The Underinsured Colonial: Replacement Cost, Coinsurance, and a Basement Backup
Devon owns a 1998 colonial insured under an HO-3 with Coverage A of $280,000, a figure chosen to match his mortgage balance. An appraiser puts replacement cost at $400,000. The policy carries a $2,000 deductible, replacement cost on both dwelling and personal property, a $10,000 water backup endorsement, and a $10,000 mold sublimit. In February a supply line to an upstairs bath bursts while the family is away for two days. Dwelling damage is $160,000 at replacement cost ($110,000 actual cash value); personal property damage is $30,000 replacement cost ($18,000 ACV); mold remediation within the burst-pipe damage is $18,000. A week earlier, a floor drain in the finished basement backed up and caused $14,000 of damage to carpet and drywall. Devon has not replaced any damaged property yet.
1. Calculate the dwelling payment for the burst-pipe loss.
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Replacement cost settlement on the dwelling is conditioned on insuring to at least 80% of replacement cost.
- Required amount: 80% × $400,000 = $320,000
- Carried: $280,000, which is 70% of $400,000 and only 87.5% of the required amount - below the 80% threshold, so the penalty applies.
- Payment = greater of ACV or (carried ÷ required) × loss
- (280,000 ÷ 320,000) × $160,000 = $140,000
- ACV is $110,000, so the formula figure controls.
- Less the $2,000 deductible = $138,000, still within the $280,000 limit.
The trap is comparing $280,000 to $400,000 and stopping there, or assuming the mortgage balance is a substitute for replacement cost. It is not, and the insured eats roughly $22,000 of the loss through the coinsurance penalty.
2. How much is payable for the floor-drain backup, and how does the deductible work across the two events?
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Water that backs up through a drain or sewer is excluded under the base HO-3 form; coverage exists only because the insured bought the water backup endorsement with a $10,000 limit.
- Loss: $14,000
- Endorsement limit: $10,000 - the cap controls
- The backup is a separate occurrence from the burst pipe, so a second $2,000 deductible applies: $8,000 payable
Two judgment points: (1) the endorsement limit is a sublimit, not an addition to Coverage A, so the insured absorbs $4,000 plus the deductible; (2) exam items frequently try to slip a second loss into the same occurrence to avoid the second deductible - separate cause, separate occurrence, separate deductible.
3. How should the personal property and mold items be handled given nothing has been replaced?
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Personal property. Replacement cost on contents is paid in two steps: the insurer pays ACV first and holds back the recoverable depreciation until the insured actually repairs or replaces within the claim period. So $18,000 now, with the remaining $12,000 available on proof of replacement. The 80% coinsurance condition applies to the dwelling, not to contents, so no penalty here. The $2,000 deductible is already exhausted by the dwelling payment on this occurrence.
Mold. The $18,000 remediation is capped at the $10,000 mold sublimit; $8,000 is uninsured. It remains part of the burst-pipe occurrence for deductible purposes, but sublimits sit inside - and do not increase - the Coverage A limit.
Net effect of the burst-pipe occurrence: $138,000 dwelling + $10,000 mold + $18,000 contents now = $166,000, with $12,000 of depreciation recoverable later - well under the Coverage A limit but far short of the $208,000 the insured assumed he had bought.