Study guide
Property adjusting is where policy language meets arithmetic: which perils are covered, which property is insured, and how much the loss is worth. This chapter covers the dwelling and homeowners forms, commercial property, flood and marine coverage, and the valuation and settlement conditions that decide the size of every check.
Dwelling Forms DP-1, DP-2, and DP-3
Dwelling policies insure residential buildings that may not qualify for a homeowners policy, such as rental houses or homes without an owner-occupant. The three forms differ mainly in the perils they cover and how they value losses. The DP-1 basic form is a named peril policy covering fire, lightning, and internal explosion, with extended coverage perils, often remembered by the acronym WHARVVES (windstorm or hail, explosion, aircraft, riot or civil commotion, vehicles, volcanic eruption, smoke), added when the extended coverage premium is shown, plus vandalism and malicious mischief available by endorsement; losses are typically settled at actual cash value. The DP-2 broad form adds named perils such as burglary damage, falling objects, weight of ice and snow, accidental discharge of water or steam, freezing, and damage from artificially generated electrical current, and generally settles building losses at replacement cost when insurance-to-value requirements are met. The DP-3 special form covers the dwelling and other structures on an open perils basis, meaning all risks of direct physical loss except those specifically excluded, while personal property remains named peril. All three forms use a common coverage structure: Coverage A for the dwelling, Coverage B for other structures such as detached garages, Coverage C for personal property, Coverage D for fair rental value, and Coverage E, on the broad and special forms, for additional living expense. Dwelling forms contain no liability or medical payments coverage; those must be added separately. Adjusters handling a DP claim should first identify the form, because the burden differs: under named perils the insured must show a listed peril caused the loss, while under open perils the insurer must point to an exclusion to deny.
Homeowners Forms and Section I Coverages
The homeowners program packages property and liability coverage for owner-occupants, and the exam tests the differences among forms. HO-2 covers dwelling and contents on a broad named perils basis. HO-3, the most common form, covers the dwelling and other structures on an open perils basis while covering personal property for named perils only. HO-5 extends open perils treatment to personal property as well. HO-4 is the tenants form, covering a renter's personal property and loss of use with no dwelling coverage. HO-6 serves condominium unit owners, covering personal property plus a limited amount for the parts of the building the unit owner must insure, such as interior fixtures and improvements. HO-8 is the modified form for older homes whose replacement cost far exceeds market value; it uses named perils and typically settles losses on a functional replacement or repair-cost basis. Section I contains Coverage A dwelling, Coverage B other structures, usually 10 percent of Coverage A, Coverage C personal property, usually 50 percent of Coverage A, and Coverage D loss of use, which pays additional living expense so the family can maintain its normal standard of living during repairs. Personal property is covered worldwide, though a percentage limitation typically applies away from premises, and special dollar sublimits apply to categories such as money, securities, watercraft, jewelry theft, firearms theft, and silverware theft. Common exclusions across forms include flood and surface water, earth movement, ordinance or law (beyond a small built-in amount), neglect, intentional loss, war, and nuclear hazard; wear and tear and gradual deterioration are likewise not covered because insurance addresses fortuitous loss.
ACV, Replacement Cost, Depreciation, and Coinsurance Math
Valuation questions are the most reliably mathematical part of the exam. Actual cash value (ACV) is most often calculated as replacement cost minus depreciation, though some states apply other measures such as fair market value or a broad evidence rule, so adjusters follow the valuation standard of the governing state and policy. Depreciation reflects age, wear, and obsolescence. Suppose Priya's ten-year-old roof would cost 20,000 dollars to replace new and roofing of that type carries a twenty-year useful life; it is 50 percent depreciated, so its ACV is 10,000 dollars. Replacement cost (RC) coverage pays the cost to repair or replace with materials of like kind and quality, without deduction for depreciation. Many policies pay ACV up front and release the withheld depreciation, called recoverable depreciation, once repairs are completed, subject to policy deadlines. Replacement cost provisions in homeowners forms typically require the dwelling to be insured to at least 80 percent of its replacement cost for full RC settlement. Commercial property policies use a coinsurance condition to the same end. The coinsurance formula is: (amount of insurance carried divided by the amount required) multiplied by the loss, minus the deductible. If a building with a 500,000 dollar replacement cost carries 80 percent coinsurance, the required insurance is 400,000 dollars. If the owner, Mr. Okafor, carries only 300,000 dollars and suffers a 100,000 dollar loss, the policy pays 300,000 over 400,000, or three-quarters of the loss: 75,000 dollars, less the deductible. Carrying at least the required amount avoids the penalty. Work these formulas until they are automatic.
Commercial Property, Causes of Loss Forms, and the Businessowners Policy
Commercial property insurance is built from modular forms. The building and personal property coverage form covers the building, the insured's business personal property, and personal property of others in the insured's care, custody, or control, each requiring its own limit. The covered perils are set by attaching one of the causes of loss forms. The basic form is named peril, covering fire, lightning, explosion, windstorm, hail, smoke, aircraft, vehicles, riot, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action. The broad form adds perils such as falling objects, weight of snow, ice, or sleet, and water damage from accidental discharge, plus limited collapse coverage. The special form covers all risks of direct physical loss unless excluded, shifting the burden to the insurer to identify an applicable exclusion. Indirect or time-element losses need separate treatment: business income coverage pays the net income the business would have earned plus continuing normal operating expenses during the period of restoration after a covered direct loss, and extra expense coverage pays costs to keep operating, such as renting temporary space. Reporting a claim for a fire at Tran Manufacturing, an adjuster would therefore evaluate both the building damage and the income lost while production is down. The businessowners policy (BOP) packages property and liability coverage for eligible small to midsize businesses, much as the homeowners form does for individuals, typically including special-form property coverage, business income and extra expense without a specific dollar limit for a stated period, and CGL-style liability. Eligibility restrictions on size and business type apply, and larger or more hazardous operations must use the standard commercial forms.
Flood, Marine Coverage, and Loss Settlement Conditions
Standard property forms exclude flood, so the National Flood Insurance Program (NFIP), a federal program managed by FEMA, fills the gap in participating communities; private flood insurance also exists in some markets. NFIP dwelling coverage carries maximum limits set by the program, currently up to 250,000 dollars on a residential building and 100,000 dollars on contents, with contents generally settled at ACV and a waiting period, commonly 30 days, before new policies take effect, subject to exceptions such as loan-closing purchases. Adjusters handling flood claims follow NFIP rules, which differ from standard homeowners practice. Inland marine insurance covers property in transit and movable or specialized property, such as contractors equipment, fine arts, and jewelry, often written on floaters that follow the property wherever it goes. Ocean marine covers vessels (hull), cargo, freight, and marine liability, called protection and indemnity. The property conditions sections drive claim settlement mechanics. Duties after loss typically require the insured to give prompt notice, protect the property from further damage, prepare an inventory of damaged property, exhibit the property as often as reasonably required, submit to examination under oath if requested, and file a signed, sworn proof of loss within the stated time, commonly 60 days after the insurer requests it. The appraisal condition resolves disputes over the amount of loss, not coverage: each side selects a competent appraiser, the appraisers choose an umpire, and agreement of any two sets the amount. Other conditions include pro rata sharing when other insurance applies, the insurer's option to repair or replace, abandonment prohibitions, mortgagee rights, and suit limitation periods, which vary by state and form.
Key terms
- Actual cash value (ACV)
- — A valuation method most commonly calculated as replacement cost minus depreciation; some states use other measures such as market value.
- Replacement cost
- — The cost to repair or replace damaged property with materials of like kind and quality, without deduction for depreciation.
- Recoverable depreciation
- — The depreciation amount withheld from an initial ACV payment that is released once the insured completes repairs or replacement within policy deadlines.
- Coinsurance
- — A commercial property condition requiring insurance equal to a stated percentage of property value; underinsurance triggers a proportional penalty at claim time.
- Named perils
- — Coverage that applies only to the causes of loss specifically listed in the policy; the insured must show a listed peril caused the loss.
- Open perils
- — Coverage for all risks of direct physical loss except those specifically excluded; the insurer must identify an exclusion to deny.
- Proof of loss
- — A signed, sworn statement of the loss details that the insured must submit within a stated time after the insurer requests it.
- Appraisal
- — A policy procedure for resolving disputes over the amount of a loss, using two appraisers and an umpire; it does not decide coverage.
- Loss of use (additional living expense)
- — Coverage paying the increased costs of maintaining a normal standard of living while a home is uninhabitable after a covered loss.
- Business income coverage
- — Time-element coverage paying lost net income and continuing expenses during the period of restoration after a covered direct property loss.
- Inland marine insurance
- — Coverage for property in transit and movable or specialized property, often written on floaters that cover the property wherever located.
- National Flood Insurance Program (NFIP)
- — The FEMA-managed federal program providing flood coverage in participating communities, with program-set limits and a waiting period for new policies.
Exam tips
- Anchor the dwelling and homeowners forms to a pattern: 1 and 8 are basic or modified named peril, 2 is broad named peril, 3 is open perils on the building only, and 5 is open perils on both building and contents. HO-4 is for tenants and HO-6 for condo unit owners.
- Drill the coinsurance formula (did over should, times the loss, minus the deductible) and the ACV formula (replacement cost minus depreciation) until you can run them in under a minute.
- Remember which disputes appraisal can resolve: amount of loss only. A disagreement about whether a peril is covered is a coverage dispute, not an appraisal matter.
- Flood and earth movement are excluded under standard homeowners and commercial property forms; flood questions should point you to the NFIP, its program limits, and its waiting period.
- Watch for burden-of-proof questions: under named perils the insured proves a listed peril caused the loss, while under open perils the insurer must cite an exclusion.