Precise use of language is essential in
insurance underwriting. Unfortunately, people in other fields can
sometimes adopt terminology that can be misleading for
property/casualty professionals.
Residential property insurers have long
understood the distinction between “site-built (or “stick-built”)
homes constructed at permanent locations, and “mobile” (or “trailer”)
homes constructed in factories and hauled to a site.
That distinction in how homes are constructed
leads to different property loss experience for site-built and
mobile homes, and provides the basis for the separate Homeowners
and Mobile-Homeowners insurance programs offered by AAIS.
Beyond the loss experience, however,
standardized homeowners and mobile-homeowners programs are very
similar. AAIS uses largely identical forms in both.
Confusion can arise, however, when the term
“manufactured housing” is used to identify mobile homes, as
the mobile home industry has done in recent years. That term was
adopted by mobile home trade groups to improve the image of mobile
homes and reflect the enhanced size and features offered in
today's mobile homes.
“Manufactured housing,” however, also
refers to “modular housing,” residences constructed from
modules that are assembled in manufacturing facilities, shipped to
permanent locations, and permanently affixed to a foundation and
adjoining modules. Modules can arrive at a site completely
pre-assembled, with plumbing and wiring included.
Manufactured housing, therefore, encompasses
structures ranging from million-dollar estate homes to traditional
trailers. Beyond that, virtually all new residential construction
has some manufactured elements.
“What is happening is that all new dwellings
have some degree of pre-assembly,” says Tom Underwood, president
and COO of Utility Body Works, Elkhart, Ind., a mobile home
manufacturer. “Even stick-built structures have trusses that are
pre-assembled.”
“It used to be that everything was either
stick-built or a mobile home. Now there's more of a continuum.”
While that may be true for residential
construction techniques, the old distinction between site-built
and mobile homes still appears to be valid for property insurance
purposes. The challenge is to make sure that residences are
properly classified.
Mobile homes have long been defined as a
unique subset of owner-occupied residences, and that is still the
case.
For example, American Modern Insurance Group,
a carrier that specializes in insuring manufactured housing,
defines a mobile home to be a factory-built structure at least
eight feet in length that is constructed on its own chassis.
According to Jerry Wachter, vice president for
manufactured housing, the requirement that the structure be built
on its own chassis ensures that a mobile home policy cannot be
written to cover other types of manufactured housing.
The American Modern definition of a mobile
home explicitly includes expansions and additions to mobile homes,
as well as fixtures. The purpose, says Wachter, is to allow for
the full range of possibilities in modern mobile homes, without
applying mobile home coverage to structures that have different
loss characteristics.
A fire safety study conducted by Foremost
Insurance, Grand Rapids, Mich., indicated that the fire rate for
mobile homes was less than that for site-built homes. The better
fire rate is attributed in part to implementation of a national
building code by the U.S. Dept. of Housing and Urban Development
(HUD) in the 1970s.
Mobile homes are more susceptible to windstorm
loss, however.
As the American Modern definition suggests,
there are three characteristics that can be used to define a
mobile home:
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Off-site construction in a factory
setting;
-
Construction on its own chassis; and
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Construction to HUD building standards, as
opposed to local building codes.
As for establishing other categories of
manufactured housing for insurance purposes, there is little
evidence of statistically significant distinctions in loss
experience between modular and completely site-built homes.
“Modular homes are treated the same as
site-built homes in terms of financing and insurance,” says
Bruce Savage, spokesman for the Manufactured Housing Institute.
“I'm not aware of any statistics showing they perform (in loss
situations) differently than site-built homes.”
Also, modular housing must generally be built
to standards in local building codes, even if the modules are
constructed out of state. The growth in modular construction would
not be possible without widespread use of standardized building
codes.
Thus, when a carrier receives an application
for a “manufactured” home, the first order of business is to
determine if it meets the characteristics of a mobile home. Many
manufactured homes would be better classified with site-built
homes.
The construction of the residence--frame,
masonry, etc.--will, of course, be a key factor in determining the
premium, but there is no indication to date that the method of
construction, in itself, alters the risk. (As a practical matter,
most manufactured homes that are not mobile homes will be frame
construction.)
Property/casualty professionals accustomed to
using identical forms to write homeowners and mobile-homeowners
coverage may be surprised to learn how differently the two lines
started out.
“Mobile home insurance developed from the
identity of mobile homes as chattel property rather than real
property,” says Wachter of American Modern. Early “trailer
homes” had axles with wheels and could be literally hauled away
at a moment's notice.
Given the character of early mobile homes, “the
insurance policy [covering a mobile home] was really a takeoff on
auto physical damage coverage,” Wachter says.
That steadily changed as mobile homes came to
be permanently affixed at locations and developed risk
characteristics similar to those of site-built homes. For decades
now, the basic, broad, special, and limited perils forms, as well
as the personal liability sections, have been largely identical in
the AAIS Homeowners and Mobile-Homeowners Programs.
The persistence of distinct homeowners and
mobile-homeowners programs lies in two related factors: rating and
valuation of structures.
Perhaps the last vestige of the original “auto”
character of mobile homes is the fact that their structures
depreciate faster than they accumulate real estate value, if they
accumulate any real value at all.
“With mobile homes, the depreciation is
greater than the growth in replacement cost,” says Werner Kruck,
executive vice president of American Superior Ins. Co.,
Plantation, Fla., a company that specializes in residential
property insurance.
“With traditional site-built homes,
replacement cost usually grows faster than the depreciation of the
home.”
Every student of insurance learns that the
market value of a home should not be confused with replacement
cost, but it frequently is because mortgage lenders often insist
that residential property insurance be written to cover the
balance on a mortgage loan.
Also, the appreciation in market value has
often been considered a factor in calculating replacement cost,
the assumption being that the cost of living drives the cost of
construction.
Whatever the reason, depreciation is rarely a
major consideration in home owners insurance, except for older
homes in areas with relatively low real estate values.
For that reason, replacement cost loss
settlement, with a coinsurance requirement, is a standard feature
of most homeowners policies written in the U.S.
Standard homeowners forms explicitly state,
however, that replacement cost terms do not apply to mobile homes,
“whether or not on a permanent foundation,” but without
otherwise defining the term “mobile home.”
Actual cash value loss settlement
automatically applies to mobile homes; replacement cost
settlement, if desired, must be added by endorsement.
In practice, the underwriting of a replacement
cost endorsement on a mobile home policy is analogous to the
underwriting of “gap” coverage on a personal auto, says
Jeffrey Holaway, AAIS manager of personal lines pricing.
According to Holaway, car owners frequently
buy coverage that will pay what it costs to replace a vehicle that
has been effectively destroyed, even if the amount of insurance
exceeds the book value of the vehicle being insured.
Replacement cost coverage for a mobile home is
written on a stated value basis in some states, says Kruck. This
raises the possibility that an owner can collect an insurance
payment for a total loss, replace the damaged home with a used one
at less cost, and pocket the rest of the money.
Apart from the settlement terms, the
distinction between homeowners and mobile-homeowners insurance
lies in the distinction between loss costs for the two lines, and
subsequently the information used to rate policies.
Insurers should be cautious about applying
loss costs derived from mobile home experience to manufactured
housing that may be more appropriately classified with site-built
housing.
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Manufactured Housing
