Calculating a homeowners’ property loss payment seems rather basic – on the surface. But there are a lot of moving parts to consider and apply before arriving at the final payment amount. Attached is a flowchart attempt at walking through the homeowners’ property loss payment process. Print out the two-page flowchart and read the following instructions for its completion. The second page of the flowchart numbers the boxes as described in the instructions below.
The next few paragraphs describe the calculation process as it relates to homeowners’ policy property losses in general with a specific focus on the HO-3 with the HO 04 90 endorsement (Personal Property Replacement Cost). Key factors initially needed to complete this process are the:
- Total Damage Amounts to both the dwelling and personal property;
- Policy limits; and
Total Damage Amount
How much will it actually cost to repair or replace the damaged or destroyed dwelling or personal property? Without this information no other steps can be taken. The “total damage amount” is taken from the proof of loss form supplied to the insured by the insurance carrier after a loss occurs – as detailed in the “Duties After Loss” of the Section I Conditions.
Once the insurance carrier provides and requests the proof of loss form, the insured has 60 days to file the requested information. Notice that the policy does not state that the proof is due 60 days from the date of loss; it is due 60 days after requested by the carrier.
The total damage amount obviously can exceed the policy limits. In the flowchart, the policy limits are requested in block “1″ for two reasons: 1) later in the process it is needed to calculate any coinsurance penalty that may apply to the dwelling (Coverage “A”); and 2) because the ultimate payout cannot exceed the policy limits. Do not lower the actual “total damage amount” to match the policy limits as the insured will be penalized when the deductible is subtracted.
Special Limits on Personal Property
Some articles of personal property insured by the homeowners’ policy are subject to specific sub-limits. Included among this list of limited property are money, securities, watercraft, trailers and personal property used in business. Other property is limited based on the type of loss; for example, jewelry and firearms are limited only if the loss is caused by theft.
In addition to the list of personal property subject to sub-limits, there is a schedule of excluded personal property. Property insured elsewhere (such as on a personal articles floater), animals, most “motor vehicles,” aircraft and property of roomers and boarders is included on this list of excluded property.
A review of the applicable homeowners’ policy will provide a full list of both limited personal property and excluded personal property.
Box “2″ and box “3″ in the flowchart apply to both classes of personal property. If there is damaged property subject to a sublimit or excluded entirely, as questioned in box “2,” the list of excluded or limited value property is listed in box “3.”
Three pieces of information are necessary to complete box “3″: 1) a description of the property; 2) the value of that property; and 3) the amount of coverage allowed in the policy. All damaged personal property subject to a sublimit is listed on the form. The replacement cost (or ACV depending on the endorsements attached) value of the specified property is listed in the second column labeled “Value;”the amount of coverage provided by the policy for that class of property is listed in the third column shown as “Amount Available.” If the “Value” is less than the “Amount Available,” schedule the actual value. Specifically excluded personal property can also be listed in this box; however “nothing” or “$0″ should be placed in the “Amount Available” column.
The “value” and the “amount available” are totaled and recorded in the last line of the box beside “TOTAL.” These amounts are used to develop the insurable “Amount of Personal Property Coverage” detailed in the box “4.”
If the personal property “total damage amount” does not include any limited or excluded personal property, boxes “3″ and “4″ can be skipped and the entire personal property damage amount can be transferred to box “5″ (labeled “Actual Insurable Damage”).
Calculating the Amount of Personal Property Coverage Available
The full value of limited and excluded personal property (detailed above) must be subtracted from the personal property “total damage amount” (listed in box “1″). The allowable amount of coverage (per the insurance policy as calculated in box “3″) is added back to the result. The result is the total “Amount of Personal Property Coverage” indicated at the bottom of box “4.”
This total is transferred to the “Personal Property” line found in box “5″ labeled “Actual Insurable Damage.” As stated in the box, this is the lesser of the “total damage amount” or the product of the calculation detailed above and demonstrated in box “4.”
Actual Insurable Damage
At this point in the flowchart, dwelling and personal property limits remain separate as the dwelling coverage must still pass the coinsurance test. The dwelling coverage in box “5″ is simply carried forward from the “total damage amount” block. Personal property coverage amounts are the lesser of the amount in box “1″ or the “amount of personal property coverage” developed in the fourth block as detailed above.
Notice that in a homeowners’ policy the only property subject to a coinsurance calculation is real property. This is explained in greater detail in the two-part coinsurance series presented earlier. Not applying the coinsurance condition to personal property is appropriate since the insured does not necessarily have the opportunity to choose the personal property limit because the amount of coverage is granted as a percentage of the dwelling coverage.
Coinsurance is a function of the amount of insurance carried (IC) compared to the amount of insurance required (IR) by the homeowners’ policy coinsurance condition. To be fully insured for partial real-property losses the insured must carry 80 percent of the dwelling’s total insurable value (TIV) at the time of the loss. (Of course this leaves a gap if there is a loss that exceeds this limit.) Deciphering the insured’s compliance with the coinsurance provision is accomplished in boxes “6″ and “7.”
The basic coinsurance formula (ignoring the deductible) is:
- (Insurance Carried (IC)/ Insurance Required (IR)) x Loss = Amount Eligible for Payment
Insurance Required (IR) is calculated by multiplying the TIV at the time of the loss by the coinsurance requirement. The coinsurance requirement in the standard homeowners’ policy is 80 percent. To develop “IR” in the standard homeowners’ policy, the formula is:
- TIV x 80% = IR.
Insurance required (IR) is calculated in box “6.” If the dwelling policy limit, as scheduled in box “1,” is greater than the IR, the coinsurance condition is met and no other calculation is required. Simply add the amount of dwelling damage to the amount of personal property damage listed in the “Actual Insurable Damage” box (box “5″) and place that total in the “Total Amount of Insurable Damage” box (box “8″).
However, if the policy limit is less than the calculated IR, then the coinsurance condition has not been met and box “7″ must be used. This box applies the basic coinsurance formula as presented above to arrive at the “coinsured” value. But, as detailed in the coinsurance series, the homeowners’ policy does not apply coinsurance as a penalty. The amount developed applying the coinsurance condition is compared to the dwelling’s actual cash value (ACV); the insured is granted the greater of these two values. Essentially the coinsurance amount is the least the insured will ever get paid in a homeowners’ policy subject only to the policy limits.
When a coinsurance calculation is necessary, the result is compared to the dwelling’s ACV. The greater of these two values is added to the personal property’s actual insurable damage as shown in box “5.” This sum is placed in box “8″ titled “Total Amount of Insurable Damage.” This is the first time the differing values meet.
Deductibles are subtracted from the total amount of insurable loss in property policies. Many make the mistake of trying to subtract the deductible from the policy limit in the event of a total loss. Also, only one deductible applies to a loss; there is not a dwelling deductible and a personal property deductible.
In the flowchart, the deductible (as listed in box “9″) is subtracted from the “total amount of insurable damage” to produce the “Amount of Eligible Loss” (found in box “10″).
Amount of Eligible Loss
After the application of the deductible to the “total amount of insurable damage,” the “amount of eligible loss” is produced and recorded in box “10.” This amount is compared to the policy limits. If the policy limits are greater than this amount, the entire amount is paid. If, however, this amount exceeds the policy limits, the insurance is limited to the amount of coverage purchased (the policy limits).
Notice the phrase, “Remember to add all applicable ‘Additional Coverages’ to this amount” in box “10.” The homeowners’ policy offers several coverages in addition to the limits purchased. Those amounts must be added to and paid in addition to the “amount of eligible loss.”
Examples of these additional coverages include debris removal, reasonable repairs, ordinance or law, loss assessment and fire department service charges. A complete list of additional coverages, their amounts and their conditions is found in the homeowners’ policy.
Calculating loss payments for commercial property policies is the subject of the next post. While many of these same provisions apply, the differences in the forms require a specific and detailed review.