3.2 Dwelling Coverages A-E and Other Coverages

The Five Coverage Letters

Every Dwelling Policy organizes property coverage under five letters. The first three are property coverages; the last two address loss of use when the dwelling becomes uninhabitable.

Coverage A is the anchor. The other limits are expressed as percentages of it, so a candidate who knows Coverage A can derive the rest.

Internal Percentage Relationships

The standard relationships, which the exam tests as fill-in-the-blank math:

Worked example. With Coverage A = 200,000 dollars:

• Coverage B = 10 percent x 200,000 = 20,000 dollars of additional insurance.
• Coverage C (owner-occupied at 50 percent) = 100,000 dollars.
• Coverages D and E combined (20 percent on a DP-3) = 40,000 dollars available for lost rent or extra living expense.

Coverage D vs. Coverage E

The two loss-of-use coverages address different occupancies, and only one applies to a given building at a time:

• Coverage D, Fair Rental Value, pays the landlord the rental income lost while a tenant cannot occupy the damaged dwelling. It pays only the fair rental value less expenses that do not continue during the period of restoration.
• Coverage E, Additional Living Expense, pays an owner-occupant the increase in living costs (temporary lodging, meals beyond normal) needed to maintain the household's normal standard of living.

Both coverages respond only to a loss caused by a covered peril, and both are limited to the shortest time required to repair or replace the dwelling (or for the household to relocate permanently).

The 80 Percent Coinsurance Condition

Replacement-cost building settlement on the DP-2 and DP-3 requires the insured to carry at least 80 percent of full replacement cost at the time of loss. If they carry less, the coinsurance penalty applies to partial losses:

Payment = (Carried limit / 80 percent of replacement cost) x Loss − Deductible, never exceeding the policy limit.

Worked example. A dwelling has a replacement cost of 300,000 dollars, so the 80 percent requirement is 240,000 dollars. The owner insured it for only 180,000 dollars. A covered fire causes 60,000 dollars of damage; the deductible is 1,000 dollars.

• Coinsurance ratio = 180,000 / 240,000 = 0.75.
• Indemnity = 0.75 x 60,000 = 45,000, minus 1,000 = 44,000 dollars paid.
• The remaining 16,000 dollars is the insured's coinsurance penalty for being underinsured.

Exam tip: Carry at least 80 percent and partial losses are paid in full (up to the limit, less the deductible). Fall below it and the ratio bites.

Other Coverages Built Into the Forms

Beyond the five letters, every form includes a list of Other Coverages. These are either part of the existing limits or small additional amounts; they are not optional purchases.

• Debris Removal – cost to remove debris of covered property after a covered loss; usually within the limit, with an additional amount if the limit is exhausted.
• Reasonable Repairs – cost of temporary repairs to protect property from further damage.
• Property Removed – covers property for up to 5 days (DP-1) while being moved to protect it from a covered peril; the DP-2/DP-3 broaden this.
• Improvements, Alterations, and Additions – tenant's interest in building improvements (relevant when the insured is a tenant).
• World-wide coverage and Lawns, Trees, Shrubs, and Plants – the DP-2/DP-3 add limited amounts (commonly up to 5 percent of Coverage A, with a per-item cap such as 500 dollars per tree or shrub).

Many of these are capped sub-limits; the exam likes to ask whether a stated dollar amount erodes Coverage A or is added on top of it.

ACV vs. Replacement Cost Settlement

The settlement basis determines how much the insured collects. Actual Cash Value (ACV) pays replacement cost minus depreciation for age and wear; the DP-1 uses it. Replacement cost pays the full cost to repair or rebuild with like kind and quality, no depreciation deducted, provided the 80 percent coinsurance condition is met. The DP-2 and DP-3 use replacement cost on the building.

Worked example. A 15-year-old roof costs 12,000 dollars to replace and has depreciated 40 percent. On a DP-1 (ACV), the insured collects 12,000 x 0.60 = 7,200 dollars less the deductible. On a properly insured DP-3 (replacement cost), the insured collects the full 12,000 dollars less the deductible, often paid in two steps: ACV first, then the held-back depreciation once repairs are completed.