3.4 Dwelling Exclusions and Conditions

Standard Exclusions

The dwelling forms exclude catastrophic, non-fortuitous, and maintenance losses. These apply to all three forms (the DP-3's open-perils promise is limited by exactly this list).

Water-damage trap: A sudden burst pipe is covered on DP-2/DP-3; flood, surface water, sewer/drain backup, and continuous seepage are excluded. Sewer backup can be bought back by endorsement.

Duties After Loss

For coverage to apply, the insured must satisfy the policy conditions:

The Vacancy Provision

This is one of the most tested dwelling rules. If the dwelling has been vacant for MORE than 60 consecutive days immediately before the loss:

• Vandalism and malicious mischief — no coverage at all
• All other covered perils (fire, wind, etc.) — payment reduced by 15%

Example: A house standing empty and for sale for 75 days is vacant; vandals cause damage → the loss is not covered. By contrast, a furnished home whose owner is hospitalized for three months is unoccupied, and the vacancy provision does not strip coverage.

Mortgage Clause

The Standard Mortgage Clause protects the lender (mortgagee) named in the policy:

1. Loss payment is made to the insured and mortgagee as their interests appear.
2. The mortgagee's right to recover survives even if the insured's acts (fraud, increased hazard, neglect) would otherwise void coverage.
3. The mortgagee must, on request, pay the premium if the insured fails to, file its own proof of loss, and notify the insurer of ownership/occupancy changes it knows of.
4. The insurer must give the mortgagee separate cancellation/nonrenewal notice (commonly 10 days for nonpayment, longer for other reasons).

Loss Settlement and Dispute Provisions

ACV vs. Replacement Cost

• ACV = replacement cost − depreciation (DP-1).
• Replacement cost on DP-2/DP-3 applies if the insured carries at least 80% of the building's replacement cost (the coinsurance requirement); otherwise the insurer pays the greater of ACV or a proportional amount.

Coinsurance formula: (Carried ÷ Required) × Loss − Deductible = Payment. If a $200,000 home (80% required = $160,000) is insured for only $120,000 and suffers a $40,000 loss: ($120,000 ÷ $160,000) × $40,000 = $30,000 before deductible.

Appraisal

If the parties agree coverage applies but dispute the amount: each picks a competent appraiser, the two select an umpire, and an agreement of any two of the three sets the amount. Each side pays its own appraiser; umpire costs are shared. Appraisal settles amount, never whether a loss is covered.

Other Conditions

How Exclusions Interact With the DP-3 Open-Perils Promise

A frequent exam misconception is that the DP-3 "covers everything." It does not. The open-perils language means covered unless excluded, so the exclusion list is what actually defines the contract. Two exclusion groups deserve special attention:

• Anti-concurrent-causation language: flood, earthquake, and certain water losses are excluded even if another covered peril contributes to the same loss. A landslide triggered by heavy rain is still excluded earth movement.
• Maintenance-related losses (wear and tear, mold, vermin, settling) are excluded because insurance covers fortuitous (sudden, accidental) events, not the predictable consequences of deferred upkeep — a recurring landlord dispute.

Worked Coinsurance Scenario

A landlord insures a building with a replacement cost of $250,000. The policy requires 80% coverage = $200,000, but the landlord carries only $150,000. A covered fire causes $50,000 of damage; the deductible is $1,000.

Step 1 — coinsurance factor: $150,000 ÷ $200,000 = 0.75. Step 2 — apply to loss: 0.75 × $50,000 = $37,500. Step 3 — subtract deductible: $37,500 − $1,000 = $36,500 paid.

The landlord absorbs the remaining $13,500 as a coinsurance penalty for underinsuring — a result the exam tests to ensure candidates apply the penalty before the deductible.

Vacancy vs. Increase-in-Hazard — Don't Confuse Them

The vacancy provision is a specific 60-day rule with two defined consequences. Separately, the policy can suspend coverage for a general increase in hazard that the insured controls (for example, storing flammable inventory in a residence). Both can reduce or eliminate a recovery, but the vacancy provision is the one with the exact 60-day / no-vandalism / 15%-reduction numbers candidates must memorize verbatim.

Cancellation and Nonrenewal Notice

State law layers notice requirements onto the policy conditions. As a rule of thumb tested generically: the insurer must give roughly 10 days' notice for nonpayment and a longer period (commonly 30 days or more) for other reasons, with separate notice to the named mortgagee. Exact day counts vary by state, so on a state-specific question, follow the state's table rather than the federal-style default.