Dwelling Exclusions, Replacement Cost and Loss Settlement

Dwelling Exclusions, Replacement Cost and Loss Settlement

Navigating property claims under ISO Dwelling policies requires a comprehensive mastery of policy exclusions, statutory loss valuation rules, and the mathematical mechanics of replacement cost coinsurance. While the insuring agreement and peril endorsements establish what events trigger coverage, the General Exclusions establish universal boundaries applicable across all dwelling forms.

General Exclusions Common to All Dwelling Forms

All three ISO dwelling forms (DP-1, DP-2, and DP-3) contain standard General Exclusions. These exclusions apply universally to both direct physical loss (Coverages A, B, and C) and indirect loss (Coverages D and E), regardless of whether the policy is written on a named-peril or open-peril basis:

1. Earth Movement: Excludes earthquake, landslide, mudslide, mudflow, earth subsidence, sinkhole collapse, and the rising, shifting, or settling of the earth.

   Note

   Under California Insurance Code (CIC) § 10081, insurers writing residential property policies in California must offer earthquake coverage by written endorsement or through the California Earthquake Authority (CEA). If an excluded earth movement event triggers an ensuing fire or explosion, the resulting fire or explosion damage is covered.

2. Water Damage: Excludes external water damage, specifically:
   • Flood, surface water, waves, tidal water, tsunami, or storm surge, and the overflow of any natural or artificial body of water.
   • Water or water-borne material that backs up through sewers or drains, or that overflows or discharges from a sump pump or related equipment.
   • Subsurface water exerting hydrostatic pressure on foundations, basement walls, concrete floors, retaining walls, or swimming pools.
3. Off-Premises Power Failure: Excludes losses resulting directly from the failure of power or other utility services if the failure originates away from the described premises. However, if power failure off-premises causes an on-premises covered peril to occur (such as a power surge causing an electrical fire), the resulting direct damage from that covered peril is covered.
4. Neglect: Excludes damage caused by the insured's failure to use all reasonable means to save, preserve, and protect covered property at and after the time of a loss, or when property is endangered by an insured peril.
5. War and Military Action: Excludes undeclared war, civil war, insurrection, rebellion, revolution, warlike operations, or destruction by military forces.
6. Nuclear Hazard: Excludes losses caused by nuclear reaction, nuclear radiation, or radioactive contamination, whether controlled or uncontrolled. Loss caused by an ensuing fire is covered.
7. Intentional Loss: Excludes any loss arising out of any act an insured commits or conspires to commit with the fraudulent or malicious intent to cause damage.
8. Ordinance or Law: Excludes the enforcement of any ordinance, statute, or building code regulating the construction, repair, renovation, or demolition of any building, unless specifically provided under the 10% Ordinance or Law coverage extension in DP-2 or DP-3.
9. Governmental Action: Excludes the destruction, confiscation, or seizure of property by order of any governmental or public authority, except where the government orders destruction to prevent the spread of a fire.

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Loss Settlement Provisions: ACV vs. Replacement Cost

The methodology used to adjust and settle property claims varies dramatically between the basic and broad/special forms:

DP-1 Basic Form: Actual Cash Value (ACV)

Under the DP-1 form, all covered property losses—both structural buildings (Coverages A and B) and personal property (Coverage C)—are adjusted strictly on an Actual Cash Value (ACV) basis:

• California Statutory Definition (CIC § 2051): Under California Insurance Code § 2051(b), the measure of ACV for structural property is statutorily defined as the expense to replace the damaged property with materials of like kind and quality, less a reasonable deduction for physical depreciation.
• Non-Depreciation of Labor in California: Under California Code of Regulations (CCR) Title 10, § 2695.9(f), claims adjusters are prohibited from deducting depreciation from the labor costs required to repair or replace property. Ordinary onsite labor is not depreciated; the rule has a limited exception for labor intrinsic to manufactured goods. Physical depreciation must be fair, condition-based and permitted for the actual property.

DP-2 Broad and DP-3 Special Forms: Dual Valuation

Under DP-2 and DP-3, valuation depends on the property category:

• Personal Property (Coverage C): Settled on an Actual Cash Value basis at the time of loss, regardless of the policy form.
• Buildings and Structures (Coverages A and B): Eligible for Replacement Cost settlement—meaning no deduction for depreciation is taken—provided the policyholder satisfies the mandatory 80% Coinsurance Condition.

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The 80% Replacement Cost Coinsurance Formula

Under the Loss Settlement Condition of DP-2 and DP-3, if a building is insured to at least 80% of its full replacement cost immediately prior to the loss, the insurer pays the full replacement cost of the damaged portion (up to the policy limit), subject to the deductible.

If the insured carries less than 80% of the replacement cost, the insurer applies the Coinsurance Formula:

Insurer Payment = [ (Insurance Carried ÷ Insurance Required) × Loss Amount ] - Deductible

Where:

• Insurance Required = Full Replacement Cost at Time of Loss × 80%

Fully Worked Coinsurance Claim Scenario

Consider an adjuster scoping a dwelling loss with the following claim facts:

• Dwelling Full Replacement Cost: $400,000
• Coverage A Limit Carried: $240,000
• Policy Form: DP-3 Special Form; assume qualifying repairs are completed at the stated cost and replacement conditions are met
• Policy Deductible: $1,000
• Covered Windstorm Loss to Roof: $60,000
• Physical Depreciation of Roof: $24,000 (meaning ACV of loss = $60,000 - $24,000 = $36,000)

Step 1: Determine Insurance Required

• Insurance Required = $400,000 × 80% = $320,000

Step 2: Calculate the Coinsurance Proportion

• Coinsurance Proportion = $240,000 ÷ $320,000 = 0.75 (or 75%)

Step 3: Calculate the Coinsurance Loss Recovery

• Coinsurance Recovery = 75% × $60,000 = $45,000

Step 4: Compare Coinsurance Result to ACV

• Coinsurance Formula Result: $45,000
• Actual Cash Value (ACV): $36,000
• The insurer must apply the larger amount: $45,000.

Step 5: Apply the Policy Deductible

• Final Insurer Payment = $45,000 - $1,000 = $44,000 (The policyholder absorbs a $15,000 coinsurance penalty plus the $1,000 deductible, paying $16,000 out-of-pocket).

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Deductible Application & The Pair and Set Clause

• Deductible Application: Standard dwelling deductibles (such as $500 or $1,000) apply on a per-occurrence basis. The deductible is subtracted once from the total adjusted covered loss, not separately against each individual coverage section.
• Pair and Set Clause: If an insured item that is part of a matching pair or set is lost or damaged (such as an antique set of four matching carved chairs, or a pair of custom handcrafted entrance lanterns), the loss of one piece does not constitute a total loss of the set. The insurer reserves the contractual option to:
  1. Repair or replace any part to restore the pair or set to its value before the loss; OR
  2. Pay the financial difference between the Actual Cash Value of the set before the loss and the Actual Cash Value of the remaining pieces immediately after the loss.

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California Adjuster Scoping and Statutory Duties

Under California Code of Regulations (CCR) Title 10, § 2695.9, property claims adjusters are subject to rigorous operational standards:

1. Detailed Scoping Estimates: The adjuster must prepare a complete, clear, and itemized written estimate detailing all physical repairs, including dimensions, materials, labor hours, and contractor overhead and profit. A copy must be provided to the insured upon request.
2. Depreciation Transparency: If depreciation is applied, the adjuster must explicitly state the basis, percentage, and condition justification in the written estimate. Depreciation cannot be arbitrary or applied uniformly across unlike building components.
3. Statutory Timelines: Under CCR § 2695.7, the adjuster must accept or deny a claim within 40 calendar days of receiving a complete proof of claim. Once a settlement is reached, payment must be tendered within 30 calendar days.