Section I Perils, Exclusions & Settlement
Key Takeaways
- The HO-3 insures the dwelling open-peril and contents named-peril; the HO-5 is open peril throughout and the HO-2 is named peril throughout.
- Core Section I exclusions include flood, earthquake, ordinance or law, neglect, war, nuclear hazard, and intentional loss.
- The dwelling settles at replacement cost only if 80% of replacement value is carried at the time of loss; otherwise the greater of ACV or the carried/required proportion applies.
- Personal property settles at ACV unless replacement-cost contents coverage is endorsed.
Covered Perils and the Form Distinction
How a homeowners policy covers perils depends on the form. The HO-3 insures the dwelling and other structures on an open-peril basis (all risk except exclusions) while covering personal property on a named-peril basis. The HO-2 is named peril throughout, and the HO-5 is open peril throughout. The named-peril contents list on the HO-3 includes fire, lightning, windstorm, hail, explosion, riot, aircraft, vehicles, smoke, vandalism, theft, falling objects, weight of ice and snow, accidental water discharge, freezing, and electrical surge.
Section I Exclusions
All homeowners forms share a core list of exclusions, which the exam tests directly:
| Exclusion | Note |
|---|---|
| Ordinance or law | Code-upgrade costs (endorse to cover) |
| Earth movement | Earthquake, landslide (endorse/separate) |
| Water damage | Flood, surface water, sewer backup (endorse sewer) |
| Power failure (off premises) | Off-site utility interruption |
| Neglect | Failure to protect property |
| War / nuclear hazard | Catastrophic, uninsurable |
| Intentional loss | No coverage for the wrongdoer |
| Governmental action | Seizure, destruction by authority |
Flood and earthquake are the two most-tested exclusions because applicants assume they are covered; flood is insured through the NFIP and earthquake by endorsement or separate policy. Sewer or drain backup is excluded but can be added by a water backup endorsement.
Loss Settlement
The homeowners dwelling (Coverage A) is settled at replacement cost if the insured carries at least 80 percent of full replacement value at the time of loss. If the insured carries less, the policy pays the greater of the ACV of the damaged part or the proportion the carried amount bears to 80 percent of replacement value, times the loss. Personal property (Coverage C) is settled at ACV unless replacement-cost contents coverage is endorsed.
Worked Settlement Example
Suppose a home has a replacement value of $400,000, so 80 percent is $320,000. The insured carries $280,000 and suffers a $40,000 partial loss to the structure. The replacement-cost condition is not met because $280,000 is below $320,000, so the policy pays the greater of ACV or the coinsurance-style proportion: $280,000 divided by $320,000 equals 0.875, times $40,000 equals $35,000 (subject to deductible), compared with the ACV figure; the insured receives whichever is greater. Had the insured carried $320,000 or more, the full $40,000 replacement cost would be paid (less the deductible).
Working this calculation in the structured order, identify the form, confirm the peril, test the 80-percent condition, then choose the greater of ACV or the proportion, is the reliable method for the layered settlement questions the exam asks about homeowners property losses.
On an HO-3, a covered windstorm damages the roof. The home's replacement value is $500,000 and the insured carries $300,000. The 80% requirement is what amount, and is the replacement-cost condition met?
Which loss is covered without an endorsement under an HO-3 dwelling coverage?
The 80% Settlement Rule in Practice
Homeowners dwelling losses turn on the 80 percent replacement-cost condition. If the insured carries at least 80 percent of full replacement value at the time of loss, covered partial losses to the dwelling are paid at replacement cost up to the limit. If the insured carries less, the policy pays the greater of the ACV of the damaged part or the amount found by multiplying the loss by the ratio of the carried amount to 80 percent of replacement value. Choosing the greater of the two figures is the step candidates most often forget.
A worked case: a home with a $500,000 replacement value (80 percent equals $400,000) is insured for $300,000 and suffers a $40,000 partial loss. The proportion is $300,000 divided by $400,000, or 0.75, times $40,000, which is $30,000; the insured receives the greater of that $30,000 or the ACV of the damaged part, less the deductible.
| Carried vs. 80% of RC | Dwelling settlement |
|---|---|
| At least 80% | Replacement cost up to the limit |
| Below 80% | Greater of ACV or the proportion × loss |
| Total loss | Limit (no proportion) |
The exclusions define the real boundary, and the two most-tested are flood and earthquake, both excluded and insured separately because applicants wrongly assume they are covered. Ordinance or law, neglect, war, nuclear hazard, and intentional loss are also excluded, and sewer or drain backup is excluded but addable by a water-backup endorsement. Personal property settles at ACV unless replacement-cost contents coverage is endorsed.
When a scenario gives a form, a limit, a replacement value, and a loss, run the sequence, form, peril, 80 percent test, greater-of choice, deductible, to reach the right number.
Homeowners dwelling losses turn on the 80 percent replacement-cost condition: carry at least 80 percent of full replacement value and covered partial losses pay at replacement cost; carry less and the policy pays the greater of ACV or the carried-to-required proportion times the loss, the greater-of step candidates forget. Flood and earthquake are the two most-tested exclusions because applicants assume coverage; both are excluded and insured separately, and sewer backup is excluded but addable by endorsement.
Personal property settles at ACV unless replacement-cost contents coverage is endorsed.
When a homeowners settlement question gives a replacement value and a carried amount, always test the 80 percent condition before computing, and when the answer falls below the condition, choose the greater of the ACV figure or the carried-to-required proportion rather than defaulting to one of them; the greater-of step is the single most common scoring difference on these items.