5.2 Homeowners Conditions and Duties After Loss
Key Takeaways
- The insured's duties after loss include prompt notice, protecting the property, an inventory, and a sworn Proof of Loss within 60 days of the insurer's request
- Coverage A is settled on replacement cost only if the insured carries at least 80% of full replacement value; otherwise the coinsurance formula or ACV (whichever is larger) applies
- Personal property (Coverage C) is settled at ACV (replacement cost minus depreciation) unless the HO 04 90 replacement-cost endorsement is added
- Appraisal settles disputes over the AMOUNT of a covered loss; it does not decide coverage questions
- Subrogation transfers the insured's recovery rights to the insurer after payment; the standard mortgage clause protects the lender separately
The Conditions of the homeowners policy are the rules of the game - they bind both the insured and the insurer and decide whether a covered loss actually gets paid. The exam tests Section I conditions (property settlement, the duties after loss, and other-insurance rules) and the general policy conditions almost as heavily as the coverages themselves.
Insured's Duties After Loss (Section I)
After a property loss the insured has a checklist of conditions precedent - failure to perform can void or reduce the claim:
- Give prompt notice to the insurer or agent.
- Protect the property from further damage (mitigate); reasonable repair costs to protect are reimbursed.
- Notify the police in case of theft.
- Prepare an inventory of damaged personal property with quantities, costs, and amounts claimed.
- Cooperate, exhibit the property, submit to examination under oath if required.
- Submit a signed, sworn Proof of Loss within 60 days of the insurer's request.
Exam Trap: The classic question is the 60-day Proof of Loss window. "Prompt" notice has no fixed number, but the sworn Proof of Loss is due within 60 days of the company's request.
Loss Settlement - Replacement Cost vs. ACV and the 80% Rule
The Loss Settlement condition is the single most calculation-heavy item on the property exam. The dwelling (Coverage A) is settled on a replacement cost (RCV) basis IF the insured carries at least 80% of the full replacement value at the time of loss. If not, the insurer pays the larger of (a) actual cash value, or (b) the proportion given by the coinsurance-style formula:
Recovery = (Amount of Insurance Carried / Amount Required) x Loss - Deductible
Where Amount Required = 80% x Full Replacement Cost of the dwelling.
Worked Example - Underinsured Dwelling
A home has a full replacement cost of $400,000. The owner insured it for only $280,000. A fire causes $100,000 in damage. Deductible is $1,000.
| Step | Calculation | Result |
|---|---|---|
| Amount required (80%) | 0.80 x $400,000 | $320,000 |
| Coinsurance fraction | $280,000 / $320,000 | 0.875 |
| Indemnity before deductible | 0.875 x $100,000 | $87,500 |
| Less deductible | $87,500 - $1,000 | $86,500 |
The insurer also compares this to the ACV of the loss and pays the larger of the two, never more than the policy limit.
Personal Property and ACV
Coverage C (personal property) is settled at actual cash value unless a Replacement Cost on Contents endorsement (HO 04 90) is attached. ACV = Replacement Cost minus Depreciation.
ACV example. A 5-year-old sofa cost $1,200 new and has a 10-year useful life. Depreciation = 50%. ACV = $1,200 - $600 = $600.
Worked 80% Settlement and the Two-Check Process
Replacement-cost claims pay in two checks. First the insurer pays ACV (replacement cost minus depreciation). Once the insured actually repairs or replaces, the insurer releases the recoverable depreciation up to the policy limit. This protects against moral hazard — you cannot pocket full replacement cost and never rebuild.
Example: a $20,000 roof, 40% depreciated. The first check is $20,000 - $8,000 = $12,000 ACV. After the owner re-roofs and submits the invoice, the second check releases the $8,000 recoverable depreciation, for $20,000 total less any deductible — but only if the 80% insure-to-value test was met when the loss occurred.
The Duties-After-Loss Checklist
The insured's duties — failure of which can defeat a claim — are tested as a list: give prompt notice; protect property from further damage and keep records of repair costs; cooperate in the investigation; prepare an inventory of damaged personal property; submit a signed, sworn proof of loss within a stated period (commonly 60 days on request); exhibit damaged property; and submit to examination under oath if required. Pair these with the appraisal condition (amount disputes), the suit-against-us time bar, and the subrogation duty not to impair recovery rights.
A dwelling has a $500,000 replacement cost. The owner carries $300,000 of Coverage A. A covered loss is $80,000 with a $1,000 deductible. Using the homeowners loss-settlement (80%) provision, what does the insurer pay (replacement-cost portion)?
Other Key Conditions
Several general conditions appear on the exam as one-line questions:
- Loss Settlement / Pair or Set: the insurer may repair, replace, or pay the difference in value of the set; it need not buy a whole new set.
- Appraisal: if the insurer and insured disagree on the amount of loss (not coverage), each selects an appraiser; the two pick an umpire; agreement by any two is binding. This resolves valuation disputes, not coverage disputes.
- Suit Against Us: the insured must bring legal action within two years (state-modified) and must have complied with all policy terms.
- Loss Payment: the insurer pays within 60 days after agreement, a court judgment, or a filed appraisal award.
- Subrogation: after paying, the insurer assumes the insured's right to recover from a responsible third party. The insured may waive subrogation in writing before a loss only.
- Mortgage Clause (Standard/Union): protects the lender's interest even if the insured's act voids coverage; the mortgagee gets separate notice of cancellation.
- Salvage / Abandonment: the insured may NOT abandon property to the insurer.
- Assignment: the policy may not be assigned without the insurer's written consent.
- Concealment or Fraud: material misrepresentation voids coverage for that insured.
Exam Tip: Distinguish Appraisal (settles the AMOUNT of a covered loss) from coverage disputes (settled by the courts). If a question says the parties "agree it is covered but disagree on value," the answer is Appraisal.
Pro-Rata Other Insurance
When two homeowners-type policies cover the same property, each pays its pro-rata share = (its limit / total of all limits) x loss. If Policy A carries $200,000 and Policy B carries $300,000 on a $50,000 loss, A pays $20,000 and B pays $30,000.
The insurer and insured agree a kitchen-fire loss is covered but cannot agree on the dollar amount of damage. Which policy condition resolves this dispute?