4.3 Dwelling Exclusions, Conditions, Endorsements & Michigan Cancellation Rules

Dwelling Exclusions, Conditions, Endorsements & Michigan Cancellation Rules

Exam Priority: Know the 9 General Exclusions across all Dwelling forms (especially Off-Premises Power Failure and Governmental Action exceptions), the 80% Replacement Cost coinsurance formula, the 72-hour Volcanic Eruption rule, the Pair or Set condition, key endorsements (DP 01 21, DP 04 72, DP 11 43, DL 24 01, DP 04 11), and Michigan's statutory notice clocks (10 days nonpayment, 55-day new-business underwriting window with 20 days' notice, 30 days nonrenewal, and 30 days loss payment).

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1. General Exclusions (Applicable to DP-1, DP-2, and DP-3)

Nine core exclusions apply to all three Dwelling policy forms regardless of whether the policy is written on a Named Perils or Open Perils basis:

1. Ordinance or Law: Excludes loss or increased cost caused by the enforcement of any ordinance or law regulating the construction, repair, demolition, remodeling, or zoning of a building (except to the extent of the 10% of Coverage A Ordinance or Law Other Coverage built into DP-2 and DP-3).
2. Earth Movement: Excludes earthquake (including land shock waves or tremors before, during, or after a volcanic eruption), landslide, mudflow, mudslide, sinkhole, subsidence, or any other earth movement (rising, shifting, or sinking of earth). Ensuing Loss Exception: If Earth Movement results in a direct loss by fire or explosion, the policy covers the ensuing fire or explosion loss.
3. Water Damage: Excludes:
   • Flood, surface water, waves, tidal water, storm surge, or overflow of a body of water, whether or not driven by wind;
   • Water or water-borne material which backs up through sewers or drains or which overflows or is discharged from a sump, sump pump, or related equipment; and
   • Water below the surface of the ground (subsurface water) that exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool, or other structure.
   • (Ensuing fire or explosion resulting from excluded water damage IS covered.)
4. Power Failure (Off-Premises Rule): Excludes loss caused by the failure of power or other utility service if the failure takes place OFF the Described Location (for example, a utility grid outage three miles away causes food spoilage). Two Critical Exceptions:
   • If the power failure occurs ON the Described Location (such as a tree falling on the insured's private backyard service drop), it is not excluded by this clause.
   • Even if the power failure occurs off the Described Location, if it results in a Peril Insured Against ON the Described Location, the insurer pays only for the loss caused by that ensuing Peril Insured Against.
5. Neglect: Excludes neglect of the insured to use all reasonable means to save and preserve property at and after the time of a loss.
6. War: Excludes war, undeclared war, civil war, insurrection, rebellion, or revolution.
7. Nuclear Hazard: Excludes nuclear reaction, radiation, or radioactive contamination.
8. Intentional Loss: Excludes any loss arising out of any act committed by or at the direction of an insured with the intent to cause a loss.
9. Governmental Action: Excludes the destruction, confiscation, or seizure of property by order of any governmental or public authority. Firebreak Exception: It DOES cover acts ordered by a governmental authority at the time of a fire to prevent its spread, provided the fire itself would have been covered under the policy.

Additional DP-3 Exclusions (Coverages A & B Open Perils)

Because DP-3 insures Coverages A and B on an Open Perils basis, it adds exclusions for maintenance, gradual, and design risks (while still covering any ensuing loss to Coverages A or B not otherwise excluded):

• Wear and tear, marring, deterioration; inherent vice, latent defect, mechanical breakdown;
• Smog, rust, corrosion, mold, wet or dry rot;
• Smoke from agricultural smudging or industrial operations;
• Settling, shrinking, bulging, or expansion (including resultant cracking) of pavements, patios, foundations, walls, floors, roofs, or ceilings;
• Birds, rodents, insects, or domestic animals, plus nesting or infestation, or discharge of waste products or secretions, by any animals (the 2014 form replaced the older "vermin" wording)—so termite damage, raccoon nesting damage, or a family dog chewing woodwork is excluded under DP-3; and
• Faulty, inadequate, or defective planning, zoning, design, specifications, workmanship, repair, construction, renovation, or maintenance (if faulty wiring causes a house fire, the defective wiring itself is excluded, but the ensuing fire damage is covered).

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2. Key Dwelling Policy Conditions

A. Policy Period, Insurable Interest, Concealment or Fraud & Duties After Loss

• Policy Period: The policy applies only to loss that occurs during the policy period shown in the Declarations.
• Insurable Interest and Limit of Liability: Even if more than one person has an insurable interest in the property covered, the insurer is not liable in any one loss to the insured for more than the amount of the insured's interest at the time of loss, nor for more than the applicable limit of liability.
• Concealment or Fraud: The insurer does not provide coverage for an insured who, whether before or after a loss, has intentionally concealed or misrepresented any material fact or circumstance, engaged in fraudulent conduct, or made false statements relating to the insurance.
• Duties After Loss: When a loss occurs, the insured must:
  1. Give prompt notice to the insurer or its agent;
  2. Protect the property from further damage, make reasonable and necessary temporary repairs, and keep an accurate record of repair expenses;
  3. Prepare an inventory of damaged personal property showing the quantity, description, Actual Cash Value (ACV), and amount of loss, attaching all bills, receipts, and related documents;
  4. Exhibit the damaged property as often as the insurer reasonably requires, provide requested records, and submit to Examination Under Oath (EUO) while not in the presence of any other insured;
  5. Send to the insurer, within 60 days after the insurer's request, a signed, sworn Proof of Loss setting forth the time and cause of loss, the interest of the insured and all others in the property, other insurance, changes in title or occupancy, specifications of damaged buildings, and the personal property inventory.

B. Loss Settlement: ACV vs. 80% Replacement Cost Rule

• Coverage C (All Forms) & Coverages A/B on DP-1: Settled at Actual Cash Value (ACV) at the time of loss, not exceeding the amount required to repair or replace.
• Coverages A & B on DP-2 and DP-3 (80% Replacement Cost Rule):
  • 80% or More (Full RCV): If, at the time of loss, the limit of liability on the damaged building is 80% or more of its full replacement cost, the insurer pays the full Replacement Cost without deduction for depreciation (up to the policy limit).
  • Less Than 80% (Coinsurance Penalty): If the building is insured for less than 80% of its full replacement cost, the insurer pays the greater of: (1) the Actual Cash Value (ACV) of the damaged part of the building, OR (2) the proportion of the replacement cost that the insurance carried bears to 80% of the building's full replacement cost: Proportional Payout = (Insurance Carried / [0.80 x Full Replacement Cost]) x Loss - Deductible For example, if a dwelling has a full replacement cost of $200,000 (so 80% is $160,000), is insured for only $120,000, and suffers a $40,000 replacement cost loss with an ACV of $26,000, the proportional calculation is (\$120,000 / \$160,000) x \$40,000 = \$30,000. Because $30,000 is greater than the $26,000 ACV, the insurer pays $30,000 (minus the deductible).
  • Small Loss Rule (Holdback Exception): The insurer pays no more than the ACV until actual repair or replacement is complete, unless the cost to repair or replace is both less than 5% of the building's limit of insurance AND less than $2,500. The insured may also make an ACV claim first and then notify the insurer within 180 days after the loss of intent to claim the remaining replacement cost depreciation holdback.

C. Other Essential Dwelling Conditions

• Pair or Set Clause: In case of loss to a pair or set, the insurer may elect to (1) repair or replace any part to restore the pair or set to its value before the loss, or (2) pay the difference between the Actual Cash Value of the property before and after the loss. Losing one item of a pair never entitles the insured to claim a total loss of the entire set.
• Appraisal: If the insured and insurer fail to agree on the amount of loss (valuation, not coverage), either party may make a written demand for an Appraisal. Under Michigan's statutory provisions (DP 01 21 / MCL 500.2833(1)(m)), each party selects a competent, independent appraiser within 20 days after receiving the written demand, and the two appraisers select an umpire within 15 days (if they cannot agree within 15 days, either party may ask a circuit court judge in the county where the loss occurred to select the umpire). Written agreement by any two of the three sets the amount of loss.
• Other Insurance and Service Agreement: If a loss is also covered by other insurance, the Dwelling insurer pays only the proportion (pro rata share) of the loss that its limit of liability bears to the total amount of insurance covering the loss. If the property is also covered by a service agreement (such as a home warranty plan), the Dwelling insurance is excess over any amounts payable under the service agreement.
• Subrogation: An insured may waive in writing before a loss all rights of recovery against any person. If not waived, the insurer may require an assignment of rights of recovery up to the amount paid.
• No Benefit to Bailee: The insurer will not recognize any assignment or grant any coverage that benefits a person or organization holding, storing, or moving property for a fee (a bailee).
• Recovered Property: If either the insured or the insurer recovers property after a loss settlement has been made, that party must notify the other; the insured has the option to take the recovered property and return the claim payment (or have the settlement adjusted), or leave the recovered property with the insurer.
• Volcanic Eruption Period: All volcanic eruptions that occur within any 72-hour period constitute a single occurrence (subject to only one deductible).
• Mortgage Clause: Protects a named mortgagee (lender) on Coverages A and B. Even if the insured's claim is denied due to the insured's act or neglect (such as arson or vacancy), the mortgagee's right to recover is not invalidated, provided the mortgagee pays any premium due on demand, submits a signed, sworn Proof of Loss within 60 days after being notified that the insured failed to do so, and notifies the insurer of any change in ownership, occupancy, or substantial change in risk known to the mortgagee.

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3. Selected Dwelling Endorsements & Michigan Statutory Rules

Personal Liability Supplement (DL 24 01) in Practice

Because the Dwelling forms are property-only, a landlord or owner-occupant who needs liability protection adds the Personal Liability Supplement. It supplies the same two liability coverages a Homeowners policy carries in Section II, renamed for the Dwelling program:

• Coverage L — Personal Liability: pays damages an insured is legally obligated to pay for covered bodily injury or property damage caused by an occurrence, plus defense costs in addition to the limit (the counterpart of Homeowners Coverage E).
• Coverage M — Medical Payments to Others: pays necessary medical expenses for others injured on an insured location or by an insured's activities, without regard to fault (the counterpart of Homeowners Coverage F).
• Insured locations: the locations shown in the PLS declarations—which can include rental dwellings the insured owns—so a landlord's premises-liability exposure at a duplex can be covered even though the DP policy itself has no liability section.
• Claim handling: an adjuster handling a slip-and-fall at a rental dwelling checks first whether a PLS (or a separate liability policy) is attached; without it, the Dwelling policy provides no liability or medical payments coverage.

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4. Michigan Property Cancellation, Nonrenewal & the MBPIA (FAIR Plan)

Under the Michigan Essential Insurance Act (MCL 500.2101–.2131)—whose termination rules apply to home insurance, meaning fire and related coverage on an insured's own dwelling or residence (MCL 500.2103)—and the fire-policy statute (MCL 500.2833), residential property policies in Michigan follow these cancellation and residual market rules:

1. Cancellation by the Insured: The named insured may cancel the policy at any time by notifying the insurer or returning the policy; any unearned premium must be refunded promptly.
2. Cancellation for Nonpayment of Premium (10 Days): The insurer may cancel at any time for nonpayment of premium by mailing at least 10 days' written notice of cancellation to the named insured and any designated mortgagee (MCL 500.2833(1)(i)–(j)); under MCL 500.2123(3), a nonpayment termination takes effect as provided in the policy.
3. First 55 Days — Underwriting Cancellation Period (20 Days Notice): Under MCL 500.2123, during the first 55 days after a new residential property policy is initially issued, the insurer may cancel for any valid underwriting reason (not prohibited by law) by mailing at least 20 days' written notice stating the reason for cancellation.
4. After 55 Days & Nonrenewal (30 Days Notice): Any other termination requires at least 30 days' written notice stating the effective date and each specific reason, and the reason must conform to the insurer's underwriting rules (MCL 500.2123(1), (4)). Because a "termination" includes nonrenewal, the same 30-day notice applies to nonrenewal.
5. Michigan Basic Property Insurance Association (MBPIA — Michigan FAIR Plan, MCL 500.2901–.2954): All licensed property insurers in Michigan must participate in the MBPIA, Michigan's residual market facility (Fair Access to Insurance Requirements Plan). The MBPIA provides basic property insurance and home insurance to qualified property owners who have made a diligent effort and are unable to obtain coverage in the voluntary insurance market, provided the property passes physical inspection and does not have uncorrected physical hazards (such as severe structural dilapidation or illegal occupancy).