DWELLING POLICIES · 6 MIN READ

Dwelling Loss Settlement: ACV, RC, and the Settlement Cap

Valuation is where the three DP forms diverge most sharply. The DP-1 Basic Form settles dwelling losses at actual cash value — replacement cost minus depreciation for age, wear, and obsolescence — and imposes no 80% coinsurance trigger. Worked example: replacement cost of the damaged portion is $80,000 with 40% depreciation, so the insurer pays $80,000 × (1 − 0.40) = $48,000, well within a $200,000 limit and with no coinsurance penalty because DP-1 has none. DP-2 and DP-3 upgrade the dwelling to replacement-cost settlement, conditioned on the insured carrying Coverage A of at least 80% of replacement cost at the time of loss to receive RC on partial losses. Replacement-cost settlement has a ceiling: recovery is capped at the LESSER of the Coverage A limit or the actual cost to repair or replace. If rebuilding cost exceeds the limit — common after total losses during construction-cost spikes — the insured absorbs the gap unless an Extended Replacement Cost endorsement (adding, for example, +25% or +50% above the limit) or a Guaranteed Replacement Cost endorsement raises or removes the cap. Insurance-to-value discipline at underwriting is what keeps the cap from biting. Contents never get the upgrade automatically: every DP form settles Coverage C at ACV, capped at the amount necessary to repair or replace, unless a personal property replacement cost endorsement (available on DP-2/DP-3, not the basic DP-1) is attached. Tenant improvements and betterments — custom cabinetry a tenant paid for — are likewise settled at ACV, depreciated for use and age, absent an RC election. For older or architecturally unusual dwellings where like-kind-and-quality replacement is uneconomic (plaster walls, slate roofs), the DP 04 60 Functional Replacement Cost endorsement settles losses at the cost of functionally equivalent but less expensive modern materials and methods — a middle path between ACV and full RC.