There is no replacement cost option; coverage is limited to actual cash value. Contrary to a standard homeowners policy, there is also no liability coverage and no additional living expenses coverage. Commercial property coverage is also available with a maximum limit of $5 million.

This discussion is an analysis of the form used by the FAIR plan to write residential property coverage. Coverage is written on a modified ISO Dwelling Property Basic Form: CFP DP 00 01 01 25. This discussion is split into several sections. The sections are as follows:

Part 1 - Insuring Agreement, Definitions & Coverages A-D

Part 2 - Other Coverages & Perils Insured Against

Part 3 - Exclusions

Part 4 - Conditions

Conditions

Analysis

There are 27 conditions on the CFP policy, many of which are identical to those found in the ISO homeowners forms. The insurable interest and limit of liability condition clarifies that even if there is more than one insured, there isn't more than one limit available. The most the policy will pay for any one loss is up to the max limit of liability.

The deductible condition states that the insurer will pay only for losses that exceed the deductible that applies to the covered loss. If more than one deductible applies, the insured will only have to pay the highest deductible.

If an insured is discovered to have intentionally concealed or misrepresented any material fact, before or after a loss, or engaged in fraudulent activity, or made false statements relating to the insurance, the insurer is not obligated to provide coverage.

There are many duties the insured must perform after a loss, or risk losing coverage, if failure to comply with the duties is detrimental to the insurer. The duties include providing prompt notice of the loss to the insurer, protecting the property from further damage, cooperating with the insurer in the investigation of a claim, and preparing an inventory of damaged personal property.

In addition, when reasonably required by the insurer, the insured must be able to show the damaged property, provide the insurer with requested records and documents, and submit to examination under oath. The final duty is sending, within 60 days of a request by the insurer, a signed, sworn proof of loss. Not complying with these requirements may result in the denial of coverage. Missing here that is found in the homeowners form is the duty to notify the policy of a loss by theft, since no such coverage is provided by the CFP policy.

E. Loss Settlement
Covered property losses are settled at actual cash value at the time of loss but not more than the amount required to repair or replace the damaged property.
F. Loss To A Pair Or Set
In case of loss to a pair or set, we may elect to:
1. Repair or replace any part to restore the pair or set to its value before the loss; or
2. Pay the difference between actual cash value of the property before and after the loss.
G. Glass Replacement
Loss for damage to glass caused by a Peril Insured Against will be settled on the basis of replacement with safety glazing materials when required by ordinance or law.
H. Appraisal
If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent and impartial appraiser within 20 days after receiving a written request from the other. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a court of record in the state where the Described Location is located. The appraisers will separately set the amount of loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will set the amount of loss. Each party will:
1. Pay its own appraiser; and
2. Bear the other expenses of the appraisal and umpire equally.

Analysis

The loss settlement condition of the CFP policy is simple compared to that of the homeowners policies, since under the CFP policy, all losses are settled at actual cash value. Losses are settled at actual cash value at the time of loss, and not more than the amount necessary to repair or replace the damaged property.

If there is loss to a pair or set, the insurer has the option to either repair or replace a part of the set to restore the set to its preloss value, or can pay the difference between the actual cash value of the property before and after the loss.

Loss for damage to glass caused by a covered peril is settled using safety glazing materials when required by ordinance or law.

The appraisal condition provides a process to resolve issues if the insured and insurer disagree about the amount of the loss. Either party may request an appraisal. Once an appraisal is requested, each party has twenty days to hire a competent and impartial appraiser. The two appraisers then select an umpire. If they cannot agree on an umpire within fifteen days, then either party may request that one be selected by a judge of a court of record in Colorado.

The appraisers will then review the claim and separately come up with an amount for the loss. If the amounts agree, then that is what is paid. If the appraisers fail to agree, they will submit their findings to the umpire. If any two of the three parties agree on a decision, that will determine the amount of the loss. Each party will pay for its own appraiser, and other expenses involved will be split between both parties. Note that the appraisal condition helps to determine the amount of loss, not whether or not coverage applies.

I. Subrogation
You may waive in writing before a loss all rights of recovery against any person. If not waived, we may require an assignment of rights of recovery for a loss to the extent that payment is made by us.
If an assignment is sought, the person insured must sign and deliver all related papers and cooperate with us.
J. Suit Against Us
No action can be brought against us unless there has been full compliance with all of the terms under this Policy and the action is started within three years after the cause of action accrues.
K. Our Option
If we give you written notice within 30 days after we receive your signed, sworn proof of loss, we may repair or replace any part of the damaged property with material or property of like kind and quality.
L. Loss Payment
We will adjust all losses with you. We will pay you unless some other person is named in the Policy or is legally entitled to receive payment. Loss will be payable 60 days after we receive your proof of loss and:
1. Reach an agreement with you;
2. There is an entry of a final judgment; or
3. There is a filing of an appraisal award with us.
M. Abandonment Of Property
We need not accept any property abandoned by you.

Analysis

Subrogation is the process by which an insurer seeks reimbursement from a responsible party for what the insurer paid to the insured. The condition requires that the insured waive in writing their right to recovery against any responsible party before a loss occurs. If the subrogation rights have not been waived, the insurer may require the insured to sign their rights of recovery for a loss to the extent that payment was made to the insurer. This gives the insurer the ability to recover some of the payment they paid from the responsible party. If an insured maintained this ability, they could potentially recover twice.

The insured cannot bring a suit or legal action against the insurer unless they fully complied with all the terms of the policy. The suit can only be filed within three years of the cause of action.

The insurer has the option to repair or replace any part of the damaged property with material or property of like kind and quality. The insurer must first provide the insured with written notice of its intentions within thirty days of receipt of the signed, sworn proof of loss.

The loss payment condition specifies that losses are to be adjusted with the named insured unless another party is named in the policy or is legally entitled to receive payment. Losses will be paid sixty days after the insurer receives the proof of loss and has either reached an agreement with the insured, there is an entry of a final judgment, or there is a filing of an appraisal award with the insurer.

The abandonment of property condition states that the insurer is not obligated to accept any property abandoned by the insured. If, for example, an insured abandons their house after a fire, the insured cannot be expected to be responsible for the property.

N. Mortgage Clause
1. If a mortgagee is named in this Policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment will be the same as the order of precedence of the mortgages.
2. If we deny your claim, that denial will not apply to a valid claim of the mortgagee, if the mortgagee:
a. Notifies us of any change in ownership, occupancy or substantial change in risk of which the mortgagee is aware;
b. Pays any premium due under this Policy on demand if you have neglected to pay the premium; and
c. Submits a signed, sworn statement of loss within 60 days after receiving notice from us of your failure to do so. Policy conditions relating to:
(1) Appraisal;
(2) Suit Against Us; and
(3) Loss Payment;
also apply to the mortgagee.
3. If we decide to cancel or not to renew this Policy, the mortgagee will be notified at least 10 days before the date cancellation or nonrenewal takes effect.
4. If we pay the mortgagee for any loss and deny payment to you:
a. We are subrogated to all the rights of the mortgagee granted under the mortgage on the property; or
b. At our option, we may pay to the mortgagee the whole principal on the mortgage plus any accrued interest. In this event, we will receive a full assignment and transfer of the mortgage and all securities held as collateral to the mortgage debt.
5. Subrogation will not impair the right of the mortgagee to recover the full amount of the
mortgagee's claim.
O. No Benefit To Bailee
We will not recognize any assignment or grant any coverage that benefits a person or organization holding, storing or moving property for a fee regardless of any other provision of this Policy.
P. Cancellation
1. You may cancel this Policy at any time by returning it to us or by letting us know in writing of the date cancellation is to take effect.
2. We may cancel this Policy only for the reasons stated below by letting you know in writing of the date cancellation takes effect. A notice stating our reasons for cancellation will be mailed to you by first-class mail at your last address known to us.
Proof of mailing will be sufficient proof of notice.
a. When you have not paid the premium, we may cancel at any time by letting you know at least 10 days before the date cancellation takes effect.
b. When this Policy has been in effect for less than 30 business days and is not a renewal with us, we may cancel for any reason by letting you know at least 60 days before the date cancellation takes effect.
c. When this Policy has been in effect for 30 business days or more, or at any time if it is a renewal with us, we may cancel:
(1) If there has been a material misrepresentation of fact which if known to us would have caused us not to issue the Policy; or
(2) If the risk has changed substantially since the Policy was issued. This can be done by letting you know at least 60 days before the date cancellation takes effect.
d. When this Policy is written for a period of more than one year, we may cancel for any reason at anniversary by letting you know at least 60 days before the date cancellation takes effect.
3. When this Policy is canceled, the premium for the period from the date of cancellation to the expiration date will be refunded pro rata.
4. If the return premium is not refunded with the notice of cancellation or when this Policy is returned to us, we will refund it within a reasonable time after the date cancellation takes effect.
Q. Nonrenewal
We may elect not to renew this Policy. We may do so by letting you know in writing at least 60 days before the expiration date of this Policy. This nonrenewal notice, together with our reason for nonrenewal, will be mailed to you by first-class mail at your last address known to us.

Analysis

The mortgage clause states that if there is a mortgagee named in the policy, then any loss payable under Coverage A and B will be paid to the insured and the mortgagee, as their interests in the property may appear. If a claim is denied to the named insured, the mortgagee can still make a valid claim and receive payment. If the insurer issues a cancellation or nonrenewal notice on the policy, the mortgagee will be notified at least ten days before the date cancellation or nonrenewal takes effect.

A bailee, or a person or organization holding, storing, or moving property for a fee, will not be awarded any coverage under the policy, regardless of any provision of the policy.

Both the insurer and the insured may cancel the policy, but with different rules. If the insured decides to cancel the policy, they may do so at any time by returning the policy to the insurer or by letting the insurer know the date the cancellation is to take effect.

An insurer may cancel a policy, but only for certain reasons, and they must mail a notice stating their reason for cancellation. Those reasons include nonpayment of premium, material misrepresentation of fact that if known would have caused the insurer not the issue a policy, a substantial change in risk since the policy was issued, for any reason if the policy has been in effect for less than 30 business days and is not a renewal policy, and lastly for any reason if the policy is written for a period of more than one year. There are different notification time requirements depending on the reason for cancellation.

When a policy is cancelled, the premium from the date of cancellation to the expiration date of the policy is returned to the insured on a pro rata basis. If the refund is not provided with the notice of cancellation or when the policy is returned to the insurer, it will be provided within a reasonable time after the cancellation is effective.

The insurer may nonrenew the policy for any reason, but must deliver notice in writing to the insured at least 60 days before the policy's expiration date. The nonrenewal notice and reason for nonrenewal will be mailed to the last known address of the insured. The homeowners forms require giving notice of nonrenewal for at least 30 days before the policy's expiration date.

R. Liberalization Clause
If we make a change which broadens coverage under this edition of our Policy without additional premium charge, that change will automatically apply to your insurance as of the date we implement the change in your state, provided that this implementation date falls within 60 days prior to or during the policy period stated in the Declarations.
This Liberalization Clause does not apply to changes implemented with a general program revision that includes both broadenings and restrictions in coverage, whether that general program revision is implemented through introduction of:
1. A subsequent edition of this Policy; or
2. An amendatory endorsement.
S. Waiver Or Change Of Policy Provisions
A waiver or change of a provision of this Policy must be in writing by us to be valid. Our request for an appraisal or examination will not waive any of our rights.
T. Non-Assignability Of Policy Or Policy Benefit
Neither the assignment of this Policy, nor the assignment of the benefits of this Policy will be valid unless we give our written consent. This non-assignability provision applies both before and after a loss.
U. Death
If you die, we insure:
1. Your legal representatives but only with respect to the property of the deceased covered under the Policy at the time of death;
2. With respect to your property, the person having proper temporary custody of the property until appointment and qualification of a legal representative.
V. Nuclear Hazard Clause
1. "Nuclear hazard" means any nuclear reaction, radiation or radioactive contamination, all whether controlled or uncontrolled or however caused, or any consequence of any of these.
2. Loss caused by the nuclear hazard will not be considered loss caused by fire, explosion or smoke, whether these perils are specifically named in or otherwise included within the Perils Insured Against.
3. This Policy does not apply to loss caused directly or indirectly by nuclear hazard, except that direct loss by fire resulting from the nuclear hazard is covered.

Analysis

The liberalization clause says that if the insurer makes a change to the policy that broadens coverage without a premium increase, that change will automatically apply at the date the insurer adopts the change, as long as the implementation date falls within 60 days before the policy period or during the policy period in the declarations.

The clause does not apply when changes are implemented that both broaden and restrict coverage, whether that change is implemented by a subsequent edition of the policy or an amendatory endorsement.

Any waiver or change of a policy provision must be made in writing by the insurer in order to be valid. The condition clarifies that an insurer's request for an appraisal or examination does not waive any of the insurer's rights.

The named insured may not assign the policy or the benefits of the policy to another party, unless that insurer gives its written consent. Insurance contracts are typically nontransferable. However, the condition allows the insurer to consent to the policy being assigned to another party.

If the named insured dies, the policy insures the person with temporary custody of the property until the appointment of a legal representative. The insured's legal representatives are also insured, for the deceased insured's covered property at the time of death.

The nuclear hazard clause defines "nuclear hazard" as any nuclear reaction, radiation, or radioactive contamination, whether controlled, uncontrolled, or however caused, or any consequence of any of these. Nuclear hazard was found earlier in the policy as an exclusion, and this condition clarifies its meaning.

A loss caused by a nuclear hazard will not be considered a loss by fire, explosion, or smoke, whether these perils are specifically named or included in the Perils Insured Against. This removes any ambiguity that a nuclear hazard loss could have coverage under a covered named peril, such as fire or explosion. However, if nuclear hazard results in direct loss by fire, the damage from the fire is covered.

W. Recovered Property
If you or we recover any property for which we have made payment under this Policy, you or we will notify the other of the recovery. At your option, the property will be returned to or retained by you or it will become our property. If the recovered property is returned to or retained by you, the loss payment will be adjusted based on the amount you received for the recovered property.
X. Volcanic Eruption Period
One or more volcanic eruptions that occur within a 72-hour period will be considered as one volcanic eruption.
Y. Loss Payable Clause
If the Declarations shows a loss payee for certain listed insured personal property, that person is considered an insured in this Policy with respect to that property.
If we decide to cancel or not renew this Policy, that loss payee will be notified in writing.
Z. Policy Period
This Policy applies only to loss which occurs during the policy period.
AA. Aggregate Loss Limit
For any one loss event covered under this Policy, the most we will pay is the aggregate limit of liability or $750,000, whichever is less.

Analysis

The recovered property condition explains what happens when stolen property has been returned or found after payment has been made to the insured. If either party recovers the property, they must notify the other. The insured has the option of keeping the returned property or letting the insurer take possession of it. If the insured decides to keep the property, then the settlement amount will be revised. If the insured has already been paid for the loss, then the insured will have to return a portion of the funds to the insurer.

The volcanic eruption period condition clarifies that any volcanic eruptions that occur within a 72-hour period will be considered one volcanic eruption. This is to prevent the insured from being charged multiple deductibles for the same volcanic event. Volcanoes often have multiple small eruptions in conjunction with a major volcanic event, similar to earthquakes and aftershocks.

The loss payable clause states that if a loss payee is listed for certain insured personal property, that person is considered an insured under the policy, with respect to that property. The loss payee will be notified in writing if the insurer decides to cancel or nonrenew the policy.

The policy period condition states that the policy only applies to loss that occurs during the policy period, which can be found in the declarations.

Finally, the aggregate loss limit condition states that the most the insurer will pay for any one loss covered by the policy is the aggregate limit of liability or $750,000, whichever is less. This reinforces that the maximum limit provided by the CFP policy is $750,000.

Read More:
State FAIR Plans
California Earthquake Authority Policy Overview