Actual Cash Value Settlement

HO 04 81 05 11

 According to manual rules, the HO 04 81 05 11 actual cash value loss settlement endorsement may be used with homeowners forms HO 00 02 05 11, HO 00 03 05 11, or HO 00 05 05 11. Previously, the endorsement was required to be used with the HO 00 08 (a modified coverage form). Now, the reference to the HO 00 08 has been deleted so that the endorsement may be used with the other homeowners forms as well as the HO 00 08. This endorsement provides for loss settlement on an actual cash value basis, but for no more than the amount required to repair or replace the damaged property. The insured benefits by paying a lower premium, since the amount of coverage A selected may be lower than that required to meet the homeowners standard replacement cost conditions. The agent will have less likelihood of an errors and omissions claim arising from an insufficient amount of coverage A (dwelling). However, the agent must make clear to the insured that covered property losses are settled on an actual cash value basis at the time of loss, but for no more than the amount required to repair or replace. The agent must also make clear that many factors, variable by state, determine actual cash value. Generally, actual cash value is determined by the cost new of building materials, plus current labor costs and contractors' profit and overhead, less depreciation for wear and tear or obsolescence of the dwelling. Occasionally market value may figure in the equation.

 Special Loss Settlement

HO 04 56 05 11

 Endorsement HO 04 56 05 11 special loss settlement modifies the, HO 00 02, HO 00 03, and HO 00 05 loss settlement provisions by allowing the insured to select a specified amount of insurance less than 80 percent of replacement cost of the dwelling. According to ISO rules, the insured can carry 50, 60, or 70 percent of the full replacement cost. (Individual insurer rules regarding acceptability of this endorsement may vary. Please check with the underwriter before attaching it.) If the insured maintains this amount, losses are settled for the least of: the limit of liability that applies to the building; the replacement cost of the part of the building damaged with material of like kind and quality and for like use; or the necessary amount actually spent to repair or replace the damaged building. If the insured elects to rebuild at a new premises, the replacement cost is limited to the amount it would have cost to rebuild at the original premises.

 If the insured fails to maintain the agreed percentage of full replacement, then covered losses are settled for the greater of: the actual cash value of the part of the damaged building; the proportion of the cost to repair (less the deductible) the damaged building which the total amount of insurance on the building bears to the percentage of the full replacement shown in the schedule; or the limit of liability.

 The benefits for the insured are three-fold. First, obviously the insured pays less premium than if the home were insured to at least 80 percent of full replacement value. Second, most homeowners losses are partial ones, so generally the insured's losses will be settled at replacement cost. Third, an insured with a home having a wide difference between replacement cost and market value (as is the case with many homes built in the early 1900s) can still enjoy a replacement cost settlement for most losses. The advantage to the agent lies in having a means of providing this valuable provision to a greater number of clients than heretofore. The agent must take care to advise the insured, though, that in event of a total loss the home would, in all probability, not be replaced exactly as it had been prior to the loss.

 Functional Replacement Cost HO 05 30 05 11 and HO 05 31 05 11

 Two endorsements delete the HO 00 02, HO 00 03, and HO 00 05 replacement cost provisions and replace them with functional replacement cost provisions. Functional replacement cost is defined on the endorsement as “the amount which it would cost to repair or replace the damaged building with less costly common construction materials and methods which are functionally equivalent to obsolete, antique or custom construction materials and methods used in the original construction of the building.” Endorsement HO 05 31 05 11 modified functional replacement cost is used where state law prohibits loss settlement for an amount that is less than the actual cash value of the damaged property. Endorsement HO 05 30 05 11 functional replacement cost is used in the remaining states. Check your company manual to see which is applicable in your state.

 The insured is required to carry at least 80 percent of the functional replacement cost of the dwelling. At the time of a covered loss, the insured must contract for repair or replacement of the damaged building for the same use within 180 days of the damage, unless otherwise agreed with the company. Then settlement will be, after application of any deductible, the lesser of the limit of liability that applies to the building, or the necessary amount actually spent to repair or replace the damaged building on a functional replacement cost basis. If the insured does not elect to settle on that basis, then the insurer pays, after application of the deductible, the least of: the limit of liability; the actual cash value of the damaged part of the building; or the amount which it would cost to repair or replace on a functional replacement basis. If the insured carries less coverage than the loss is settled on a proportional basis.

 Under the HO 05 31 modified functional replacement cost loss settlement, if the necessary amount actually spent to repair or replace on a functional replacement cost basis is less than the actual cash value of that part of the damaged building, then the loss will be settled on an actual cash value basis.

 The advantage for the insured in choosing functional replacement lies in a lower premium payment, since a lower amount of insurance is selected. The insured benefits by knowing his or her home will be replaced (albeit with common construction methods and materials). The agent will be able to target qualifying older homes, and offer affordable coverage.

 However, there are potential pitfalls with these endorsements. The insured must carry at least 80 percent of functional replacement cost. Determining this amount could prove as difficult as determining standard replacement cost. Further, many insureds think of functional only in terms of replacing plaster walls with dry wall, or solid wooden interior doors with hollow core doors. The reality is that expensive custom kitchen cabinets may be replaced with “over the counter” cabinets, carved wood with plain or machine-turned, hardwood floors with wall-to-wall carpeting over plywood, etc. In other words, the rebuilt building will certainly function as a dwelling, but will have lost its unique character.

 Specified Additional Amount of Insurance for Coverage A – Dwelling HO 04 20 05 11

 This endorsement may be attached to the HO 00 02, HO 00 03, or HO 00 05. The insured agrees to: (1) allow the insurer to adjust coverage A (dwelling) in accordance with any property valuation made by the company and any increase in inflation; and (2) notify the insurer, within thirty days of completion, of any improvements, alterations or additions to the building which increase the replacement cost by 5 percent or more. Then, following a covered loss, the company will provide an additional percentage amount of insurance up to the percentage previously selected by the insured. For example, the insured may insure his or her home for $100,000, and select an additional percentage of 25 percent (rules allow a choice of either 25% or 50%) of this amount to be available if a loss to the building exceeds $100,000. The advantage to agent and client is in knowing that, should a total loss occur, in all probability the dwelling will be rebuilt, so long as the percentage increase chosen is adequate.

 Although the endorsement is entitled dwelling, note that the form itself refers to building. This clarifies that all property insured under coverage A is subject to this replacement cost coverage. For example, a breezeway connecting the dwelling to a garage might not technically be considered part of the dwelling itself, but it is insured under coverage A and therefore receives the benefit of the coverage.

 Following a covered loss, the insurer will pay no more than the smallest of: the replacement cost of the part of the damaged building with material of like kind and quality and for like use; the necessary amount actually spent to repair or replace the damaged building; or the limit of liability plus the additional amount provided by the endorsement. If the building is rebuilt at new premises, then recovery is limited to the cost that would have been incurred to rebuild on the original premises.

 Certain provisions of this endorsement must be kept in mind. First, the endorsement responds only if a loss to the building exceeds the coverage A (dwelling) amount. Losses in excess of any coverage B (other structures) amount are not settled for more than the coverage B amount shown on the policy. Second, although this is an additional amount of insurance, other policy provisions still apply. For example, following a total loss, rebuilding must be in accordance with current building codes. If there is no coverage for ordinance and law in the policy, this endorsement will not provide it.

 Additional Limits of Liability for Coverages A, B, C, and D

HO 04 11 05 11

 This endorsement may be used with forms HO 00 02, HO 00 03, and HO 00 05. It allows an additional amount of coverage should a covered loss to the dwelling exceed the coverage A amount shown on the policy. The insured must agree to: (1) allow the company to adjust coverage A in accordance with any property evaluation made by the company and any increase in inflation; and (2) report to the company, within 30 days of completion, any improvements, alterations, or additions that increase the replacement cost of the dwelling by more than 5 percent. Then, following a covered loss to the dwelling that exceeds the coverage A (dwelling) limit of liability, the coverage A amount is increased to an amount equal to the current replacement cost of the dwelling. The limits for coverages B (other structures), C (personal property), and D (loss of use) are increased by the same percentage applied to coverage A, and the premium from the time of loss for the remainder of the policy period is adjusted accordingly.

 The insurer then pays the smallest of: the replacement cost of the damaged building with material of like kind and quality and for the like use; the necessary amount actually spent to repair or replace the damaged building; or the increased limit of liability. If the building is rebuilt on a new premises, then the insurer will pay no more than the cost to rebuild on the original premises.

 Obviously this endorsement provides peace of mind to the insured in knowing that the amount necessary to rebuild his or her dwelling becomes available. However, as noted above, all other provisions of the policy apply. Say, for example, a dwelling is insured for $150,000, and a covered total loss occurs. The cost to rebuild is currently $170,000, $10,000 of which is the cost to comply with current building codes. If the insured does not have ordinance and law coverage, then the policy will only respond with $160,000. The prudent agent will want to make sure his or her client understands this. Also, as noted previously, the trigger to coverage is a loss exceeding the coverage A (dwelling) amount. Should a covered loss occur that falls under coverage B (other structures), C (personal property), or D (loss of use) that is greater than the amount provided in the policy, these amounts will not be increased unless the covered loss first exceeds the coverage A amount.

 ACV Loss Settlement – Windstorm or Hail Losses to Roof Surfacing

HO 04 93 05 11

 This endorsement may be used with all homeowners forms except the HO 00 04 05 11 When the endorsement is attached, then loss settlement is strictly on an actual cash value basis for roof surfacing damaged by windstorm or hail. The insured receives a premium credit when this endorsement is attached.

 The endorsement might be requested by the underwriter when the property to be insured is situated in a part of the country susceptible to violent weather, such as hurricanes, tornadoes, or hailstorms.

 Replacement Cost Loss Settlement for Certain Nonbuilding Structures

HO 04 43 05 11

 This endorsement provides replacement cost loss settlement for nonbuilding structures, such as walls, patios, driveways, pools, and hot tubs. The endorsement may be used with all homeowners forms.

 The endorsement is intended to be used with those structures that are not subject to rapid depreciation. Coverage is on a blanket basis, and there is no requirement that the limit of liability for the covered structures be equal to any percentage of the replacement value of the structures. Eligible structures include: reinforced-masonry walls; metal or fiberglass fences; fences made of materials such as PVC; patios or walks not made of wood or wood products; driveways, and pools or hot tubs with walls and floors made of reinforced masonry, cement, metal or fiberglass. Coverage applies only to structures on the residence premises. The endorsement does not provide any cost associated with enforcement of any ordinance or law.

 When a covered loss occurs, the insurer will not pay more than the least of: the limit of liability that applies to coverage B, or if the structure is specifically insured, the amount for which the structure is insured; the replacement cost of that part of the structure damaged with material of like kind and quality and for like use; or the necessary amount actually spent to repair or replace the damaged structure.

 Although this endorsement may prove useful, it must be remembered that exclusions that apply to these types of property—such as freezing—continue to apply. The endorsement does not broaden the scope of coverage.

 Personal Property Replacement Cost Loss Settlement

HO 04 90 05 11

 This endorsement provides replacement cost coverage for personal property, and may be attached to any of the homeowner forms. The endorsement amends the loss settlement provisions in the homeowners forms so that awnings, carpeting, household appliances, outdoor antennas and outdoor equipment, whether or not attached to buildings, as well as personal property, are adjusted on a replacement cost basis, rather than actual cash value.

 Certain classes of property are not eligible, such as antiques, fine arts, collectors items, and outdated or obsolete items. In event of a covered loss, the insurer will pay no more than the least of: replacement cost at the time of the loss with no deduction for depreciation; the full cost of repair at the time of the loss; the limit of liability that applies to coverage C; any applicable special limits of liability (such as the theft limit for guns); or for certain scheduled classes of property, the limit of liability that applies to the item. The provisions of the endorsement allow the insured to make a claim on an ACV basis, and then make a claim for the additional amount, if the insurer is notified of the insured's intent to do so within 180 days after the date of loss.

 If the cost to repair or replace the damaged property is more than $500, the insurer will pay no more than actual cash value until the actual repair or replacement is complete.

 The endorsement applies to property that has been scheduled on endorsement HO 04 61 05 11, unless the property is subject to agreed value. These classes of property are: jewelry; furs; cameras and projection machines; musical equipment; silver-, gold-, and pewterware; and golfer's equipment.

 Scheduled Personal Property with Agreed Value Loss Settlement

HO 04 60 05 11

 This endorsement was new in the 2000 ISO homeowners program. In the past, when property was scheduled and the insurer could replace it for considerably less than the insured amount, the insured was left wondering if he or she had been taken advantage of. Of course, the insurer could then charge less for the coverage, but this concept was difficult for many insureds to comprehend. When the scheduled property with agreed value loss settlement endorsement is used, in event of a covered loss to the scheduled property the insurer will pay the full amount indicated for each article. In event of a loss to part of a pair or set, the insurer pays the full agreed value of the pair or set. The insured then agrees to surrender the remainder of the pair or set to the insurer if requested to do so. Proper documentation and appraisals are key in setting values and coverage for this endorsement.