3.3 Dwelling Perils, Conditions, and Endorsements

Coinsurance and the 80% Requirement

The building forms (DP-2, DP-3) settle the dwelling at replacement cost only if the insured carries at least 80% of the dwelling's replacement cost at the time of loss. Carry less, and the coinsurance penalty applies to partial losses. The formula:

Recovery = (Amount Carried ÷ Amount Required) × Loss − Deductible, capped at the policy limit.

Worked example. A dwelling has a replacement cost of $400,000. The 80% requirement = $320,000. The owner insures it for only $240,000 and suffers a $100,000 partial loss with a $1,000 deductible.

• Coinsurance ratio = $240,000 ÷ $320,000 = 0.75
• Indicated payment = 0.75 × $100,000 = $75,000
• Less deductible = $74,000 paid

The owner absorbs the $25,000 coinsurance shortfall plus the deductible. Total losses are paid up to the policy limit without applying the ratio, but the limit ($240,000) is still the ceiling.

Loss Settlement Condition

Under the Loss Settlement condition, when the 80% test is met the building is paid at replacement cost without deduction for depreciation, up to the limit. When the test is NOT met, the form pays the greater of (a) the ACV of the damaged part or (b) the coinsurance-reduced amount shown above. Personal property and structures not buildings are always settled at ACV.

Standard Exclusions

The dwelling forms exclude the same broad categories the exam expects you to recite:

Adding Liability

Because no DP form contains liability, agents attach it by endorsement when the owner wants it. The two endorsement coverages are:

• Personal Liability (Coverage L) – bodily injury and property damage the insured is legally liable for, on a split or single limit
• Medical Payments to Others (Coverage M) – small no-fault medical limit for injuries to others on the premises, regardless of fault

Key Endorsements

• Broad Theft Coverage – adds on-premises (and optionally off-premises) theft for owner-occupants; DP-1 still cannot get theft
• Automatic Increase in Insurance – raises Coverage A by a set percentage during the term to keep pace with inflation and the 80% test
• Dwelling Under Construction – rates the policy on the average amount of insurance over the build period
• Ordinance or Law – funds the added cost of rebuilding to current code
• Earthquake – buys back the earth-movement exclusion

Exam trap: Replacement cost on the dwelling depends on meeting the 80% coinsurance condition AT THE TIME OF LOSS, not at policy inception. Inflation can quietly push a once-compliant policy below 80%.

Other Important Conditions

Several policy conditions recur on the exam.

• Insurable interest / amount of loss – the insurer pays no more than the insured's financial interest, never more than the limit.
• Other insurance – when more than one policy covers the loss, each pays its pro-rata share of the limits.
• Subrogation – after paying a claim, the insurer takes the insured's right to recover from the at-fault party.

Two more conditions protect the parties to the contract.

• Mortgage clause – protects the lender's interest even if the owner's act voids coverage; the mortgagee receives separate notice of cancellation.
• Loss payment – the company pays within a set number of days (often 60) after reaching agreement or a final judgment.
• Appraisal – if the insurer and insured disagree on the amount (not coverage), either may demand appraisal; each picks an appraiser and they select an umpire.

Duties After a Loss

The insured must give prompt notice, protect the property from further damage, prepare an inventory, and submit a signed, sworn proof of loss within a stated period (commonly 60 days). Failure to meet these duties — or the neglect to preserve property — can reduce or bar recovery.

Pair Endorsements to the Risk

Underwriters select endorsements to match exposure: an inland farm dwelling far from a hydrant may take a higher deductible plus Ordinance or Law; a rental in an inflationary market takes Automatic Increase; a fault-zone home buys back Earthquake. The exam expects you to match the named exposure to the correct endorsement rather than recall fine print.

Deductibles and How They Apply

The deductible is subtracted from each covered loss before the limit and after any coinsurance penalty. Most dwelling policies carry a flat all-peril deductible, but wind/hail and named-storm losses in catastrophe-prone areas are often subject to a separate percentage deductible (for example, 2% of Coverage A). On a $300,000 dwelling, a 2% wind deductible is $6,000 — far larger than the flat deductible — so the order of operations matters: apply coinsurance first, then subtract the applicable deductible.

Cancellation and Nonrenewal Basics

While state law sets the specifics, the national concepts are consistent. During the first 60 days of a new policy the insurer may cancel for almost any lawful reason with notice; after that, cancellation is generally limited to nonpayment, fraud/material misrepresentation, or a substantial increase in hazard. Nonrenewal requires advance written notice (commonly 30 days) and lets the insurer end coverage at the policy anniversary. The mortgagee must receive its own notice so the lender's interest is protected.

Exam trap: Coinsurance applies to the building forms (DP-2, DP-3) on PARTIAL losses. A total loss is paid at the policy limit (subject to any valued-policy law), and the coinsurance ratio is not used to cut a total-loss payment below the limit.