5.2 Homeowners Conditions and Duties After Loss

Policy Conditions: The Rules of the Contract

Conditions are the provisions that set out the rights and duties of the parties and the procedures that govern a claim. Failure by the insured to comply with a condition can bar or reduce recovery. The ISO Homeowners form carries separate condition sections: Section I — Conditions (property), Section II — Conditions (liability), and Conditions Applicable to Both Sections. The exam expects you to know the major conditions and, especially, the insured's duties after a loss.

Key Section I (Property) Conditions

• Insurable Interest and Limit of Liability — the insurer will not pay more than the insured's interest, nor more than the applicable limit.
• Deductible — applies per occurrence to Section I losses.
• Loss Settlement — Coverage A/B on the dwelling/structures is settled on a replacement cost (RCV) basis if the insured carries at least 80% of replacement cost at the time of loss; otherwise the larger of ACV or a coinsurance-style proportion applies. Coverage C personal property is generally ACV unless an RC endorsement (HO 04 90) is added.
• Loss to a Pair or Set — insurer may repair, replace, or pay the difference in value.
• Appraisal — if the insured and insurer disagree on the amount of loss (not coverage), each selects a competent appraiser; the two select an umpire; agreement of any two sets the amount.
• Other Insurance and Service Agreement — pays only the proportion the policy limit bears to total applicable insurance.
• Mortgage Clause — protects the mortgagee even if the insured's act voids coverage; mortgagee must be notified before cancellation.
• Suit Against Us — the insured must comply with policy terms and bring suit within two years (state-variable) of the loss.

Duties After Loss (Section I)

After a property loss the insured must, as often as reasonably required:

1. Give prompt notice to the insurer or agent.
2. Notify the police in case of theft.
3. Notify the credit card/EFT company in case of loss under that coverage.
4. Protect the property from further damage; make reasonable emergency repairs and keep records of expenses.
5. Prepare an inventory of damaged personal property showing quantity, description, ACV, and amount of loss.
6. Exhibit the damaged property, provide records, and submit to examination under oath.
7. Send a signed, sworn proof of loss within 60 days of the insurer's request.

Memory hook: "Notify, Protect, Prove." Missing the 60-day proof-of-loss deadline is the single most-tested duty.

Section II (Liability) Conditions and Duties

Section II conditions include the Limit of Liability (Coverage E is the most paid for any one occurrence regardless of number of insureds or claimants), Severability of Insurance (coverage applies separately to each insured, but does not increase the limit), and Bankruptcy of an Insured (does not relieve the insurer of obligations).

Duties after an occurrence under Section II:

• Give written notice identifying the policy, insured, and details of the occurrence as soon as practicable.
• Cooperate with the insurer in investigation, settlement, and defense; forward every notice, demand, or legal paper.
• Do not voluntarily make payments, assume obligations, or admit liability (except first-aid expenses to others at the time of injury).

Duties for Coverage F (Medical Payments) specifically: give written proof of claim, allow the insurer to obtain medical records, and submit the injured person to a physical exam by a doctor of the insurer's choice when and as often as reasonably required.

Worked Example - The 80% Coinsurance/Replacement-Cost Test

Loss Settlement on the dwelling rewards insureds who carry adequate limits. The replacement-cost recovery formula is:

Payment = (Insurance carried / [0.80 x Replacement Cost]) x Loss, capped at the policy limit and never less than ACV.

A home has a replacement cost of $400,000. The owner carries Coverage A = $280,000. A kitchen fire causes $50,000 in damage (the deductible is ignored here for clarity).

• Required amount for full RC settlement: 0.80 x $400,000 = $320,000.
• Insurance carried is only $280,000, so the insured is underinsured.
• Recovery = ($280,000 / $320,000) x $50,000 = $43,750.
• The insured absorbs $6,250 of the loss as a penalty for failing to carry 80% of replacement cost.

Had the owner carried at least $320,000, the loss would have been paid at full replacement cost ($50,000 less the deductible).

Severability and the Suit-Against-Us Conditions

Two Section II conditions recur on exams. Severability of insurance (the "separation of insureds" clause) applies the coverage separately to each insured, so an exclusion that defeats one insured's claim does not automatically defeat another's — though the policy limit is not multiplied. Example: an intentional act by one family member is excluded as to that person, yet a co-insured who was merely negligent may still have coverage.

The suit-against-us condition bars a third party from suing the insurer directly until the insured's obligation has been determined by judgment or written agreement. And the bankruptcy of the insured does not relieve the insurer of its duties — the injured party's rights survive the insured's insolvency, a point examiners test against the misconception that bankruptcy voids coverage.