Homeowners Co-insurance Penalty

Under an HO-3 open peril policy, is cleaning of the dwelling after a partial loss subject to the underinsurance penalty when coverage does not meet the 80 percent requirement?

Ohio Subscriber

When the policy is underinsured it pays the greater of ACV or the proportion of the repair to the proportion of the 80 percent of the replacement cost. An example makes it easier. The house is worth $300,000.00 and is insured for $210,000. To determine whether or not it's insured to 80%, divide the 210,000 by the 300,000. So 210,000/300,000 = .70 or 70 percent. The loss is $50,000.

The actual cash value to repair the damage is $35,000. The policy will pay the greater of ACV or the proportion of the repair less deductible of the actual insurance on the dwelling bears to the 80 percent of insurance. The 80 percent is $240,000. The actual insurance is $210,000 so we divide the $210,000 by the $240,000 which equals 87.5 percent. 210,000/240,000=.875. Then we take the loss, $35,000 and multiply by .875 for the proportional figure. 35,000 x .875 = 30,625. Since the actual cost to repair or replace the damage is $35,000 and that is greater than the proportional amount of $30,625, the $35,000 is what is paid for the loss.

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