5.2 Dwelling Policy Conditions, Exclusions, Endorsements & Loss Settlement Provisions

Core Focus: Adjusting a dwelling property claim requires a rigorous command of valuation rules, coinsurance mathematics, policy exclusions, and statutory conditions. A Louisiana claims adjuster must know how to calculate replacement cost settlements versus actual cash value penalties, apply the 80% coinsurance formula, manage recoverable depreciation holdbacks, navigate critical exclusions such as water and off-premises power failure, and enforce vacancy restrictions.

Loss Settlement Provisions: ACV vs. Replacement Cost

The method of loss settlement depends on the dwelling form purchased and the relationship between the insurance limit carried and the full replacement cost of the building:

1. DP-1 Basic Form Settlement

Under DP-1, all losses to buildings (Coverages A and B) and personal property (Coverage C) are settled on an Actual Cash Value (ACV) basis:

Actual Cash Value (ACV) = Replacement Cost - Physical Depreciation

No replacement cost coverage is available under DP-1, regardless of how much insurance is carried.

2. DP-2 and DP-3 Replacement Cost Settlement (80% Rule)

Under DP-2 and DP-3, losses to personal property (Coverage C) are always settled on an ACV basis. However, covered losses to buildings under Coverages A and B are eligible for Replacement Cost Value (RCV) settlement without deduction for depreciation, subject to the 80% Coinsurance Condition:

• Full RCV Compliance: If the amount of insurance carried on the building at the time of loss equals or exceeds 80% of the full replacement cost of the building, the insurer pays the full replacement cost of the repair or replacement, up to the policy limit, minus the deductible.
• Proportional Underinsurance Penalty: If the amount of insurance carried is less than 80% of the building's full replacement cost, the insurer will pay the GREATER of the following two amounts, not to exceed the policy limit:
  1. The Actual Cash Value (ACV) of the damaged part of the building; OR
  2. The proportional amount determined by the Coinsurance Formula:

Proportional Payment = [Amount of Insurance Carried / (80% × Full Replacement Cost)] × Loss Amount - Deductible

Step-by-Step Worked Adjuster Scenarios & Holdback Mechanics

Understanding how to calculate underinsurance payouts is a frequent testing point on the Louisiana adjuster examination:

Scenario A: Proportional Formula Exceeds ACV

• Building Full Replacement Cost: $250,000
• 80% Coinsurance Requirement: $250,000 × 0.80 = $200,000
• Insurance Limit Carried: $150,000 (Underinsured: only carries 75% of required amount)
• Building Loss (RCV): $40,000
• Depreciation: $16,000 (meaning ACV = $40,000 - $16,000 = $24,000)
• Deductible: $1,000

Adjuster Calculation:

1. Check proportional formula:
   • Fraction = $150,000 / $200,000 = 0.75
   • Proportional Loss = 0.75 × $40,000 = $30,000
2. Compare with ACV: $30,000 is greater than $24,000 ACV.
3. Apply deductible: $30,000 - $1,000 = $29,000. The insurer pays $29,000.

Scenario B: ACV Exceeds Proportional Formula

• Building Full Replacement Cost: $300,000
• 80% Coinsurance Requirement: $300,000 × 0.80 = $240,000
• Insurance Limit Carried: $120,000 (Carried / Required = 50%)
• Building Loss (RCV): $50,000
• Depreciation: $5,000 (brand new roof section, so ACV = $50,000 - $5,000 = $45,000)
• Deductible: $1,000

Adjuster Calculation:

1. Check proportional formula:
   • Proportional Loss = ($120,000 / $240,000) × $50,000 = 0.50 × $50,000 = $25,000
2. Compare with ACV: The ACV of $45,000 is substantially higher than the proportional figure of $25,000.
3. The policy explicitly mandates paying the greater of the two amounts. Less deductible: $45,000 - $1,000 = $44,000. The insurer pays $44,000.

The Two-Step Settlement Process & Holdback

When a loss is settled on an RCV basis, insurers do not write a check for the full replacement cost upfront. They utilize a two-step payment procedure:

1. Step 1 — ACV Advance: The adjuster determines the gross replacement cost, subtracts applicable depreciation, and subtracts the policy deductible. The insurer immediately issues payment for this net ACV amount.
2. Step 2 — Recoverable Depreciation Holdback: The withheld depreciation (the difference between RCV and ACV) is held in escrow. To collect this "holdback," the insured must actually repair, rebuild, or replace the damaged property within 180 days from the date of loss. Once the insured presents paid contractor invoices proving completion, the holdback is disbursed.
3. Small Loss Waiver: Under DP-2 and DP-3, if the total building loss is less than 5% of the Coverage A limit AND less than $2,500, the insurer pays the full replacement cost upfront without any holdback or requirement that repairs be completed first.

General Exclusions Across All Dwelling Forms

The following exclusions apply universally to DP-1, DP-2, and DP-3:

1. Ordinance or Law: Excludes loss or increased repair/reconstruction cost caused by the enforcement of any building ordinance, zoning law, or code regulation (e.g., being forced to rewire an entire home to modern code after a partial fire). Note: DP-2 and DP-3 provide an additional coverage providing up to 10% of Coverage A for Ordinance or Law.
2. Earth Movement: Excludes earthquake, landslide, mudflow, earth sinking, rising, or shifting, and sinkhole collapse. If an earth movement results in fire or explosion, the ensuing fire/explosion damage is covered.
3. Water Damage (The Flood Exclusion): Excludes:
   • Flood, surface water, waves, tidal water, storm surge, tsunamis, or overflow of any body of water.
   • Water or water-borne material backing up through sewers, drains, or discharging from a sump pump.
   • Subsurface water exerting hydrostatic pressure on or seeping through foundations, basement walls, floors, or paved surfaces.
   • Exam Note: Flood is never covered under standard dwelling forms; it must be insured under a separate National Flood Insurance Program (NFIP) or private flood policy.
4. Off-Premises Power Failure: Excludes loss resulting from the failure of electrical power or other utility service if the failure takes place away from the described location. However, if power failure results in a covered peril on premises (e.g., power failure causes a fire), the direct fire damage is covered.
5. Neglect: Excludes loss caused by the insured's failure to use all reasonable means to save and preserve property at and after the time of a loss.
6. War and Nuclear Hazard: Total exclusions for military warfare, insurrection, radiation, and radioactive contamination.
7. Intentional Loss: Excludes any loss arising out of an act committed by or at the direction of an insured with the intent to cause a loss.

Special Conditions, Theft Endorsements & Deductibles

Freezing of Plumbing Exclusion

In DP-2 and DP-3, freezing of a plumbing, heating, air conditioning, or automatic fire sprinkler system is excluded unless the insured has satisfied one of two mandatory conditions:

• Maintained heat in the building; OR
• Shut off the domestic water supply and completely drained all systems and appliances of water.

If a landlord leaves a rental property unheated during a sub-freezing Louisiana cold snap and fails to drain the pipes, any resulting burst pipe water loss is completely excluded.

Theft of Personal Property & Available Endorsements

Base dwelling policies (DP-1, DP-2, and DP-3) do NOT cover theft of personal property. While DP-2 and DP-3 cover damage to the building caused by burglars, the stolen contents are excluded. Policyholders must attach a specific theft endorsement:

• Broad Theft Coverage Endorsement: Designed for owner-occupants. It covers theft, attempted theft, and vandalism resulting from theft. Provides both on-premises and off-premises coverage worldwide. Contains special theft limits for certain property, such as $200 on money, $1,500 on securities, $1,500 on jewelry, watches and furs, and $2,500 on silverware.
• Limited Theft Coverage Endorsement: Designed for landlords / non-owner occupants. It covers on-premises theft only of landlord-owned furnishings. It does not provide off-premises coverage, and it never covers personal property owned by tenants.

The 60-Day Vacancy Condition

Under DP-2 and DP-3, if a building is vacant for more than 60 consecutive days immediately preceding a loss, coverage is completely suspended and excluded for:

1. Vandalism and Malicious Mischief (VMM); and
2. Accidental discharge or overflow of water or steam.

Adjusters must carefully distinguish vacancy (completely empty of furniture and inhabitants) from unoccupancy (temporarily unoccupied by people, but furnished). Unoccupancy does not trigger this specific 60-day exclusion.

Deductibles and Adjustment Practices

• Standard Base Deductible: Standard dwelling policies typically carry a flat $250, $500, or $1,000 deductible applying per occurrence to property losses.
• Louisiana Hurricane / Named-Storm Percentage Deductibles: Louisiana dwelling policies often carry a separate percentage deductible (e.g., 2%, 3%, or 5%) for hurricane or named storm losses. The percentage applies to the insured value stated in the policy, usually the Coverage A limit, not to the dollar amount of the loss. For example, a 5% hurricane deductible on a $200,000 Coverage A limit equals a $10,000 deductible before the insurer pays any covered damage. For one- or two-family owner-occupied premises, R.S. 22:1337 applies the separate deductible on an annual basis to all named storm and hurricane losses in a calendar year.

Common Dwelling Endorsements