Homeowners Form HO 00 08
Repair Cost or Actual Cash Value
March 5, 2012
Summary: For many insureds the Insurance Services Office (ISO) HO 00 08 05 11 provides the best alternative to purchasing a replacement cost policy. Those insureds with ornate homes built earlier in the century, or those with replacement values far exceeding market value, may be provided less costly insurance with this policy. This discussion gives an overview of the HO 00 08, as well as a look at changes made in the 2011 edition. Differences from the 2000 edition are noted. Since most of the changes made are identical with those of the other homeowners forms, only those changes specific to the HO 00 08 are included.
Topics covered:
For a large segment of insureds, the replacement cost clause presents a dilemma: the substantial and often ornately detailed homes put up before the 1950s often have a “replacement cost” far in excess of what the owner might spend to replace the dwelling using modern materials and simpler construction techniques. The problem is exacerbated when the dwelling is located in a declining neighborhood.
The cost to replace the dwelling could well be several multiples beyond its market value. In order to buy replacement cost under such circumstances, the insured must be willing to buy—and the insurer willing to sell—insurance in an amount well beyond the price for which the house could be sold. Frequently the insured homeowner simply wishes to recover the actual cash value of the dwelling, and has no thought of rebuilding to the pre-loss condition. (However, if the insured wishes to rebuild, that option is available, as will be discussed later.)
Form HO 00 08 is the solution. Insurance thus becomes a means of indemnification, not of betterment. Form HO 00 08 deletes the replacement cost provision of the other homeowners forms and substitutes repair cost, or, where required by law in some states, actual cash value.
Form HO 00 08 differs from other coverage forms in four major areas: (1) actual cash value or repair cost settlements are promised in lieu of replacement cost; (2) theft coverage is restricted; (3) certain broadened coverage agreements are not provided, most notably in the limit applicable to personal property off the residence premises; and (4) there are only ten named perils, and eight additional coverages, as opposed to sixteen and twelve respectively in form HO 00 02 05 11.
The following discussion is based on the 2011 forms edition, with reference to differences from the 2000 form.
These are the loss provisions of the current HO 00 08.
Covered property losses are settled as follows:
1. Property of the following types:
a. Personal property;
b. Awnings, carpeting, household appliances, outdoor antennas and outdoor equipment, whether or not attached to buildings; and
c. Structures that are not buildings;
at actual cash value at the time of loss but not more than the amount required to repair or replace.
2. Buildings under Coverage A or B:
a. If you repair or replace the loss to restore the building structure for the same occupancy and use at the same site within 180 days of the date of loss, we will pay the lesser of the following amounts:
(1) The limit of liability that applies to the damaged or destroyed building structure; or
(2) The necessary amount actually spent to repair or replace the loss to the building structure but no more than the cost of using common construction materials and methods where functionally equivalent to and less costly than obsolete, antique or custom construction materials and methods.
b. If you do not make claim under Paragraph a. above, we will pay the least of the following amounts:
(1) The limit of liability that applies to the damaged or destroyed building structure;
(2) The market value at the time of loss of the damaged or destroyed building structure exclusive of land value; or
(3) The amount which it would cost to repair or replace that part of the building structure damaged or destroyed with material of like kind and quality less allowance for physical deterioration and depreciation.
In this provision, the terms “repair” and “replace” do not include the increased costs incurred to comply with the enforcement of any ordinance or law.
Analysis
In the paragraph (following b.(3)), the 2000 form stated that the terms ″repair″ and ″replace″ did not include the increased costs incurred to comply with the enforcement of any ordinance or law, ″except to the extent that coverage for these increased costs is added to this policy.” But since the form does not include, as an additional coverage, ordinance or law, nor do manual rules allow the coverage to be added, the statement was misleading. So, the current form has eliminated the statement.
Originally, form HO 00 08 substituted actual cash value for replacement cost as the loss valuation for both buildings and personal property. In certain states, the 1984 homeowners program changed this provision to repair cost loss valuation for buildings. The current form contains the repair cost loss condition, but many states require actual cash value loss adjustment. In those states that do not permit losses to be handled on a repair cost basis, loss settlement endorsement HO 04 81 05 11 is added to form HO 00 08 to provide actual cash value coverage. This endorsement deletes the entire paragraph D. loss settlement and replaces it with the following: “Covered property losses shall be settled at actual cash value at the time of loss but shall not be settled at more than the amount required to repair or replace.” Actual cash value is not defined in the form, but the generally accepted definition is replacement cost less depreciation.
Repair cost coverage responds up to the coverage limits for the “necessary amount actually spent to repair or replace” damaged property “using common construction materials and methods where functionally equivalent to and less costly than obsolete, antique or custom construction materials and methods.” If the conditions under the repair cost provision are not met (that is, restoration of the property for the same use and occupancy at the same site within 180 days of the date of loss), settlement becomes the smallest of: (1) the applicable limit of liability; (2) the market value of the building excluding land; or (3) the amount it would have cost to repair or replace at actual cash value.
Note that, unlike the HO 00 02, HO 00 03 05 11, or HO 00 05 05 11, the insured does not have the option of replacing the dwelling at a new premises. If the dwelling is repaired or replaced, it must be at the same site.
Actual Cash Value versus Repair Cost Settlement
Actual cash value is generally taken to mean the cost of repairs or replacement minus depreciation. The amount to repair or replace should include the cost of materials plus contractors’ overhead and profit; a sum representing depreciation is then deducted from that amount. The remainder is actual cash value.
An example of how an ACV settlement works is the following: if a roof with a life expectancy of twenty years is destroyed in its tenth year, restoration of the roof starts a new twenty-year cycle. The owner has received ten years more use from the new roof than he had before the loss. Under an actual cash value settlement, the owner must contribute to the cost of restoration to account for the improvement that the new twenty-year roof has over the old roof with its life expectancy of ten years. The owner does not actually contribute money to the insurer toward the cost of a new roof; he simply does not receive a payment for a new roof. (Of course, the insured is not obligated to replace the roof; he may simply take the settlement.)
With a claim settlement based on repair cost provisions, there is no contribution by the owner. Instead, the roof will be repaired or replaced using functionally equivalent materials, for example, asphalt shingles instead of slate.
Form HO 00 08 has the most restrictive theft coverage in the homeowners program. Under form HO 00 08, the maximum recovery for theft in any one occurrence is $1,000. The special limits of liability covering theft of jewelry, furs, watches, precious and semiprecious stones, firearms, silverware, platinumware, goldware, and pewterware found in the other homeowners forms are not included in form HO 00 08. Instead, the $1,000 limit applies to theft losses of all types of property.
HO 00 08 theft coverage applies to property on the residence premises only. However, personal property in any bank, trust company, safe deposit company, self-storage facility, or public warehouse is considered to be on the residence premises. The exceptions found in the other homeowners forms—for property at another residence while an insured is temporarily living there, or for an insured who is a student away at school—are not included in the HO 00 08.
It is possible in some states to increase the on-premises theft limit and provide limited off-premises coverage. Through the addition of theft coverage increase endorsement HO 04 30 05 11, it is possible to increase the on-premises theft limit to a $3,000 or $5,000 aggregate. Additionally, if the on-premises limit is increased, $1,000 of coverage can be provided for off-premises coverage. An increase in on-premises coverage also increases the limit of liability for personal property in a bank, trust company, safe deposit company, self-storage facility, or public warehouse. Insureds may select a $1,000 or higher sublimit for any one on-premises theft. If off-premises theft coverage has been purchased, a per-loss limit must be designated on the endorsement.
The endorsement adds the standard special limits for theft of certain items: $1,500 for theft of jewelry, watches, furs, precious and semiprecious stones; $2,500 for theft of firearms; and $2,500 for theft of silverware, silver-plated ware, platinum-plated or platinumware, goldware, gold-plated ware, and pewterware.
The theft restrictions found in the other homeowners forms apply when off-premises theft coverage has been added. Thus, coverage applies to property in a residence other than the “residence premises” only while the insured is temporarily living there. Students living away from home have coverage for their personal property if they have been at their student residence any time during the 60 days before the loss. No off-premises theft coverage applies to watercraft, their furnishings, equipment, and outboard engines or motors; or trailers, semitrailers, and campers.
The limit applies whether the theft involves personal property, structural items, or a combination of these. However, damage done by burglars to the building while entering or exiting, or while removing items (e.g., by putting gashes in woodwork or furniture), can be characterized as losses falling under the peril of vandalism or malicious mischief. The theft limitation applies only to items actually taken.
The full limit of coverage C is applied only to unscheduled personal property on the residence premises—rather than on a worldwide basis. There is coverage for property away from the residence premises, but it is limited to 10 percent of the coverage C amount, or to $1,000 if that happens to be greater. A change made in the 2000 version of HO 00 08 and continuing today states that the limitation does not apply to property moved from the residence premises because the residence is being repaired, renovated, or rebuilt and is not fit to live in or store property in. (Nor does the limitation apply when property is being moved to a newly acquired principal residence for 30 days from the beginning of the move.) In other homeowners forms, the 10 percent or $1,000 limitation applies only to property usually located at an insured’s residence that is not the residence premises shown in the declarations. Other homeowners forms have added a limitation of 10 percent of the coverage C amount (or $1,000, whichever is greater) for property owned or used by an insured and located in a self-storage facility; but because the HO 00 08 limits property coverage to 10 percent or $1,000 for property away from the residence premises, there is no need to include the limitation in the HO 00 08. Remember, though, for purposes of theft coverage, property in a self-storage unit will be considered on the residence premises. The limit for any one loss caused by theft, as noted earlier, is nonetheless $1,000, regardless of whether the property is in a self-storage unit or on the residence premises.
Unscheduled personal property away from the residence premises is covered only if it is owned or used by an insured. Although insureds may choose to cover personal property of others while it is on the residence premises, an insured cannot select the customary option for covering property owned by guests or residence employees while these people are staying with the insured at another residence.
Although the percentage of coverage A that applies to additional living expense has been increased in the program for other homeowners forms, it remains 10 percent for form HO 00 08 05 11.
Any recovery for the expense of removal of debris of covered property is included in the limit applying to the covered item. Unlike form HO 00 08, the other homeowners forms provide an additional amount of coverage (five percent of the limit that applies to the damaged property) if the limit is exceeded by the amount of the actual loss and debris removal cost. To illustrate, assume that an insured under form HO 00 02 has $100,000 insurance under coverage A, and a building and debris removal loss of $105,000. The total amount of the loss and debris removal cost are covered because the additional five percent coverage provision would give an additional $5,000 and thus the $105,000 loss would be covered. But under form HO 00 08, the limit for the direct loss includes debris removal, so if a dwelling is insured for $100,000 and is a total loss, and an additional $5,000 is necessary for debris removal, the policy will not provide that extra amount.
The debris removal provision includes coverage ($1,000 total; $500 per tree) for the removal from the residence premises of: (1) the insured’s trees felled by windstorm or hail; or (2) a neighbor’s trees felled by a peril insured against under coverage C. For coverage to apply, the trees must either damage a covered structure, or block a drive accessing the residence premises or a ramp designed to assist the handicapped (this latter provision was new in the 2000 edition). Form HO 00 08 does not include a coverage contained in other homeowners forms, i.e., coverage for the removal of the insured’s trees felled by the weight of ice, snow, or sleet.
The maximum recovery for an insured loss on any tree, shrub, or plant is $250 in form HO 00 08, in lieu of the $500 limit provided in the other homeowners forms, although all of the forms’ limit is 5 percent of coverage A. The 1991 homeowners program introduced an additional coverage of $2,500 for a landlord’s furnishings that are in an apartment on the residence premises. This coverage appears in forms HO 00 02, HO 00 03, and HO 00 05, but not in form HO 00 08. Form HO 00 08 does not contain the additional coverage for collapse found in the other forms. The HO 00 08 does not contain the additional coverages for ordinance or law, or for grave markers, as found in the other forms.
Form HO 00 08 provides $100 for: (1) breakage of glass or safety glazing material which is part of a covered building, storm door, or storm window; and (2) loss caused by damage to covered property by glass or safety glazing material. Other homeowners forms provide the coverage without a sublimit.
Form HO 00 08 includes coverage for losses caused by ten named perils: (1) fire or lightning; (2) windstorm or hail; (3) explosion; (4) riot or civil commotion; (5) aircraft; (6) vehicles; (7) smoke; (8) vandalism or malicious mischief; (9) theft; and (10) volcanic eruption.
The perils of theft, vehicles, and smoke have more restrictions than appear in the other forms.
The form excludes loss to any property caused by a vehicle owned or operated by a resident of the insured dwelling. Forms HO 00 02 and HO 00 06 exclude coverage for vehicle damage to fences, driveways, or walks if the vehicle is owned or operated by a resident of the premises; other forms do not contain even this limitation.
Form HO 00 08 provides coverage for “sudden and accidental damage from smoke” except for damage resulting from agricultural smudging, industrial operations, or loss caused by smoke from fireplaces. Other homeowners forms cover losses caused by smoke from fireplaces. Form HO 00 08 does contain a clarification of coverage found in the other homeowners forms, and that is that smoke damage includes the “emission or puffback of smoke, soot, fumes or vapors from a boiler, furnace or related equipment.”
Similar to the other homeowners forms, the peril of vandalism does not apply if the dwelling has been vacant for more than sixty (increased from thirty in the 1991 form) consecutive days immediately before the vandalism loss. The vandalism peril will not apply to any ensuing loss (such as fire) committed in the course of the vandalism if the dwelling has been vacant more than sixty consecutive days.
As with other forms, the base deductible figured into the rating of the HO 00 08 form is $250. However, an insured can buy back a $100 deductible or choose a higher fixed or optional theft or windstorm or hail percentage deductible.
The other section I coverage options available to the HO 00 08 insured is actual cash value settlement for roof surfacing (HO 04 93 05 11 or a reduced coverage C amount. For section II options, the insured may select any endorsements that may be used with an HO 00 02.