Three Losses in One Policy Year
Tom and Ana own a Las Cruces home insured on an HO-3 with Coverage A of $450,000, Coverage C at 50% of Coverage A, a $2,500 all-perils deductible, and a 2% wind/hail deductible. Three things happen in one policy year. (1) A washing-machine supply hose bursts, causing $32,000 of repairs - $6,000 of which is mold remediation - plus $4,000 of damaged personal property. (2) A plumber later finds a shower leak that has been seeping behind the tile for at least a year, producing $14,000 of rot and $3,000 of mold. (3) In March, Ana's $9,000 engagement ring is stolen from a gym locker. Tom wants to keep the undamaged $4,000 sofa from the first loss, whose actual cash value is $2,400.
1. Calculate what the insurer pays for the burst-hose loss and explain any limit that constrains it.
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Coverage. Accidental discharge of water from a plumbing system is a covered peril on the HO-3; this is a plumbing failure, not a flood (flood is excluded and requires a separate policy).
Arithmetic.
- Building damage: $32,000, including $6,000 of mold
- Personal property: $4,000
- Total: $36,000
- Less all-perils deductible: $2,500
- Payable: $33,500
The mold sublimit. Homeowner forms cap mold remediation at a sublimit (commonly $10,000) that applies as an aggregate over the policy period. The $6,000 here fits inside it, so nothing is trimmed. If mold remediation had been $14,000, only $10,000 would have been payable and the remaining $4,000 would fall on the insured.
The 2% deductible is irrelevant. That is the wind/hail deductible ($9,000). Applying the correct deductible - not the larger one - is most of the analysis, and it is the kind of error that produces a complaint to the insurance department.
2. Will anything be paid for the shower leak? Explain your reasoning, including why the mold sublimit does not help.
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Nothing is payable. Two exclusions combine.
- Constant or repeated seepage/leakage over a period of time. The plumber's finding of at least a year of seepage takes this squarely out of coverage. The form covers accidental discharge, not gradual deterioration. Wear-and-tear and deterioration exclusions point the same way.
- Mold following an excluded peril. The mold sublimit is a limit on covered mold, not a grant of coverage. When mold results from an excluded cause of loss, no mold coverage exists to sublimit.
Why this matters to the analysis: the insured will argue that the first loss and this loss are identical because both involve water and both involve mold. The distinction is time - a burst is sudden and accidental, a year of seepage is not. That is the single fact driving the outcome, and it is also why the $6,000 paid on the first claim does not recycle the mold sublimit argument here.
Advice. Suggest a leak-detection shutoff and a maintenance schedule; also confirm the insured understands that neither loss is a flood loss, so a flood policy would not have changed this result.
3. Ana's ring is stolen. What does the policy pay, and how should the sofa be settled?
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Ring: theft is a covered peril, but the special limit controls. Homeowner forms impose a special limit on theft of jewelry and furs - commonly $1,500 per occurrence. That limit is far below the $9,000 value and even below the $2,500 deductible, so the practical recovery is $0. Even if the carrier applied the deductible first and the limit second, the payable amount could never exceed $1,500, and here the deductible wipes it out.
The lesson is placement, not claims handling: jewelry should be scheduled on a personal articles floater, which carries no deductible, insures on a broader "risk of loss" basis, and pays replacement cost. Recommend that at renewal.
Sofa: replacement cost is conditional. Personal property is settled at actual cash value until the item is actually replaced. Tom keeps the sofa, so the carrier pays ACV now:
- Paid now: $2,400
- Held back: $1,600, payable only if a replacement is purchased within the form's replacement period (typically 180 days)
Tell Tom the deadline in writing. If he never replaces it, the $1,600 is not owed - and that is the fact pattern exam writers use to test whether you understand that replacement cost coverage is a reimbursement provision, not a valuation provision.