5.2 Homeowners Conditions and Duties After Loss
Key Takeaways
- HO-3 settles dwelling and other structures at replacement cost (no depreciation) only if the insured carries at least 80% of full replacement cost.
- Below 80%, the insurer pays the greater of ACV or (Carried/Required) x Loss minus deductible, never exceeding the policy limit.
- ACV equals replacement cost minus depreciation; Coverage C personal property is ACV unless RC coverage is endorsed.
- The insured must file a sworn proof of loss within 60 days of the insurer's request, protect the property, and may be examined under oath.
- Appraisal settles disputes over the amount of loss, not coverage; loss is paid within 60 days of agreement, award, or judgment.
Conditions: The Rules of the Contract
Conditions are the provisions that govern how the homeowners policy operates - what the insured must do, how losses are valued, and how disputes are resolved. The exam tests Section I conditions (property) heavily, including the coinsurance/replacement-cost loss settlement math. Master the numerics here.
Loss Settlement: The 80% Replacement-Cost Rule
Under HO-3, Coverage A (dwelling) and Coverage B (other structures) are settled at replacement cost (RCV) with no deduction for depreciation - provided the insured carries at least 80% of full replacement cost at the time of loss. Coverage C (personal property) is settled at actual cash value (ACV) unless replacement-cost coverage is endorsed.
The Replacement-Cost (Coinsurance) Formula
When the insured carries less than 80% of replacement cost, the loss is settled at the greater of:
- the ACV of the damaged part, or
- the amount produced by the formula: (Carried / Required) x Loss - Deductible, where Required = 80% x replacement cost.
Worked example. A home costs $400,000 to replace. The required amount is 80% x $400,000 = $320,000. The owner insures it for only $240,000. A partial fire loss costs $60,000 to repair (RCV). Deductible $1,000.
- Formula amount: ($240,000 / $320,000) x $60,000 = 0.75 x $60,000 = $45,000, minus $1,000 deductible = $44,000.
- ACV (say 60% of $60,000) = $36,000.
- Insurer pays the greater: $44,000 (still subject to the policy limit).
ACV: Replacement Cost minus Depreciation
Actual cash value = replacement cost - depreciation. If a 10-year-old roof has a replacement cost of $12,000 and a 20-year useful life, it is 50% depreciated, so ACV = $12,000 - $6,000 = $6,000.
Key related conditions to memorize:
- Other Insurance - if other insurance applies, the HO pays its pro-rata share (proportion of its limit to total applicable limits).
- Loss Payment - the company pays within 60 days after receiving the proof of loss and reaching agreement, an appraisal award, or a court judgment.
- Appraisal - if the insured and insurer disagree on the amount of loss, either may demand appraisal; each picks an appraiser, the two select an umpire, and agreement by any two sets the amount. Appraisal resolves amount, not coverage.
- Suit Against Us - the insured cannot sue the company unless they have complied with policy terms; suit must be brought within 2 years (varies by state).
- Salvage / Abandonment - property may not be abandoned to the insurer.
Duties After Loss (Section I)
After a property loss the insured must:
- Give prompt notice to the insurer or agent.
- Notify the police in case of theft.
- Protect the property from further damage; make reasonable temporary repairs (recorded for additional living expense / extra costs).
- Prepare an inventory of damaged personal property with quantities, descriptions, and amounts.
- As often as reasonably required, show the damaged property, provide records and documents, and submit to examination under oath.
- Send a signed, sworn proof of loss within 60 days of the insurer's request.
Failure to comply can void coverage for that loss. The 60-day proof-of-loss requirement is the most-tested duty.
Section II imposes parallel Duties After Loss for liability claims: give written notice of the occurrence; promptly forward every legal paper (summons, complaint) received; cooperate with the insurer; and, for the goodwill Damage to Property of Others coverage, submit a sworn statement of loss within 60 days. The insured must not voluntarily make payments, assume obligations, or admit fault except at their own cost (first aid to others is allowed). Examiners contrast Section I and Section II duties, so keep them distinct.
Other Frequently Tested Conditions
- Subrogation - after paying a loss, the insurer may require the insured to assign rights of recovery against a responsible third party. The insured must not impair those rights; a written waiver of recovery before a loss is permitted.
- Mortgage Clause - protects the named mortgagee's interest even if the insured's act voids the policy; the mortgagee gets 10 days' notice before cancellation/nonrenewal and may pay premium and file proof of loss.
- No Benefit to Bailee - a carrier or bailee holding the property for a fee gets no benefit from the insurance.
- Concealment or Fraud - intentional concealment or material misrepresentation voids the policy.
Pair Rule and Recovered Property
Two more tested conditions: Loss to a Pair or Set - the insurer may repair/replace any part to restore the set, or pay the difference between the ACV of the set before and after the loss; it need not pay the full set value for one lost item. Recovered Property - if stolen property is recovered after payment, the insured may keep it and return the claim payment, or keep the payment and let the insurer take the property. Examiners pair the coinsurance math with these qualitative conditions, so do not neglect them while drilling the formula.
Quick-Reference Condition Time Limits
| Condition | Time Limit |
|---|---|
| Proof of loss after insurer's request | 60 days |
| Loss payment after agreement/award/judgment | 60 days |
| Coverage F medical expenses | 3 years from accident |
| Suit against insurer (Section I) | 2 years (state-variable) |
| Mortgagee notice before cancellation | 10 days |
| Replacement-cost coinsurance threshold | 80% of full RC |
A dwelling has a replacement cost of $500,000. The owner insures it for $300,000. A covered partial loss has a replacement cost of $80,000 and the ACV of the damaged portion is $50,000. The deductible is $1,000. Applying the HO replacement-cost provision, what does the insurer pay?
The insured and insurer agree the roof was damaged by a covered windstorm but cannot agree on the dollar amount of the loss. Which condition resolves this?