11.3 Perils, Exclusions, and Loss Settlement

11.3 Perils, Exclusions, and Loss Settlement

Quick Answer: On an unendorsed HO-3, the dwelling and other structures are open perils (special form) and personal property is named perils. Section I exclusions still take out ordinance or law (beyond a limited additional coverage), earth movement, water (flood, surface water, waves, overflow of a body of water, and standard sewer/drain/sump backup), power failure off premises, neglect, war, nuclear hazard, intentional loss, and governmental action. Buildings typically settle at replacement cost if insured to at least 80% of replacement cost; otherwise a coinsurance-style penalty applies. Contents typically settle at actual cash value (ACV) unless a replacement-cost endorsement is attached.

This is the claims chapter inside the homeowners form. Coverages A–D tell you what is insured. Perils, exclusions, and loss settlement tell you whether a reported event is a covered cause and how much the insurer owes after depreciation, underinsurance, pair-and-set rules, and deductibles.

Open-perils dwelling, named-perils contents

HO-3 Coverage A and B agree to pay for direct physical loss to the dwelling and other structures unless an exclusion applies. Coverage C agrees to pay for direct physical loss to personal property only if a named peril causes it.

A plumbing discharge that stains hardwood and a sofa is the classic split. The hardwood is a special-form building loss unless a Coverage A exclusion (wear and tear, constant seepage, freezing of poorly maintained plumbing, mold except as provided) takes it away. The sofa needs a listed contents peril—accidental discharge or overflow of water or steam from a plumbing, heating, or air-conditioning system is on the broad-form list. Gradual leakage, flood, and backup through a sewer or sump are not that named peril.

HO-3 also adds building-specific open-perils exclusions that do not appear as named-perils problems: collapse except as additional coverage; freezing of plumbing if the house is vacant or unoccupied and the insured did not maintain heat or shut off and drain systems; theft to a dwelling under construction; vandalism after long vacancy (commonly 60 days); mold, fungus, or wet rot except when it results from a sudden accidental discharge; wear and tear, inherent vice, smog, rust, settling or cracking; birds, rodents, and insects. Special form is not “everything but flood.”

Section I exclusions that apply to all property

These exclusions apply to Coverages A, B, and C. Learn them as a set.

1. Ordinance or law — extra cost to demolish, rebuild, or upgrade to current code, except to the extent of the ordinance-or-law additional coverage (commonly 10% of A on later ISO HO-3 editions). A full code-upgrade endorsement is how serious coastal and older-home accounts buy more.
2. Earth movement — earthquake, landslide, mine subsidence, mudflow, earth sinking or shifting. A separate earthquake endorsement or policy is the usual fix.
3. Water — flood, surface water, waves, tides, tidal water, overflow of any body of water, spray from these whether or not driven by wind; water that backs up through sewers or drains or overflows from a sump; water below the surface of the ground that exerts pressure or seeps through a basement. This is the standard water exclusion. Accidental discharge from a plumbing system inside the house is a different path from flood and from backup.
4. Power failure — failure of power or other utility off the residence premises. Food in a freezer after a grid outage is the textbook miss unless an endorsement applies. On-premises failure from a covered peril (lightning hits the service mast) can still be in play.
5. Neglect — failure to use all reasonable means to save and preserve property during and after a loss. Leaving a wind-opened roof untarped through a week of rain is how a covered opening becomes a partly uncovered continuation.
6. War.
7. Nuclear hazard — with an ensuing fire exception in standard wording: nuclear contamination is out; fire damage that follows may still be in.
8. Intentional loss — loss arising out of an act committed by or at the direction of an insured with intent to cause a loss. Arson by an insured is the flagship. Innocent-spouse rules are state-specific; do not invent a nationwide “always pays the innocent spouse” answer.
9. Governmental action — destruction, confiscation, or seizure by order of a governmental body, with a narrow exception for acts to prevent the spread of fire.

Ensuing fire is the exception pattern to remember with earth movement and nuclear (and some water wording): if an excluded cause produces a fire, the fire damage can still be covered even though the excluded cause is not. Earthquake that breaks a gas line and burns the kitchen does not turn the policy into earthquake insurance for the cracked foundation; it can still pay the fire.

Weather versus flood: the trap that pays or denies the wrong way

Every wet-house call is not a flood denial, and every hurricane call is not a wind payment.

• Windstorm that peels shingles, and rain that enters through the storm-created opening, is typically a covered weather loss on HO-3 buildings (open perils) and may be a named-peril windstorm loss to contents if the facts fit. The deductible may be a wind/hail percentage rather than the all-peril dollar deductible.
• Flood — overflow of a body of water, surface water, waves, storm surge, tidal water — is excluded. The National Flood Insurance Program or a private flood policy is the product, not an unendorsed HO-3.
• Wind-driven rain with no opening, sitting against windows that did not fail, is a fact fight on buildings (open perils still has to be a direct physical loss, and some water exclusions remain) and a named-perils fight on contents.
• Sewer or sump backup is in the standard water exclusion. A water backup endorsement is how that claim enters the contract. Accidental discharge from a burst supply line is not backup.

Anti-concurrent-causation language, where the form uses it, can bar a claim when flood and wind combine. Walk DICE: identify the damaged property, the peril path, then the water exclusion. Do not decide the file from the word “water.”

Theft versus mysterious disappearance

Theft is a named peril for Coverage C on HO-3 (and part of the open-perils building grant, subject to construction and vacancy rules). Theft means a stolen-property fact pattern: breaking, missing property plus evidence of a taking, a snatched purse. Mysterious disappearance — a ring is gone, no signs of theft, no idea when it left — is not theft. Unendorsed HO-3 contents do not pay mysterious disappearance. HO-5 open perils on contents, or a scheduled personal-articles endorsement, is how that gap is closed, and even then exclusions (intentionally thrown away, mysterious disappearance of an unscheduled item versus scheduled) still matter. Do not upgrade HO-3 contents to “it’s gone, so it pays.”

Loss settlement: buildings, 80%, and contents ACV

Buildings (Coverage A and B) on HO-2/3/5 typically settle at replacement cost if the limit at the time of loss is at least 80% of full replacement cost. That is a coinsurance-style condition, not a 20% deductible. If the insured fails the 80% test, the insurer pays the larger of:

• ACV of the damaged building property, or
• (Limit of insurance ÷ (80% × replacement cost of the building)) × replacement cost of the loss

then minus the deductible. Full replacement-cost payment also usually requires the insured to actually repair or replace.

Worked example. Dwelling replacement cost is $400,000. Coverage A is $280,000. A roof’s replacement cost is $40,000. Depreciation on the roof is $15,000, so ACV is $25,000. Deductible is $1,000.

• 80% of replacement cost = $320,000. $280,000 is below $320,000, so the 80% test fails.
• Coinsurance-style amount = ($280,000 / $320,000) × $40,000 = $35,000.
• After deductible: $34,000.
• ACV path: $25,000 − $1,000 = $24,000.
• The policy pays the larger figure: $34,000, not full replacement cost of $39,000 after deductible.

If Coverage A had been at least $320,000 and the insured replaced the roof, settlement would be $40,000 − $1,000 = $39,000.

Personal property on unendorsed HO-3 typically settles at ACV: replacement cost minus depreciation. A five-year-old sofa does not pay as a new sofa. A personal property replacement cost endorsement (ISO HO 04 90 or a carrier equivalent) is how contents move to replacement cost, still subject to special limits. HO-5 often includes contents replacement cost as part of the comprehensive package; do not assume every “homeowners” file has it.

Pair and set. If one of a pair of antique candlesticks is stolen, the insurer may repair or replace any part to restore the pair, or pay the difference between the value of the pair before the loss and the value of the remaining piece. It does not automatically pay as if both pieces were gone.

Deductibles. Section I losses take a deductible, usually per occurrence. In coastal and catastrophe-prone areas, windstorm or hail is often a separate percentage deductible of Coverage A (1%, 2%, 5% are common structures). A $1,000 all-peril deductible and a 2% wind deductible on a $400,000 Coverage A dwelling are not the same number. Quote and adjust the deductible that matches the peril.

A CSR who can work the 80% example, refuse to call storm surge “wind,” and ask whether contents have a replacement-cost endorsement is doing Assignment 3 at claims quality.