5.2 Homeowners Conditions and Duties After Loss
Key Takeaways
- Buildings settle at replacement cost only if insured to at least 80% of full RCV; otherwise the larger of ACV or the coinsurance penalty applies.
- Coinsurance formula: (Did carry / Should carry) x Loss - Deductible; recoverable depreciation is held back until repairs are completed.
- Duties After Loss include prompt notice, protect property, inventory, examination under oath, and a sworn proof of loss within 60 days of request.
- Appraisal resolves disputes over the amount of loss only; suit against the insurer must be brought within 2 years (Section I).
5.2 Homeowners Conditions and Duties After Loss
Conditions are the rules that govern how the policy works once it is in force and after a loss occurs. They appear in Section I Conditions, Section II Conditions, and Conditions Applicable to Both Sections of the ISO HO 3. Memorize the major property-side conditions; they generate a large share of national exam questions, especially the valuation and coinsurance math.
Loss settlement and the 80% coinsurance rule
Homeowners buildings (Coverage A and B) are settled on a replacement cost (RCV) basis if the insured carries at least 80% of full replacement cost at the time of loss. Carry less than 80% and the larger of the actual cash value (ACV) or the coinsurance-penalty formula applies:
Recovery = (Did carry / Should carry) x Loss - Deductible
Worked numeric: A home costs $400,000 to replace. The insured carries only $280,000 of Coverage A. A partial fire loss is $60,000; deductible is $1,000.
- Should carry (80%): 0.80 x $400,000 = $320,000
- Ratio: $280,000 / $320,000 = 0.875
- Payable: 0.875 x $60,000 = $52,500 - $1,000 = $51,500
The insured eats the difference because of the coinsurance penalty. Had the insured carried $320,000+, the full $59,000 (loss minus deductible) would be paid as RCV.
ACV vs. RCV
- Replacement cost (RCV): the cost to repair/replace with like kind and quality, no deduction for depreciation. Applies to buildings meeting the 80% rule.
- Actual cash value (ACV): replacement cost MINUS depreciation. Applies to personal property (Coverage C) by default and to buildings that fail the 80% test.
Worked ACV example: A 10-year-old roof costs $18,000 to replace and has a 20-year useful life. Depreciation = 50%, so ACV = $9,000. Under an RCV building settlement, the insurer pays ACV first ($9,000) and the recoverable depreciation ($9,000) only after the insured actually completes repairs and submits receipts - a frequently tested 'hold-back' rule.
Duties After Loss
The insured's Duties After Loss condition is a checklist of what an insured must do to preserve coverage. The exam tests these as conditions precedent - fail them and the insurer can deny the claim. In the typical order tested:
- Give prompt notice to the insurer or agent.
- Notify the police in case of theft.
- Notify the credit card/EFT company for credit-card coverage losses.
- Protect the property from further damage and make reasonable emergency repairs (keep records of those costs).
- Cooperate with the investigation.
- Prepare an inventory of damaged personal property with quantities, descriptions, and amounts.
- As often as reasonably required, show the damaged property, submit to examination under oath, and produce records.
- Submit a signed, sworn proof of loss within 60 days of the insurer's request.
Other heavily tested conditions
| Condition | Key rule |
|---|---|
| Loss payment | Insurer pays within 60 days after proof of loss and agreement/appraisal/judgment |
| Appraisal | Either party may demand; each picks an appraiser, the two pick an umpire; agreement of any two sets the amount |
| Suit against us | Insured must bring suit within 2 years (Section I) of the date of loss |
| Subrogation | Insurer may recover from the at-fault third party; insured may waive in writing before a loss |
| Other insurance | Pays only its pro-rata share when other property insurance applies |
| Mortgage clause | Named mortgagee has its own rights; gets 10 days' notice of cancellation |
| Concealment or fraud | Voids the policy if the insured intentionally conceals or misrepresents a material fact |
Trap: Appraisal resolves disputes over the amount of loss, never coverage questions. If the dispute is whether a peril is covered, appraisal does not apply.
Policy period, territory, and assignment
A few administrative conditions round out the form:
- Policy period - coverage applies only to losses that occur during the policy period shown on the declarations.
- Coverage territory / where applicable - Section I property coverage applies to property at the described residence premises and, with sublimits, to personal property anywhere in the world; Section II liability is worldwide.
- Assignment - the policy may not be assigned without the insurer's written consent. This protects the insurer's right to underwrite the risk; an insured who sells the home cannot simply hand the policy to the buyer.
- Death - if the named insured (or spouse) dies, coverage continues for the legal representative and household members, preserving protection while the estate is settled.
Reading a coinsurance question on the exam
Coinsurance problems follow a predictable pattern. Work them in this order so you never miss a step:
- Compute the 'should carry' amount = coinsurance % (usually 80%) x full replacement cost.
- Compute the ratio = amount carried / should-carry amount. Cap the ratio at 1.00; over-insuring never pays more than the loss.
- Multiply the ratio by the loss.
- Subtract the deductible last.
- Cap the result at the policy limit.
Second worked numeric: full RC $250,000; carried $150,000; loss $40,000; deductible $500. Should carry = $200,000; ratio = 150,000/200,000 = 0.75; 0.75 x $40,000 = $30,000; minus $500 = $29,500. The candidate who forgets to subtract the deductible answers $30,000 - a common distractor.
A home with a $500,000 full replacement cost is insured for $300,000 of Coverage A. A covered $80,000 partial loss occurs with a $2,000 deductible. Applying the 80% coinsurance rule, what does the insurer pay?
Under the homeowners Duties After Loss condition, within how many days of the insurer's request must the insured submit a signed, sworn proof of loss?