3.3 Dwelling Perils, Conditions, and Endorsements

Standard Exclusions

Even the open-perils DP-3 is limited by a list of exclusions. These apply to all three forms — the DP-3's "all risk" promise is exactly as wide as this list is narrow.

The Coinsurance Condition and Loss Settlement

Replacement-cost forms (DP-2, DP-3) require the insured to carry at least 80% of replacement cost to be paid in full for a partial loss. If the insured is underinsured, the coinsurance penalty applies:

Payment = (Insurance Carried ÷ Insurance Required) × Loss − Deductible

Worked example. A home has a replacement cost of $400,000. Required = 80% × $400,000 = $320,000. The owner carries only $240,000. A kitchen fire causes a $60,000 loss; deductible is $1,000.

• Ratio = $240,000 ÷ $320,000 = 0.75
• Indemnity = 0.75 × $60,000 = $45,000 − $1,000 = $44,000

The insured eats the $15,000 penalty plus the deductible because the 80% requirement was not met.

ACV vs. Replacement Cost

The DP-1 settles at Actual Cash Value (ACV) = replacement cost minus depreciation. DP-2 and DP-3 settle the dwelling and other structures at replacement cost (RC), with no deduction for depreciation, provided the coinsurance condition is met.

Worked ACV example. A roof costs $18,000 to replace and is 60% through its useful life. Depreciation = 60% × $18,000 = $10,800.

• ACV = $18,000 − $10,800 = $7,200 under a DP-1
• Under a DP-3 meeting coinsurance, the insurer pays the full $18,000 RC (less deductible).

Replacement-cost forms often pay ACV first and release the withheld depreciation (the 'recoverable' portion) only after the insured actually repairs or replaces the property and submits proof. An insured who pockets the ACV and never rebuilds keeps only the depreciated amount.

Key Policy Conditions

• Other Insurance / Pro Rata: if two policies cover the same loss, each pays its pro rata share by limit.
• Subrogation: after paying, the insurer takes over the insured's right to recover from a negligent third party.
• Vacancy / Mortgagee: vandalism and glass coverage are suspended after 60 days vacant; the mortgagee clause protects the lender even if the insured's own act voids the policy.
• Duties After Loss: prompt notice, protect from further damage, and provide a sworn proof of loss (commonly within 60 days of request).

The Appraisal Condition

The appraisal clause resolves disputes over the amount of a loss — never over whether coverage applies. If the insurer and insured cannot agree on value, either party may demand appraisal:

• Each side selects a competent, impartial appraiser.
• The two appraisers select an umpire; a court appoints one if they cannot agree.
• An agreement by any two of the three (two appraisers, or one appraiser plus the umpire) sets the amount and is binding.

Each party pays its own appraiser and shares the umpire's cost equally. Because appraisal is limited to valuation, a coverage denial still goes to the courts.

Common Dwelling Endorsements

• Automatic Increase in Insurance — raises Coverage A periodically to track inflation.
• Dwelling Under Construction — adjusts limits as the structure is built.
• Broad Theft / Limited Theft Coverage — adds theft, which the unendorsed DP form does not provide.
• Personal Liability Supplement (DL 24 01) / Premises Liability — adds the liability the DP forms omit.
• Ordinance or Law — funds the extra cost of rebuilding to current building codes.
• Water Back-Up and Sump Overflow — covers sewer/drain back-up, which is otherwise excluded.

Why Coinsurance Exists and the 80% Threshold

Most dwelling losses are partial, not total. If insureds could buy a small limit and still be paid in full for partial losses, they would under-insure to save premium, and the insurer would collect too little to pay the aggregate of partial claims. The coinsurance clause corrects this by requiring the insured to carry at least a stated percentage — commonly 80% of replacement cost — to be paid in full for a partial loss.

Meet the threshold and there is no penalty up to the policy limit. Fall short and the pro rata penalty bites every partial claim. A total loss is settled at the policy limit regardless, so under-insurance always favors carrying close to full value.

Deductibles and the Order of Operations

On replacement-cost dwelling claims, apply the math in a fixed order so the numbers come out right on the exam:

1. Confirm the coinsurance ratio (carried ÷ required).
2. Multiply the ratio by the amount of loss.
3. Cap the result at the policy limit if it is higher.
4. Subtract the deductible last.

Reversing steps 2 and 4 is the most common arithmetic error. Note also that wind/hail or hurricane deductibles are often expressed as a percentage of Coverage A rather than a flat dollar amount — a 2% wind deductible on $300,000 of Coverage A is $6,000, not a small flat figure, which can swallow a modest claim entirely.