1. Forms
2. DP
3. DP-05-31

What the form is

The DP 05 31, Modified Functional Replacement Cost Loss Settlement endorsement, alters the standard loss settlement conditions found in the Dwelling Property 2 – Broad Form (DP 00 02) and Dwelling Property 3 – Special Form (DP 00 03). Instead of settling losses based on replacement with materials of like kind and quality (standard replacement cost) or solely on actual cash value (ACV), this endorsement provides for loss payment on a modified basis. Specifically, it pays the lesser of the policy limit or the amount actually spent to repair or replace, but not more than the cost using common, adequate construction materials, OR the actual cash value of the damaged property, whichever amount is greater. This allows for a functional restoration of the property even if exact original materials are obsolete, excessively expensive, or not essential for functionality.

Classes of business it applies to

This endorsement is used for residential dwellings insured under the DP 00 02 or DP 00 03 forms. These policies typically cover 1-4 unit dwellings that may be owner-occupied or, more commonly, tenant-occupied, seasonal homes, or other residences not eligible or suited for a homeowners policy. Real-world examples include:

• Older homes with ornate or custom features where restoring with identical materials would be economically impractical or where modern, functional materials are preferred.
• Rental properties where the primary concern is restoring functional use for tenants rather than exact replication of original construction.
• Properties in areas where certain traditional building materials are no longer readily available or cost-effective.

Special considerations

• This endorsement is specifically designed for use with the DP 00 02 and DP 00 03 forms and should not be attached to the DP 00 01 (Basic Form).
• It offers a middle ground between full replacement cost (which can be expensive for certain properties) and actual cash value (which may not provide sufficient funds for repair). The "greater of" provision ensures the insured receives at least the ACV if the cost of repair with adequate materials is somehow less.
• It's important to distinguish this endorsement from DP 05 30, Functional Replacement Cost Loss Settlement, which has different settlement terms. The DP 05 31 specifically includes the provision for the greater of the functional replacement cost with adequate materials or the ACV.
• The policy, when this endorsement is attached, may include a condition regarding the timeframe for notifying the insurer of the intent to repair or replace (e.g., within 180 days of the loss), though failure to do so might not invalidate the claim unless it prejudices the insurer's rights.

Key information for agents and underwriters

• Pricing/Risk Assessment: This endorsement can make coverage more affordable for certain types of properties, particularly older or unique structures, by controlling repair costs. Underwriters should consider the age, condition, and unique features of the dwelling to determine if this modified settlement basis is appropriate.
• Coverage Gaps: Agents must clearly explain to the insured how this endorsement modifies the loss settlement. The insured needs to understand that repairs will be made with "adequate" or "common" materials, not necessarily "like kind and quality" as in a standard replacement cost policy. This means there could be a difference in the aesthetic or historical character of the repaired portion.
• Underwriting Guidelines: Underwriters should assess whether the concept of "adequate materials" is likely to lead to disputes for a particular property. For very high-value custom homes, this endorsement might not be suitable if the insured expects an exact replication. It is more appropriate for properties where functionality is the primary concern.
• Client Suitability: This endorsement is beneficial for property owners who prioritize functional restoration and cost-effectiveness over exact material replacement, especially for older buildings where original materials are costly or unavailable.