HO 04 56–SPECIAL LOSS SETTLEMENT

(July 2020)

PURPOSE

This endorsement modifies the replacement cost provision found in the HO 00 02, HO 00 03 or HO 00 05. It requires that dwelling coverage be written at a specified percentage of the insured dwelling’s replacement cost. Instead of carrying coverage at the standard 80%, Coverage A may be written at 70%, 60% or even 50% of the home’s total replacement cost and still qualify for settling losses on a replacement cost basis. The use of the endorsement is subject to rules and company underwriting with regard to minimum dwelling coverage limits.

THE PROBLEM

Maintaining high limits of insurance to comply with insurance-to-value requirements as residence values continuously rise can be problematic. This is especially true in certain instances, such as when:

· the replacement cost bears little relationship to market value

· an insured is financially constrained (and NO leinholder exists)

· an insured has a strong aversion to maintaining full insurance to value limits

In these cases, the HO 04 56 form may be an option.

The HO 04 56–Special Loss Settlement form permits an insured to cover his home at 70, 60 or even as low as 50% of an applicable insured home’s replacement cost and still remain eligible for replacement cost adjustment on partial, note partial losses. Replacement cost settlement applies to residence and other structure losses if, at the time of the loss, the amount of coverage carried on the property exceeds the specified percentage to replacement cost requirement that appears on this form’s schedule. If it is less than what was required, settlement is made on an ACV basis.

The form’s Loss Settlement condition replaces the provision of the policy it modifies. Any calculation of a loss settlement does not include the financial impact from the enforcement of any ordinance or law applying to construction, renovation, demolition, etc., except for what may be provided under the base policy’s Ordinance or Law Additional Coverage.

Of course, both the agent and the insurer must be very careful in agreeing to provide this coverage since other options may be more prudent. This is especially the case when other financial interests are involved, such as mortgagees. Errors and Omissions could also be a problem if a significant loss occurs and an insured becomes unhappy with their loss settlement.

Example: The Smiths have had their luxury home insured with Upskale Casualty since 2007. At the time, they added the HO 04 56 and wrote the home with a Coverage A limit of $314,000 which represented 70% of its replacement cost. In 2017, the home was struck by lightning and the resulting fire destroyed the home. The Smiths, claiming that they forgot about the HO 04 56, sue their agent and Upskale because the home’s current replacement cost exceeds $500,000.

Certain property, such as structural support elements and subsurface structures are excluded when calculating the applicable replacement cost figure.

Personal property, including outdoor antennas, non-building structures, equipment, grave markers, and mausoleums are adjusted according to actual cash value.

Under Coverages A or B, when a loss occurs that exceeds the lesser of $2,500 or 5% of the applicable amount of insurance, payment is based on ACV, initially. When the actual repair or replacement of the damaged or destroyed property is completed, the loss qualifies for settlement on a replacement cost basis. However, any payment is still constrained by the applicable limit appearing on the form, the actual cost to make a replacement or repair and the use of material of like kind, quality, or function. The form is only obligated to respond to a loss according to the least expensive option. Therefore, while the form permits more flexibility in writing more complicated coverage situations, the property owner, ultimately, bears a much larger share of risk.