Underinsured HO-3: The Dwelling, the Workshop, and the Furniture Inventory
An Ames couple insured their 1968 two-story home on an HO-3: Coverage A $320,000, Coverage B $32,000, Coverage C $160,000, a $1,000 all-perils deductible, and replacement cost on the dwelling. Coverage A was never increased after a 2021 addition; the home's current replacement cost is $480,000. In February an ice dam forced water through a second-floor wall, damaging the dwelling ($120,000 to repair at today's prices, of which $30,000 is depreciation) and a detached, purely personal-use workshop ($58,000 to repair, $12,000 depreciation). The couple also lost $9,200 of personal property in the house, including a $4,800 dining set and $2,600 of finished furniture the husband built for sale and moved indoors after the workshop flooded.
1. The couple expects the full $120,000 dwelling repair bill. Using the HO-3 loss settlement condition, compute what the insurer pays and explain the reasoning.
Read the worked answer
Step 1 - Insurance-to-value test. The HO-3 pays replacement cost on the dwelling only if the Coverage A limit is at least 80% of the dwelling's full replacement cost at the time of loss.
- 80% × $480,000 = $384,000 required
- Carried: $320,000 (about 67% of replacement cost)
The insured fails the test, so the loss-settlement condition applies a penalty. It pays the least of: (a) actual cash value, (b) the coinsurance formula amount, or (c) the limit of liability.
Step 2 - The three numbers.
| Basis | Calculation | Amount |
|---|---|---|
| ACV | $120,000 − $30,000 depreciation | $90,000 |
| Formula | ($320,000 ÷ $384,000) × $120,000 | $100,000 |
| Limit | Coverage A | $320,000 |
Least of the three = $90,000, less the $1,000 deductible = $89,000 payable.
Step 3 - Practical point. The couple cannot "elect" replacement cost; the only cure was to have carried $384,000 before the loss. They absorb roughly $31,000 on the dwelling alone. Note also that the reported figure is a repair estimate - if the home is not actually repaired, most forms settle at ACV regardless.
2. How much does the policy pay for the detached workshop, and does the 80% condition reduce that number a second time?
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- The workshop is a structure on the residence premises, set apart from the dwelling by clear space, and is used only personally - it falls under Coverage B (other structures), whose limit is $32,000 (10% of Coverage A) and is additional to Coverage A.
- Loss at replacement cost: $58,000. ACV: $58,000 − $12,000 = $46,000.
- Even on the most favorable basis, the Coverage B limit caps the payment at $32,000. The couple bears the $26,000 excess plus depreciation.
Does the 80% condition bite again? The insurance-to-value formula in the HO-3 is keyed to the Coverage A amount shown in the Declarations measured against the dwelling's replacement cost; Coverage B does not carry its own separate coinsurance test in the standard form. In any event, applying a proportional reduction to the workshop loss (which would still exceed $32,000) does not change the answer - the limit, not the formula, is the binding constraint.
Deductible: The workshop and dwelling damage arise from the same occurrence, so only one $1,000 deductible applies, already absorbed in the dwelling settlement. Coverage B therefore pays $32,000 with no further reduction.
3. How should the adjuster handle the $9,200 of personal property, including the $2,600 of furniture built for sale?
Read the worked answer
Split the loss into ordinary household contents and business property, because the HO-3 imposes a special limit on business property on the residence premises (the current ISO form uses $2,500 - verify the edition in the policy jacket).
| Item | Amount | Treatment |
|---|---|---|
| Dining set and other household goods | $6,600 | Ordinary Coverage C; covered up to the $160,000 limit |
| Furniture built for sale | $2,600 | Business property; capped at the special limit |
- Payable: $6,600 + $2,500 = $9,100 (the $100 excess over the special limit is uninsured).
- Coverage C is not exhausted, so the limit is not an issue.
- Valuation: Coverage C pays ACV unless the policy carries a replacement-cost contents endorsement; if it does not, the $4,800 dining set is settled at depreciated value. Confirm before issuing payment.
- No separate deductible - the occurrence deductible was consumed by the building loss.
Coaching note for the insured: the same underinsurance problem drove all three results. Increasing Coverage A to at least 80% of replacement cost, scheduling the workshop properly, and buying a business-property endorsement would have closed most of the gap.