1. Forms
2. DP
3. DP-00-08

What the form is

The DP 00 08, Modified Loss Settlement endorsement, is designed to alter the standard loss settlement terms found in the Dwelling Property 1 Basic Form (DP 00 01). Its primary function is to change how losses to the dwelling or other structures are valued and paid. Instead of a replacement cost valuation (which might pay for new materials), this endorsement typically stipulates that losses will be settled on an actual cash value (ACV) basis or on a repair cost basis. ACV accounts for depreciation due to age and wear and tear. The endorsement also commonly specifies that the insurer will not pay for the increased costs associated with the enforcement of any ordinance or law that regulates the construction, demolition, remodeling, renovation, or repair of property.

Classes of business it applies to

The DP 00 08 is used in conjunction with the DP 00 01 policy, which provides basic coverage for dwellings. This often includes properties that may not qualify for broader homeowners insurance policies, such as:

• Rental properties: Dwellings occupied by tenants rather than the owner.
• Older homes: Properties where the age and condition make replacement cost coverage less appropriate or too costly.
• Vacant properties: Though coverage for vacant properties is often limited, a DP 00 01 with modified loss settlement might be an option in some cases.
• Properties with underwriting concerns: Dwellings that have certain characteristics (e.g., condition, prior loss history) leading an insurer to offer more restricted coverage terms.
• FAIR Plan policies: State-mandated plans like the Wisconsin Insurance Plan often use the DP 00 01 with the DP 00 08 endorsement to provide essential insurance for properties unable to obtain coverage in the standard market. For example, a property in a high-risk area or one that doesn't meet typical underwriting standards might be insured under such a program with this modified settlement.

Special considerations

• Only for DP 00 01: This endorsement is specifically designed to amend the DP 00 01 Basic Form.
• Impact on Claim Payout: The most significant consideration is that the insured will not receive 'new for old' compensation for damaged property. The ACV settlement means the insured receives the value of the damaged property just before the loss, which includes a deduction for depreciation. Repair cost settlement may limit payment to the cost of repairing with functionally equivalent materials, not necessarily new or identical ones. This can result in a substantial gap between the insurance payout and the actual cost to rebuild or replace with new materials, leading to higher out-of-pocket expenses for the insured.
• Ordinance or Law Exclusion: The exclusion of increased costs due to ordinances or laws means that if building codes require upgrades during repair or reconstruction, those additional expenses are not covered by this endorsement's loss settlement provision.
• Informed Consent: It is crucial for the insured to understand the implications of this endorsement. The lower premium that might result from an ACV settlement comes at the cost of reduced coverage at the time of a loss.

Key information for agents and underwriters

• Pricing: Policies with the DP 00 08 endorsement are generally less expensive than those offering replacement cost coverage because the insurer's maximum potential payout for a structural loss is lower.
• Risk Assessment: Underwriters use this endorsement as a tool to manage risk for properties that might otherwise be uninsurable or only insurable at a very high premium. It's appropriate for dwellings where the market value is significantly less than its replacement cost, or where the insurer is not comfortable offering full replacement cost due to age, condition, maintenance, or occupancy (e.g., some rental situations).
• Coverage Gaps and E&O: Agents must meticulously explain the difference between ACV (or repair cost) and replacement cost to clients. Failure to do so can lead to dissatisfaction at claim time and potential Errors & Omissions (E&O) claims against the agency. The client should understand that they will be responsible for the difference between the ACV payment and the cost to replace with new materials.
• Underwriting Guidelines: Insurers will have specific underwriting criteria dictating when the DP 00 08 is mandatory. For example, it's commonly used in residual markets or for dwellings of a certain age or those in below-average condition. Its presence often indicates a more restrictive underwriting approach for that specific risk.