Guaranteed Replacement Cost—Effect on Other Coverages

The standard HO-3 policy provides coverage for trees and shrubs in the amount of 5 percent of the coverage A limit. How does the addition of a “guaranteed replacement cost” endorsement affect this coverage?

Such an endorsement automatically increases the amount of coverage A in the event of a total loss, if the coverage is inadequate. When the endorsement is used, is the limit for trees and shrubs still 5 percent of the amount on the declarations page or is it 5 percent of the new amount of insurance?

Ohio Subscriber

The guaranteed replacement cost form is not a standard form. Each company adopts a slightly different version of it. However, Insurance Services Office (ISO) does have an advisory form.

 

That form says that if an increase is needed, it is an increase in the “coverage A limit of liability.” The form goes on to say that the other three section I coverages are also increased accordingly.

 

The ISO HO-3 policy says that the limit for trees and shrubs is 5 percent “of the limit that applies to the dwelling.” If your client's policy has this wording, it is clear that the 5 percent for trees and shrubs is 5 percent of the new amount. The ISO form also calls for the insured to pay an additional premium for the increased coverage from the inception (or renewal date) to the date of loss. If your form calls for this, then again, the 5 percent limit for shrubs would be 5 percent of the increased amount. That coverage is included in the base premium and cannot be broken out.

 

However, if your client's policy does not refer to the “coverage A limit of liability,” or if it does not charge an extra premium for the added coverage, there may be some question as to the amount of coverage for trees.

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