3.3 Dwelling Perils, Conditions, and Endorsements

Standard Exclusions

Even the open-peril DP-3 excludes certain causes of loss. Memorize this exclusion set — it appears on nearly every dwelling exam:

• Flood and surface water (covered only by the NFIP or a separate policy)
• Earth movement (earthquake, landslide, sinkhole) — endorsable
• Ordinance or Law (added cost to meet current building codes)
• War, nuclear hazard, and governmental action
• Neglect of the insured to protect property
• Power failure off-premises and intentional loss

The Coinsurance Condition

DP-2 and DP-3 contain an 80% coinsurance (loss settlement) requirement: to collect full Replacement Cost, the insured must carry coverage equal to at least 80% of the dwelling's replacement cost at the time of loss. Carry less, and recovery is the greater of ACV or the coinsurance penalty amount, which reduces the payment proportionally.

Coinsurance Formula and Worked Example

The formula is:

Payment = (Amount Carried / Amount Required) × Loss − Deductible

Example: Replacement cost of the home is $300,000. The required amount is 80% × $300,000 = $240,000. The insured carries only $180,000 and suffers a $60,000 loss with a $1,000 deductible.

• Penalty fraction = $180,000 / $240,000 = 0.75
• 0.75 × $60,000 = $45,000
• $45,000 − $1,000 = $44,000 paid

The insured absorbs the $15,000 shortfall plus the deductible for being underinsured.

Key Policy Conditions

Beyond coinsurance, dwelling forms share standard conditions:

Common Endorsements

Because DP forms are bare-bones, endorsements customize them:

• Broad Theft Coverage (DP 04 72) — adds theft for owner-occupants
• Personal Liability Supplement — adds Coverage L and M (liability/medical payments)
• Dwelling Under Construction (DP 11 43) — provisional limits during construction
• Ordinance or Law (DP 04 71) — pays added cost of code-compliant rebuilding
• Automatic Increase in Insurance — indexes Coverage A against inflation
• Special Provisions — state-mandated amendments

Why the Exclusions Exist

The standard exclusions are not arbitrary — they remove catastrophic, uninsurable, or separately-insurable exposures so the form stays affordable. Flood and earth movement are correlated catastrophes that would bankrupt a property pool, so they move to the NFIP or specialty/endorsement markets. Ordinance or law is excluded because rebuilding to current code can cost far more than the original structure; the DP 04 71 endorsement buys it back.

Wear and tear, neglect, and intentional loss are excluded because they are not fortuitous (accidental) — insurance covers chance events, not certainties or self-inflicted damage. On a DP-3 these exclusions are exactly the items the insurer must prove to deny an open-peril claim.

Second Coinsurance Worked Example (Adequate Coverage)

Contrast the underinsured case with a properly insured one. Replacement cost is $300,000, required amount is 80% × $300,000 = $240,000, and the insured carries $260,000 (above the requirement) with a $1,000 deductible. Because coverage meets or exceeds the 80% requirement, the penalty fraction is 1.0 (capped at 1) and a $60,000 loss pays $60,000 − $1,000 = $59,000 — full replacement cost less deductible, with no penalty. The lesson: carrying more than 80% never increases the recovery beyond actual loss or policy limit; carrying less triggers the proportional penalty.

Coinsurance Penalty vs. ACV Floor

When underinsured, the insured collects the greater of (a) the coinsurance-formula amount or (b) the ACV of the damaged part. The form never pays less than ACV even if the coinsurance math would. This "greater-of" rule is a common exam subtlety — candidates who apply only the penalty fraction and forget the ACV floor get the wrong number on borderline questions.

Mortgage Clause and Appraisal Mechanics

Two conditions deserve special attention:

• Standard (Union) Mortgage Clause — protects the lender's interest even when the insured's own act voids coverage (e.g., arson or fraud by the owner). The mortgagee gets paid up to its interest, then the insurer is subrogated to the lender's claim against the owner. The mortgagee must pay premium if the insured does not and give notice of hazard changes it knows about.
• Appraisal — when the insurer and insured agree the loss is covered but dispute the amount, either party can demand appraisal: each picks an appraiser, the two select an umpire, and agreement by any two binds the amount. Appraisal settles value, not coverage — a frequent distractor claims it resolves whether a peril is covered, which is false.

Ordinance or Law Worked Example

A 1970s dwelling with replacement cost of $200,000 suffers a fire destroying 60% of the structure. The city's code now requires the entire building be brought up to current standards, costing an extra $45,000 in upgraded wiring, sprinklers, and bracing. The base DP-3 excludes that $45,000 as increased cost from ordinance or law and pays only the $120,000 to restore like-kind-and-quality.

With the DP 04 71 Ordinance or Law endorsement (commonly sold at 10%-25% of Coverage A), the extra code cost is covered up to the chosen percentage. This is why the endorsement is essential on older homes — exactly the housing stock common in Idaho's established neighborhoods.