6.2 Homeowners Perils Insured Against, Exclusions & Section I Conditions (Including the 80% Replacement Cost Test)
Key Takeaways
- HO-3 Coverages A and B insure against risk of direct physical loss unless excluded, while Coverage C is limited to 16 named perils.
- HO-3 excludes wear and tear, mechanical breakdown, settling and cracking, pests, constant or repeated seepage over weeks or longer, and freezing of plumbing unless heat was maintained or the system was drained.
- Section I exclusions with an anti-concurrent-causation lead-in include ordinance or law, earth movement, water (flood, backup, subsurface), power failure, neglect, war, nuclear hazard, intentional loss, and governmental action.
- If Coverage A is at least 80% of full replacement cost, a building loss is paid at replacement cost; if less, the insurer pays the greater of actual cash value or limit ÷ (80% × replacement cost) × loss.
- The homeowners form requires a signed, sworn proof of loss within 60 days after the insurer's request and allows suit within two years after the date of loss.
Coverage A and B: Open Perils with Carve-Outs
HO-3 insures the dwelling and other structures against risk of direct physical loss unless the loss is excluded. Beyond the general Section I exclusions, the perils-insured-against section itself removes certain losses:
| Excluded within the open-perils grant | Notes |
|---|---|
| Collapse | Covered only as provided in the collapse additional coverage |
| Freezing of plumbing, heating, air conditioning, or sprinkler systems or household appliances | Excluded while the dwelling is vacant, unoccupied, or being constructed unless the insured used reasonable care to maintain heat or shut off and drain the system |
| Freezing, thawing, pressure, or weight of water or ice on fences, pavements, patios, pools, foundations, retaining walls, bulkheads, piers, wharves, or docks | Structural freeze damage to these items is excluded |
| Theft in or to a dwelling under construction | Includes materials and supplies |
| Vandalism and malicious mischief | Excluded if the dwelling has been vacant more than 60 consecutive days immediately before the loss |
| Constant or repeated seepage or leakage of water or steam over a period of weeks, months, or years | The classic long-term leak exclusion |
| Wear and tear, deterioration; mechanical breakdown, latent defect, inherent vice; smog, rust, corrosion; settling, shrinking, bulging, or expansion of foundations, walls, floors, roofs; birds, rodents, insects, and animals owned or kept by an insured | Unless the policy says otherwise, a resulting covered loss (for example, water damage from a sudden pipe burst caused by corrosion) can still be covered |
Coverage C: Named Perils
Personal property under HO-3 is covered only for the 16 named perils: fire or lightning; windstorm or hail; explosion; riot or civil commotion; aircraft; vehicles; smoke; vandalism or malicious mischief; theft; falling objects; weight of ice, snow, or sleet; accidental discharge or overflow of water or steam; sudden and accidental tearing apart, cracking, burning, or bulging of a heating, cooling, sprinkler, or water-heating system; freezing; sudden and accidental damage from artificially generated electrical current; and volcanic eruption.
Important internal limits: windstorm or hail does not cover interior contents unless wind or hail first makes an opening in the roof or wall. Watercraft is covered for wind only when inside a fully enclosed building. Theft excludes theft committed by an insured, and covers property at a secondary residence only while an insured is residing there.
Section I Exclusions
Introduced by an ACC lead-in (loss excluded regardless of any other contributing cause):
- Ordinance or law (except the ordinance-or-law additional coverage)
- Earth movement (ensuing fire or explosion covered)
- Water: flood, surface water, waves, tidal water, overflow, spray; water or waterborne material that backs up through sewers or drains or overflows from a sump; water below the ground surface pressing on or seeping through foundations, walls, and floors
- Power failure originating off the residence premises
- Neglect
- War
- Nuclear hazard
- Intentional loss
- Governmental action
A second group of exclusions has no ACC lead-in: weather conditions (only when they contribute with one of the excluded causes above), acts or decisions of any person or group, and faulty, inadequate, or defective planning, design, workmanship, materials, or maintenance. Any ensuing loss not otherwise excluded is covered.
Section I Conditions
Duties After Loss
The insured must give prompt notice, notify the police of theft, notify the card company in a credit card loss, protect the property and make reasonable repairs, cooperate in the investigation, prepare an inventory, show the damaged property, provide records, submit to an examination under oath, and send a signed, sworn proof of loss within 60 days after the insurer's request. In New York the timing trigger is reinforced by Ins. Law § 3407 (Section 11.1).
Loss Settlement: The 80% Replacement Cost Test
Buildings under Coverage A and B are settled at replacement cost only if the limit at the time of loss is at least 80% of the full replacement cost of the building. When determining replacement cost, the form excludes excavations, foundations and supports below the undersurface of the lowest basement floor, and underground flues, pipes, wiring, and drains.
| Situation | Payment |
|---|---|
| Limit ≥ 80% of replacement cost | Cost to repair or replace, without depreciation, up to the least of the limit, the replacement cost of that part, or the amount actually and necessarily spent |
| Limit < 80% of replacement cost | The greater of (a) the actual cash value of the damaged part, or (b) (limit ÷ 80% of replacement cost) × cost to repair or replace |
Worked example: replacement cost $500,000; required 80% = $400,000; Coverage A = $300,000. Kitchen fire: repair cost $40,000, ACV $28,000. Proportional amount = ($300,000 ÷ $400,000) × $40,000 = $30,000. The insured receives the greater of $28,000 and $30,000, which is $30,000 before the deductible.
The insurer may pay actual cash value until repair or replacement is complete, except when the damage is less than 5% of the amount of insurance and less than $2,500. The insured may claim the additional replacement cost within 180 days after the loss.
Personal property and certain other items (awnings, carpeting, household appliances, outdoor equipment) are settled at actual cash value unless the Personal Property Replacement Cost endorsement is attached (Section 6.3).
Other Conditions
- Loss to a pair or set: repair or replace a part, or pay the difference in ACV before and after the loss.
- Appraisal: each party picks an appraiser; the appraisers pick an umpire (a court appoints one if they cannot agree); an agreement of any two sets the amount of loss.
- Other insurance and service agreements: pro rata; homeowners coverage is excess over a service agreement such as a home warranty.
- Suit against us: only after compliance with the policy's provisions and within two years after the date of loss.
- Our option: the insurer may repair or replace with property of like kind and quality if it gives notice within the time the policy allows after receiving the proof of loss.
- Abandonment of property: the insurer need not accept property abandoned by an insured.
- Mortgage clause and no benefit to bailee (Section 4.2); recovered property; volcanic eruption period (all eruptions within 72 hours are one occurrence); concealment or fraud (no coverage for an insured who intentionally conceals or misrepresents a material fact or makes false statements).
Under an unendorsed HO-3, water slowly leaked from a shower valve behind a tiled wall for about eight months, rotting the subfloor. How is the rot damage treated?
An HO-3 dwelling has a full replacement cost of $600,000 and a Coverage A limit of $360,000. A covered fire causes $50,000 of damage (replacement cost), and the actual cash value of the damaged part is $35,000. Ignoring the deductible, what does the homeowners loss settlement condition pay?
Under the 2011 ISO homeowners form, within what time must the insured send a signed, sworn proof of loss?