Chapter 15 Key Takeaways: Homeowners Underwriting
A one-page field card. Pair it with the chapter; do not substitute it for the chapter.
The core claims
- Homeowners is two lines in one policy. For the everyday peril (fire, theft, burst pipe, guest's fall) it is a friendly, poolable, plan-rated line. For the catastrophe peril (hurricane, wildfire, earthquake, flood) the law of large numbers breaks, and profitability is decided in the rare year, not the average one.
- Read the form first. HO-3 (open-peril dwelling, named-peril contents) is the workhorse; HO-5 is open-peril on both (a selection tool for the best risks); HO-6 is the condo unit-owner's form (read the master policy too). Every form is property and liability — don't wave through the dog, the pool, or the home business.
- Valuation is an underwriting decision. Replacement cost pays with no depreciation deduction; ACV pays replacement cost minus depreciation. On an aging dwelling — especially the roof — endorse to ACV: insurance covers fortuitous loss, not expected wear (the Chapter 1 principle).
- ITV is the line's quiet structural problem. Insurance to value means Coverage A = full rebuild cost, not purchase or market price. The coinsurance/replacement-cost condition penalizes under- insurance on partial losses. Demand surge silently makes adequate limits inadequate after a catastrophe — revisit limits at renewal.
- The catastrophe perils are handled differently. Wind and fire are covered (managed by deductibles, selection, accumulation); earthquake and flood are excluded (pushed to separate policies/programs, creating a protection gap). The peril most likely to total a coastal home — storm-surge flood — is the excluded one.
- Flood is excluded from every standard HO policy. The NFIP (1968) writes it where the private market would not, but caps limits, has not been fully risk-priced, and has low take-up — so most flood loss is uninsured. Private flood is growing but doesn't close the gap.
- A hardening market pulls four levers: raise the named-storm/wind deductible (a % of dwelling limit), narrow coverage, tighten selection, and non-renew/withdraw. When carriers retreat, the state FAIR Plan / residual market swells — a safety net and a warning sign at once.
The key rules of thumb
- Coinsurance recovery (partial loss):
recovery = loss × (coverage carried ÷ coverage required), then less the deductible. Carry below the requirement and the insured co-insures their own loss. - ACV ≈ replacement cost × (remaining useful life ÷ total useful life). A 60%-depreciated \$30,000 roof settles at ~\$12,000 under ACV.
- Named-storm deductible is a percentage of the dwelling limit: 5% of a \$400,000 home = \$20,000 retained before coverage responds.
- Covered ≠ insurable. A peril written into the policy can still become one no carrier will offer if the price the risk demands and the price the system allows come apart (California wildfire).
The key terms
homeowners forms (HO-3/HO-5/HO-6) · replacement cost vs. actual cash value (ACV) · catastrophe peril · NFIP · named-storm/wind deductible · insurance to value (ITV)
What you could defend to your manager
"I priced the wind on this coastal home cleanly, but I treated the whole peril picture: I endorsed the end-of-life roof to ACV rather than buying a new roof against wear that's already coming; I verified Coverage A against a rebuild-cost estimate, not the purchase price, so the coinsurance clause won't ambush the insured on a partial loss; I confirmed a separate flood policy is in place, because storm surge — the most probable total loss here — is excluded; and I checked our Port Hadley accumulation before binding, because on a catastrophe peril a perfectly good house can still be a decline simply because the zone is full. Nine profitable years in this wind zone is not evidence that we should grow it — one storm decides the combined ratio."