy.

Any discussion regarding an HO-3 in the present example should now center solely on fraud on the part of the Insured or Insureds as well as complicity in such fraud by the agent in obtaining this policy under false pretense. Due to a fraudulent policy application, the policy is voidable and void without regard to any consideration for any payment to anyone for any reason.

Alan is correct that at a real estate closing for an EXISTING HOME that a homeowners or dwelling policy is required by a lender before release of permanent loan funds but he is in grave error in not realizing that it is also customary for a Builder's Risk Policy to be in effect up to the time of closing by a new owner for new construction. The existing home is obviously "livable" and the new home is considered "livable" when and after the issuance of a Certificate of Occupancy.

Perhaps the poster needs to do his own homework and go make a few phone calls to a few builders, construction lenders, real estate agents, and insurance agents to inquire as to what is customary for new home construction closings, and how and through what insurance mechanisms new construction is protected during the construction phase prior to issuance of a Certificate of Occupancy.

You can follow whatever path you may choose in this type example, but if you want to prevent an E&O claim against your own carrier as an adjuster, then I highly suggest you ignore those who don't know what the heck a Certificate of Occupancy is evidently, and cannot be persuaded to read, understand, and comply with the very policy language in a policy they blindly believe legally exists.
Tom Joyce (Tomj)
Posted on Tuesday, July 24, 2001 - 1:31 pm:   

Does the term INSURABLE INTEREST ring any bells??
alan jackson (Ajackson)
Posted on Tuesday, July 24, 2001 - 1:11 pm:   


Time for us all to da a little homework. We all need to make two telephone calls. One to your local agent and the other to the local real estate lawyer. At every real estate closing, refinance etc.. One thing is always required, PROOF OF INSURANCE. Usually the local agent forwards a binder or cerftificate of insurance over to the closing or refinance attorney for his file. Usually this is a HO policy if the insured is living or going to live in the house. At a closing,(sale of the property), the insured is not yet living in the house, unless it was vacant at the time of the sale. The seller usually has 14 to 30 days to vacate the property. All this time a HO policy, taken out by the purchaser is in effect even though they are not yet living in the house. Please make a few calls and verify this is the way it is done in your state. The mtg. taken out by the purchaser will require a policy before releasing the funds. This is the same as converting from builders loan over to a conv. mtg. Insurance companies issue HO policies like this everyday.

In our story, they have already bought and paid for a homeowners policy. A repersentative of the company, Harry, inspected the property prior to issuance of a policy. Insurance company issued policy and accepted prem. for one year.

Now, Sue who is insured under this policy has submitted a Proof of Loss. What do you do? What procedures or steps do you take? Does the intentional act of one insured bar recovery for all insureds? Whatever you do, you have to CYA. We don't want a bad faith suit.
Jim Flynt (Jimflynt)
Posted on Tuesday, July 24, 2001 - 11:28 am:   

Mark, you can almost be sure the bank did not loan any money for construction of a new home WITHOUT requiring a Builder's Risk policy. As the poster has described, the construction loan had not been converted to conventional financing at the time of loss, so the Builder's Risk policy should have still been in effect.

While it is a possibility, I do not see this as being an agent E&O claim either, for the simple reason that the insured and/or insureds would have been required to complete or answer questions for the policy application, and two of the questions asked would be: (1) When was the house "completed" and (2) Where do you presently reside. For the insured to have obtained an HO-3 policy would require the insured to fraudulently answer policy application questions as well as require the complicity of an agent in such fraud. The actions of the agent with regard to ignoring the answers on the policy application would lend themselves more to agent fraud than to agent ignorance, and you can bet your bottom dollar that a carrier would have refused coverage were truthful answers provided.

I think the bank will get their money, but in the instant situation, it is most likely coming from a Builder's Risk policy. Banks may make mistakes from time to time, but it is dang near impossible for me to believe that a lender would make a construction loan without requiring a Builder's Risk policy to be in place, or absent that, requiring the builder and/or insured to provide and maintain a performance or completion bond (surety). The bank may also have some form of fidelity coverage which could provide coverage for loan omission errors, fraud and financial crime (theft, embezzlement, employee dishonesty or conversion).
mark (Olderthendirt)
Posted on Tuesday, July 24, 2001 - 10:11 am:   

Are we now talking about the agents E & O? You can be sure the bank will get their money somewhere!
mark (Olderthendirt)
Posted on Tuesday, July 24, 2001 - 10:10 am:   

Are we now talking about the agents E & E? You can be sure the bank will get their money somewhere!
Ghostbuster (Ghostbuster)
Posted on Tuesday, July 24, 2001 - 10:06 am:   

OK, Today I will make my Confession of Ignorance.

About this Certifcate of Occupancy thing, are we saying ANY structure used to live in, whether in Texas or any other god-for-saken place Must have the above mentioned piece of paper? Are we talking in incorporated locales or even out in the boondocks? Does this mean my two hole outhouse with deluxe attached sun deck is out of compliance?
Posted on Tuesday, July 24, 2001 - 5:16 am:   

First off, Jim Flynt is not 99% correst but 100% correct. At least in Texas. Until I finally inspect (punchout) the risk and issue a notarized certificate of occupancy issued by the local code administrator, Me, as I once was, the risk is nothing more than a pile of lumber/brick & wire and the builder better have a Builders Risk policy paid up in full. Also better have anything and I mean anything to maybe add to little sweeties house on the premisies.Or it aint covered, the agent is an idiot, and it all reads like a fraud scam, and I handled a claim almost to the T just like it in 1998. Go figure, and thanks Jim for clarifying things.
Jim Flynt (Jimflynt)
Posted on Tuesday, July 24, 2001 - 12:15 am:   

Just to help those who do not seem to understand why the HO-3 cannot provide coverage, I am enclosing herein a couple of definitions from the HO-3 policy to re-elighten those who seem to have forgotten policy provisions:

(8) "Residence premises" means:

(a.) The one family dwelling, other
structures, and grounds; or
(b.) That part of any other building;

where you reside and which is shown as the "residence premises" in the Declarations.

To refresh your memory as well, now let's look at another definition:

(4) "Insured location" means:

(a.) The "residence premises";
(b.-h.) etc. etc. etc.

Finally let's look at one last yet vitally important thing under Section 1 - Property Coverages

Coverage A - Dwelling

We cover:

(1) The dwelling on the "residence premises" shown in the Declarations, including structures attached to the dwelling; and

(2) Materials and supplies located on or next to the "residence premises" used to construct, alter, or repair the dwelling or other structures on the "residence premises."

Since the insured and/or insureds cannot reside in the dwelling until a Certificate of Occupancy is granted, there is by definition NO "residence premises" and hence no coverage under Coverage A by any reasonable and prudent reading of the definitions of the HO-3 policy as I have shown above.

I would sincerely LOVE to hear anyone's coverage theory which can possibly explain away this gaping exclusion in the HO-3 policy which truly prohibits any insurance coverage under Coverage A for the instant example. Please share with me and others how you can conceivably or even possibly close an exclusion big enough to drive a Mack truck through.

Finally, for any adjuster who would recommend a Coverage A payment of any kind to "any" Insured or anyone (including the lender) where such coverage does not and cannot exist, please run to your E&O carrier ASAP to protect yourself from your lack of knowledge of policy coverages. Unfortunately, you are an accident just waiting to happen and sooner not later we will all be reading about your misadventures in one of the FC&S Bulletin case studies.

Yes, I know I am being extremely adamant in my argument in this scenario but the policy could not be more clear in exclusion nor could it be more clear that this is a builder's risk exposure which ONLY a Builder's Risk policy (Monoline Inland Marine or Endorsed CPP) can cover.

There is the exact same coverage available here for this Coverage A fire loss under an HO-3 as there would be under an ocean marine, jeweler's block, or auto floor plan policy; to wit, NONE. And the agent might as well have sold the insured any one of the other three as the four all offer the exact same protection for Coverage A residential fire protection: NONE.
Jim Flynt (Jimflynt)
Posted on Monday, July 23, 2001 - 10:17 pm:   

There is absolutely positively NO COVERAGE WHATSOEVER under an HO-3 policy for this loss under the circumstances as described by the poster. None. Nada. Zilch. Zero. Too bad, so sad. Nyet.

To argue that there is HO-3 coverage is to argue that either (1) The insured committed fraud in applying for the policy in which case the policy is voidable (2) The agent committed an error and omissions mistake of the highest magnitude, which would give rise for cause of an E&O policy response. Such an argument would be as ludicrous as one arguing that there is coverage for a residential risk fire under a jeweler's block, ocean (wet) marine or umbrella insurance policy.

There is NEVER a way to cover a builder's risk exposure with a homeowner's policy. NEVER.

And if this is not a Builder's Risk exposure at the time of loss, then the builder's risk policies have ceased to exist within just the last week or so.

Until such time as a home newly constructed is issued a Certificate of Occupancy, the structure is nothing more than a pile of lumber, fixtures, and components which really amounts to personal property. It does not constitute a residence (for Coverage A purposes) by definition until it is both "completed" and "occupied."

There is no gray area here whatsoever for HO-3 coverage: arson, minors entering contracts, relationships of parties, intentional acts, etc. nowithstanding.

Any other discussion is certainly enlightening for educational and information purposes, but it is not applicable in the instant situation.
Ricky Smith (Ricky)
Posted on Monday, July 23, 2001 - 3:28 pm:   

I don't know too much about these things since I am only a contractor.
Ricky Smith (Ricky)
Posted on Monday, July 23, 2001 - 3:24 pm:   

First of all sweet Susie is a minor and if she wanted to she could void the contract completely. But she would not want to do that. However, some states do allow minors to enter contracts, Nevada being one of them. I would think the agent might have fouled up for letting a minor enter into a contract of insurance and so did the mortgage company. However, with Susie submitting a single proof of loss, the insurance company because of the agent allowing her to be an insured would have to pay. Then they can sue the agent under his E & O policy.
Chuck Deaton
Posted on Monday, July 23, 2001 - 12:59 pm:   

First, anyone who thinks a minor can't enter into a contractual relationship needs to review the laws regarding minors and contracts.

Second, is this a state that has a "valued policy" law?

Third, did the adjuster have E & O. As there is a real possibility of "bad faith" here.
Posted on Monday, July 23, 2001 - 2:15 am:   


I have seen policies which state that the intentional act of ANY insured is a bar to recovery. Having said that, I had a claim years ago where Mr. Insured tried to kill wife and daughter by fire and we arrived at the conclusion that his acts resulted from many days of drug induced mania. It was decided that he couldn't form intent and we extended coverage to the innocent wife. Mr. resides in jail.

Posted on Sunday, July 22, 2001 - 11:53 pm:   

First of all this is a case that requires an arson investigation before any payment is made to anyone. The red flags are all over the place with the facts as they have been presented.

The first question that comes to mind is insurance fraud. The facts as they have been stated leads you to suspect collusion between Bob, Joe & Sue & others. You may even need to explore the relationship of these individuals with the bank loan officer. It is one thing to suspect insurance fraud and quite another to prove it. In any case if you are going to deny payment, suspicions are not enough you must be able to prove your case.

Now let us look at the facts:

1. Dwelling insured for $100,000.00 that cost $50,000.00 to build.
1a. Was the dwelling worth $100,000.00 as it was built?
2. A bank that lent $50,000.00 to an unmarried 23 year old (Joe) and Sue. Or did he? Sue being a minor can not legally enter into a contract so why is she a named insured on the $100,000.00 policy? And how can a bank loan officer loan her any money?
3. The relationship between the builder (Bob) & owner (Joe).
4. The relationship between the owner (Joe) & his fiancee (Sue).
5. The relationship between the builder (Bob) & Sue.
6. The relationship between the insurance agent, Bob, Joe, Sue & the loan officer at the bank.
7. And finally the relationship the bank loan officer with all of the players.
8. Oops, I almost forgot the individual that Sue was a little too friendly with. What is his relationship with everyone else? And who is this mystery person?

On the surface this is how the situation appears. Builder Bob wants to give his son a new home as a wedding present. The problem is he may not be able afford to and Joe may not have the ability to repay a mortgage loan. So how can you get a home paid for by someone else?

Well first build the house for $50,000.00 and insure it for twice it's cost of replacement. Now how can you build a dwelling for half of what it should cost? Easy cut every corner possible, falsify construction specifications, obtain a certificate of completion from the building department, then burn it down before anyone figures out that the dwelling was not built to specifications and now the deficiencies can not be discovered due to all of the evidence being destroyed in the fire. Then collect insurance proceeds, payoff the mortgage and wallah you have $50,000.00 clear to build the house that Bob wanted to give Joe in the first place.

The only thing left to do is to prove it. This is where the experience adjuster should turn the file over to a special investigation unit.
Johnny McMennamy
Posted on Sunday, July 22, 2001 - 9:45 pm:   

Also it does not matter if they were married or not. Little Joe burned the risk without her knowledge. Both Sweet Sue and the mortgage company has an insured interest. The check is in the mail and Little Joe's probably headin for jail.
John McMennamy
Posted on Sunday, July 22, 2001 - 9:38 pm:   

I agree with Mr. Toll. The check should be made out to Sweet Sue and the mortgage company, also a named insured, I'm sure.
Little Joe has to go back to the Pondarosa with nothing.
Just my oppinion.
Take care and work safe.
Johnny Mac
Lenny Wenrick
Posted on Sunday, July 22, 2001 - 9:11 pm:   

Sue is entiled to full recovery of the HO-3 policy as insured on the policy and is cassified as an innocent insured.

The adjuster estimate for 50,000 to repair stands as the RCV amount to repair the house.The price was agreed to by the policy holder and the contractor. It was not said that this was a total loss of the dwelling. The estimate is for repair and I would not withhold a deprecaition because the house was new and never lived in.

I am not sure legaly what happens to Joe as he did not try to burn the house down to collect insurance money, however if he lives at home with his papa he will have to wake up to Bubba with a smile on his face, every day living in his rebuilt house by the insurance company on the nice little two acres.
Jim Flynt (Jimflynt)
Posted on Monday, July 23, 2001 - 8:58 am:   

First of all, the answer to any question regarding the innocent insured problem under an HO-3 will be dependent on state by state case law, so it is imperative that an adjuster be aware of state case law on this issue when confronted with an applicable example.

Secondly, construction loans are not set up on an amortizing basis, and are normally paid "on call" within 12 to 24 months or converted to a prearranged permanent loan as part of a contruction loan package. When Joe says he is continuing to make payments to the bank, that is an irrelevant fact.

The bank would be paid in full for the amount of their construction loan regardless of location of the loss. (Assumes a Builder's Risk Policy is in effect which is generally a requirement for a construction loan).

One of the other posters is correct that the HO-5 would be the proper vehicle for guaranteed replacement cost benefits, but the HO-5 as well as HO-3 policies are for houses which are "completed" and "occupied."

There is no coverage for the homeowner's interest for this loss under the present scenario as the loss coverage should be under a Builder's Risk policy until it is completed and a Certificate of Occupancy is granted after a final inspection. Since the construction loan is still in effect at the time of loss, the Builder's Risk policy would respond and the homeowners policy would not (by both definition and HO underwriting guidelines).

The fact that Bob has prepaid for an HO-3 is irrelevant in the present example as it can be assumed that the policy inception date was anticipated for such time in the future after the Certificate of Occupancy has been issued. The HO-3 policy application requires a risk completion date for processing and to have furnished false information on the application would make the policy voidable in it's entirety, as the application is itself part of the policy.

The very nature of the risk exposure in the current example at the time of loss is one of builder's risk indemnification and not homeowner's insurance coverage.

Since Joe set an intentional fire he should be behind bars waiting trial at this point based on the facts as well as his own admission of guilt.

And despite the tender years of Sue's youth, her shifting affections and attitude toward fealty provide her with the requisites for fast tracking into a career as a carrier or vendor claims manager.

Bubba no doubt would make an excellent Public Adjuster.
Tom Toll (Tom)
Posted on Sunday, July 22, 2001 - 7:25 pm:   

Please substitute the word Bob to Joe. Bob is innocent.
Tom Toll (Tom)
Posted on Sunday, July 22, 2001 - 7:23 pm:   

Sue and Bob are not married, therefore separate insured's. Bob puts up the bondfire without Sue's permission, as she is too busy with Bubba. Bob committed an intentional act, which is not covered under the HO-3. Sue did not commit an intentional act and has a right to recover, even though Bubba will want a part of it. Bob should SUEBUBBA.
Kile Anderson (Kileanderson)
Posted on Sunday, July 22, 2001 - 7:14 pm:   

If the agent thought they needed guaranteed replacement cost why did he sell them the HO3, he should have sold the HO5. There would be no coverage in my oppinion because the house was destroyed by a criminal act of the insured. Maybe I'm just tired right now, West Virginia flood claims are wearing me out. The scenery is nice though.
alan jackson (Ajackson)
Posted on Sunday, July 22, 2001 - 7:00 pm:   

Joe is 23 years old and the son of Bob the Builder. He is in love with Sue. Sue is 17 years old. Joe and Sue wanna get married. However, Sue's daddy will not hear of it until Joe has a proper house for his little girl. Joe,s daddy gives him 2 acres out back so he can build Sweet Sue her dream home. Joe has the 2 acres of land deeded in his and Sue's name. The value of the 2 acres is $25,000 dollars. Sue draws up some house plans on the back of a brown paper bag and shows them to Joe. Joe determines it would cost $100,000 dollars to build this lovely home. However, his daddy, Bob the Builder, says they can build it at nights and weekends. Use some of the kinfolk to help. Bob thinks it will only cost $50,000 to build if they do it his way.

Joe and Sweet Sue go to the bank and take out a $50,000 construction loan so they can build her dream home. Six months later the home is complete and ready to move into. They are just waiting for their final inspection so they can convert their construction loan into a con. mtg. The wedding is 4 months away. Just as soon as Sue graduates HS in the spring.
Joe and Sue visit their local agent Harry. Harry visits the property and determines they need a Ho-3 policy with guarnteed replacement cost for both dwelling and contents in the amount of $100,000 for Coverage A. Bob the Builder, being the proud daddy of Joe decides to prepay the policy for an entire year.

The next week Joe catches Sue being a little to nice to his best buddy Bubba. Joe says I'll teach that hussy a leason and burn the dream house down. Joe puts a match to the dream home and watches her burn. As a kicker, he grills a few hot dogs to boot. Sue is livid over loosing her house. But Joe says baby this is what you get for being a little 2 sweet to my best buddy Bubba. Sue turns in a claim to the homeowners carrier. The adjuster calls Joe 2 get his version of events. Joe says dang right I burned the house, its my house and I can burn it if I want to. I'm still making payments. I'm happy the banks happy so what if Sue is upset. You prepare a estimate and determine the house can be repaired for $50,000. This estimate was agreed to by Bob the Builder. Sue and Sue alone submits a proof of loss for $50,000. What do you do?

Please base your answer only using the facts given. In a few days I will add a few more facts that may or may not change the adjustment of this claim. I hope we all can have some fun with this. P.S. Please read the fact pattern very carefully.

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