An HO-3 dwelling has a replacement cost of $500,000. The insured carries only $300,000 of Coverage A. After a $50,000 partial fire loss, how does the loss settlement provision generally apply?

a.Insurer pays the full $50,000 because the loss is below the policy limit

b.Insurer pays a reduced amount because the insured failed to carry at least 80% of replacement cost ($400,000)

c.Insurer pays only actual cash value because the policy is invalid

d.Insurer pays nothing because the insured was underinsured

Explanation

The HO-3 loss settlement clause pays replacement cost on the dwelling only if the insured carries at least 80% of the full replacement cost at the time of loss. Here 80% of $500,000 is $400,000 but the limit is only $300,000, so the insurer pays the greater of actual cash value or the proportion (300,000/400,000 = 75%) of the loss, which results in a reduced settlement on the $50,000 loss.

Law Reference: ISO Homeowners — Loss Settlement / 80% coinsurance

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An HO-3 dwelling has a replacement cost of $500,000. The insured carries only $300,000 of Coverage A. After a $50,000 partial fire loss, how does the loss settlement provision generally apply?

Explanation

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