Calculating property damage payment for homeowners seems very necessary
– on the surface. But there are several moving parts to consider
before arriving at the final payment number. Exhibit 12.1 is an effort
to walk through the property-loss-payment process of homeowners. Below
are the completion instructions. The second flowchart page numbers the
boxes, as mentioned below. The next few paragraphs explain the process
of estimating policy property losses for homeowners, with a particular
emphasis on HO-3 with HO 04 90 endorsements (Personal Property Replacement Cost).
These are the main factors required to complete this process. Maximum loss
Housing and personal property amounts Insurance Limits Deductible Maximum
Loss Amount How much would it cost to restore or replace damaged or lost
home or personal property? No other steps can be taken without this knowledge.
The "absolute damage number" is taken from the proof of loss
form given by the insured carrier after a loss occurs – as detailed
in Section I Conditions "Duties After Loss."
Once the insurance company issues the proof of loss form, the insured has
60 days to file the requested details. Note that the policy does not specify
that proof is due 60 days from the loss; it is due 60 days from the carrier's
appeal. The cumulative damage will surpass the policy limits. The policy
limits in the flowchart are requested in block "1" for two reasons:
1) later in the process, it is essential to determine any coinsurance
penalty that may apply to the dwelling (coverage "A") and 2)
because the ultimate payout can not surpass the policy limits.
Do not lower the real "absolute loss number" as the insured would
be penalized when the deductible is subtracted. Some articles of personal
property policy of homeowners are subject to clear sub-limitations. It
includes capital, securities, watercraft, trailers, and personal property
used in business. Another property is limited by loss form. Jewelry and
guns, for example, are restricted only if burglary causes damage.
Besides the list of personal property subject to sub-limits, there is a
schedule of exempt personal property. Property insured elsewhere (such
as floating on personal items), livestock, most "motor vehicles,"
aircraft and roomer, and border property are included in this excluded
property list. A summary of the relevant homeowners' policy will include
a comprehensive list of both limited personal and excluded personal property.
Box "2" and box "3" in the flowchart refer to all
groups. If the damaged property is subject to a sublime or excluded as
discussed in box "2," the list of excluded or restricted value
property is described in the box "3." Three pieces of information
are needed to complete box "3": 1) a summary of the property,
2) the value of the property and 3) the amount of coverage allowed in
All damaged personal property is identified on the form. Replacement cost
(or ACV, depending on the endorsements attached)
Defined property is mentioned in the second column, "Value."
The sum of coverage given by the policy for that property class is mentioned
in the third column as "Sum Accessible." If the "Value"
is less than the "Amount Accessible," schedule the actual value.
This box can also list explicitly excluded personal property; however,
"zero" or "$0" should be put in the "Sum Available"
section. These amounts are used to develop the insurable "Amount
of Personal Property Coverage" as detailed in box "4."
If the personal property "total loss amount" does not include
any restricted or excluded personal property, boxes "3" and
"4" can be skipped. The entire amount of personal property loss
can be moved to box "5."
Calculation of personal property coverage Available Full value of restricted
and excluded personal property (detailed above) must be subtracted from
the "absolute loss number" of personal property (listed in box
"1"). The acceptable amount of coverage (as determined in box
"3" by the insurance policy) is added back to the result. The
result is the total "Amount of Personal Property Coverage" shown
at the bottom of box "4." This total is moved to the "Personal
Property" line contained in box "5" called "Real Insurable
Loss." As specified in the box, this is the lesser of the "Total
Loss Amount" or t.
Coinsurance Note that the only property subject to a coinsurance calculation
is the homeowners' policy's real property. It is reasonable not
to extend the coinsurance requirement to the personal property since the
insured may not have the ability to pick the personal property cap. Coinsurance
is given as a percentage of the home coverage.
To be insured entirely for partial real-estate losses, the insured must
bear 80% of the gross insurable value (TIV) at the time of the loss. (This
leaves a void, of course, if a loss reaches this limit.) Deciphering the
insured's compliance with the coinsurance clause is done 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 determined by
multiplying the TIV at the time. The standard homeowners' coinsurance
requirement is 80%.
The formula for developing "IR" in the standard homeowners'
policy is TIV x 80 percent = IR Insurance Required (IR) is calculated
in box "6." If the dwelling policy cap, as set out in box "1,"
is greater than the IR, the coinsurance requirement is met, and no other
calculation is required. Add the amount of residential damage to the amount
of personal property damage described in box "Real Insurable Damage"
(box "5") and position that number in box "Number Insurable
Damage" (box "8").
However, if the policy cap is less than the measured IR, the coinsurance
requirement has not been met and use box "7." This box applies
the basic coinsurance formula mentioned above to the "coinsured"
value. As detailed in the coinsurance series, the homeowners' policy
does not extend coinsurance as a penalty. The sum developed for coinsurance
is compared to the actual cash value (ACV) of the dwelling.
The insured gets the greater of these two prices. Essentially, the amount
of coinsurance is the least the insured would ever get charged in a homeowners'
policy, subject only to policy limits. When measuring coinsurance, the
result is compared to the ACV of the dwelling. The greater of these two
values is applied to the real insurable loss of the personal property,
as shown in box "5." This number is put in box "8"
titled "Absolute Amount of Insurable Loss." Deductibles are
subtracted from gross insurable losses of property plans.
Some make a mistake in case of complete loss, subtract the deductible from
the policy cap. Often, just one loss of deductible exists. No home deductible
and personal property deductible. In the flowchart, to generate the "Value
of Eligible Loss" (found in box "10"), the deductible (as
stated in box "9") is subtracted from the "complete insurable
Eligible Loss amount After applying the deductible to the "total amount
of insurable injury," the "amount of eligible loss" is
created and reported in box "10." This amount is compared to
policy limits. If policy limits surpass this amount, the entire amount
However, if this number reaches policy limits, the greater the amount of
coverage purchased (policy limits). Note the expression, "Remember
to apply all available 'Additional Coverages' to this number"
in box "10." Homeowners' policy provides multiple coverages
in addition to purchased limits. Besides the "amount of qualifying
loss," these sums must be added and charged.