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CHAPTER 2. PROPERTY INSURANCE

EXPLANATION AND REQUIREMENTS

2-1. PROPERTY COVERAGE.

Property insurance policies shall be written to cover all HA-

owned property based on their current replacement value

including equipment and furnishings. The policy does not

cover property owned by a tenant, and it is the tenants

responsibility to insure their household property if they

desire to do so.

The majority of insurance companies providing commercial

property insurance either use the three coverage forms

designed and copyrighted by the Insurance Services Office

(ISO), or coverage forms that are very similar. These forms

are:

a\. Basic Form: This form protects against loss from fire,

lightning, explosion, windstorm or hail, smoke,

aircraft or vehicles (non-owned), riot or civil

commotion, vandalism, sprinkler leakage, sinkhole

collapse, and volcanic action.

b\. Broad Form: This form insures against all of the

perils included in the basic form plus breakage of

glass, falling objects, weight of ice, snow, or sleet,

and water damage (not flooding).

c\. Special Form: This form is considered to be an \"all

risk\" form, providing more protection than the other

two. Rather than listing the perils insured against,

it insures against all causes of loss except those

which are specifically not covered under the exclusions

section of the contract.

The ACC requires a HA to purchase property insurance.

However, the extent of the coverage is at the discretion of

the HA, but the most comprehensive coverage (special form) is

recommended. The cost is usually very little above the cost

of the basic form.

None of the above forms cover damage as a result of an

earthquake or land subsidence. If a HA is located in a fault

zone or areas where underground mining has been carried out,

the HA should check for the availability of coverage and if

the cost is affordable.

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2-2. AMOUNT OF COVERAGE REQUIRED.

The ACC requires that property insurance be written on a

replacement cost basis. This means that the insurance will

pay the cost to replace the destroyed or damaged property on

the same premises with other property of comparable material

and quality, or the actual amount spent to repair or replace,

whichever is less. As opposed to insuring on an \"actual cash

value\" basis, depreciation based on the age and type of

construction of the property may not be taken into

consideration when adjusting a loss. If depreciation is

taken into consideration, it will produce inadequate values

and the HA will become a co-insurer on each loss. In some

cases, this method has produced per dwelling unit values of

under \$10,000 thereby abrogating the intent of the ACC

insurance provisions, which is to protect the interest of the

Federal government in the HA properties.

In order to obtain replacement cost coverage, the property

must be in insured for at least 80% (preferably 100%) of what

it would cost to replace the property. The following method

may be used to determine the current insurable value and meet

the ACC requirement:

a.  Determine the original insurable value from Form
    [HUD-5460](http://www.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/forms/files/5460.pdf),

b.  see Exhibit 1, then,

b\. At each annual renewal date, increase the original

insurable value by a percentage factor which should

take into consideration any increased cost of

construction due to labor and/or material costs. To

assist HAs in arriving at these percentage increases,

HUD is currently providing each field office with

increased cost of construction factors. The factors,

however, are regional in nature, and may be adjusted if

local conditions warrant deviation.

c\. The annual percentage increase should be equal to 100

percent replacement value which is the current

insurable value.

2-3. ALTERNATE METHODS TO DETERMINE CURRENT INSURABLE VALUE.

If Form
[HUD-5460](http://www.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/forms/files/5460.pdf)
is not available to the HA or to the Field

Office, the HA may use either of the following methods:

a\. Contract the services of a professional appraiser to

determine the current or replacement cost of each

building, or utilize the services of Marshall-Swift or

Boeckh. These are organizations that specialize in

publishing tables that can be used for this purpose.

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b\. Contact the local county or state building trades

association for the current construction cost, by type

of building construction (i.e., concrete, brick

concrete/brick or frame). The association can provide

a per square foot cost to replace each type of

building. Multiply the per square foot cost by the

total square feet in each building (do not include the

square footage of a basement) to arrive at the current

insurable value.

2-4. CONTENTS COVERAGE.

The current insurable value of HA property must include the

HA owned contents of the buildings. Form
[HUD-5460](http://www.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/forms/files/5460.pdf)
does not

include the cost of office equipment or property in

maintenance/community buildings. The HA must determine a

reasonable replacement cost for these items and add their

value to the total contents coverage required. Ranges and

refrigerators are considered part of the building. The

insurable value as shown on Form
[HUD-5460](http://www.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/forms/files/5460.pdf)
does include the

original cost of these appliances.

2-5. SPECIFIC SCHEDULED LIMITS VS. BLANKET POLICY.

The ACC requires that property insurance be written under a

blanket policy which provides one limit covering the combined

insurable values of all buildings and contents. This

simplifies both the policy purchasing/maintenance procedures

and the settlement of claims. It eliminates the possibility

of under insuring individual properties.

2-6. AGREED VALUE CLAUSE.

Unless eliminated, policies contain a coinsurance clause

which requires that the insured carry an amount of insurance

equal to a predetermined percentage of the property value

(e.g., 80, 90 or 100 percent). If a HA fails to carry the

predetermined percentage, the amount paid for a partial loss

is prorated in the same proportion as the difference between

the carried limit and the required limit. This could act to

penalize the HA. Therefore, the coinsurance clause must be

removed and an agreed value clause used in lieu of the

coinsurance clause.

2-7. DEDUCTIBLES.

Most policies have a provision requiring the HA to pay an

initial predetermined amount of a claim. This initial

payment is called a deductible. The deductible amount may

range from \$100 to over \$25,000 per claim.

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a\. Cost Impact. Deductibles are applied on a per claim

basis. The cost impact of the deductible must be

measured by: (1) the amount of the deductible, and (2)

the number of claims to which the deductible would

apply.

Note: Because deductible amounts accumulate as the

number of claims increase, deductibles higher than \$250

generally are not recommended, except for HAs with 500

or more dwelling units. The deductible should not

exceed the ability of the HA to pay the uninsured

portion of all loses.

b\. Evaluating Bids. When evaluating bids, which contain

different deductibles, it is necessary to value the

deductible based on the previous claim experience in

order to determine the most cost effective alternative.

For example:

Losses during prior 12 months:

\(1\) \$15,000; (2) \$8,000; (3) \$20,000; (4) \$2,000;

\(5\) \$4,000\-- Total \$49,000

Bid A Bid B

Deductible \$10,000 Deductible \$5,000

Annual Premium \$150,000 Annual Premium \$160,000

If the losses for the next annual period were to follow

the same pattern then the net cost of bid A would be

\$184,000 (The annual premium plus the deductible

amounts not paid by the insurance company.) Bid B would

net out at \$181,000. Under this set of circumstances,

bid B would be the more cost effective.

2-8. ORDINANCE OR LAW COVERAGE.

Many communities have building ordinances requiring that any

building which is damaged to some extent (usually 50%) must

be completely demolished and rebuilt in accordance with

current building codes. None of the causes of loss forms

described earlier provide this coverage. If a HA owns a

building where building codes have changed since they were

built, the HA should definitely consider adding an

endorsement which would provide this coverage.

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2-9. NOTICE OF CANCELLATION ENDORSEMENT.

This recommended endorsement provides that the insurance

company will give the HA a minimum of 60 days notice prior to

policy cancellation. (Individual state statutes may require

more than the 60 days prior notice.)

2-10 REMOVAL OF VACANCY ENDORSEMENT.

This recommended endorsement provides for the removal of that

portion of the policy that voids or restricts coverage on

entire buildings left vacant beyond a specific period of time.

The vacancy clause should be removed.

2-11 DAVIS-BACON ACT WAGE RATES.

When the damages covered under the property policy are in

excess of \$2,000 and amounts to reconstruction, the policy

should require the insurance company to pay any additional

labor cost under the Davis-Bacon Act, as amended (40 U.S.C.

27a-5) A separate endorsement is needed to this effect.

2-12 BUSINESS INCOME.

Although not a requirement, HAs may wish to consider

purchasing this separate type of property insurance. Rather

than insuring against replacing the property itself, this

coverage would reimburse the HA for any loss of rental income

while the premises were untenable due to a covered cause of

loss. In evaluating the need for this coverage, the HA should

consider the reimbursement provision of the Performance

Funding System.

2-13 BUILDERS RISK.

When a new building is being constructed for a HA, a separate

builders risk insurance policy is required. This can either

be purchased by the HA or by the contractor. In either event,

the policy should name the HA, the contractor, and any

subcontractors as insureds. It is not necessary to obtain a

separate builders risk policy to cover alterations or repairs

to existing structures since this is covered under the form

used for completed structures.

2-14 PARTIES INSURED.

The HA should be shown as the named insured. The U.S.

Department of Housing and Urban Development should not be

named as an insured.

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