The Underinsured Dwelling and the 80% Replacement Cost Threshold
A single-family dwelling is the insured's principal residence. The policy has $180,000 building coverage and $60,000 contents coverage, with a $1,000 deductible. At the time of loss, the replacement cost of the dwelling is $250,000. A flood causes $80,000 in building damage and $20,000 in contents damage (actual cash value). The adjuster estimates depreciation on the building damage at $25,000. The insured has no other flood insurance. The insured demands replacement cost on the building because 'it is my home and I have flood insurance.' The policy was issued on the Dwelling Form. The building was insured for $180,000 at the time of loss. The 80% threshold is $200,000. The adjuster has documentation of the replacement cost and depreciation. The home is in a participating community and the policy is in force.
1. Is the insured entitled to replacement cost on the building? Explain the 80% requirement.
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No. The Dwelling Form provides replacement cost settlement for the building only when the building is the insured's principal residence and the amount of insurance at the time of loss is at least 80% of the building's replacement cost. The replacement cost is $250,000, so the 80% threshold is $200,000. The policy limit is $180,000, which is $20,000 short. Because the 80% test is not met, the building loss is settled on an actual cash value basis. The insured's principal-residence status is necessary but not sufficient; the coverage amount also matters. The adjuster should document the replacement-cost estimate, the policy limit, and the 80% calculation. The insured should be told that increasing the limit before a future loss would restore replacement-cost eligibility, but it cannot be done after the loss.
2. Calculate the building payment on an ACV basis after deductible.
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The building replacement-cost damage is $80,000. Depreciation is $25,000, so the actual cash value of the building damage is $80,000 − $25,000 = $55,000. The policy limit is $180,000, so the limit is not exceeded. The building deductible is $1,000, so the building payment is $55,000 − $1,000 = $54,000. The contents damage is $20,000 on an ACV basis; contents are always settled on ACV under the Dwelling Form, so the contents payment is $20,000 − $1,000 = $19,000, subject to the $60,000 contents limit. The total payment would be $54,000 + $19,000 = $73,000. The adjuster should show the depreciation calculation and cite the loss-settlement provision in the estimate.
3. What would change if the insured had increased building coverage to $200,000 before the loss?
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If the building limit had been $200,000 at the time of loss, the 80% threshold would be met ($200,000 = 80% × $250,000). The building would be eligible for replacement cost settlement, assuming it is the principal residence. The building payment would then be the replacement-cost damage of $80,000, subject to the $200,000 limit, minus the $1,000 deductible, for $79,000. The contents result would not change because contents remain ACV. The adjuster should note that replacement-cost settlement may be paid in stages: the insurer may pay ACV first and the recoverable depreciation after the insured completes the repair or replacement, depending on the policy terms. The insured would have paid a higher premium for the higher limit, but the increased limit would have produced a larger payment.