1. Forms
2. DP
3. DP-05-40

What the form is

The DP 05 40, titled "Limited Coverage For Earthquake - California (All Forms)", is an endorsement designed to be added to an Insurance Services Office (ISO) Dwelling Policy (such as DP 00 01 Basic Form, DP 00 02 Broad Form, or DP 00 03 Special Form) for properties located in California. Its primary function is to provide limited insurance coverage for direct physical loss or damage to insured property caused by an earthquake. Standard dwelling policies typically exclude earthquake damage, making this endorsement crucial for property owners in seismically active regions like California. Notably, this form also incorporates a specific definition of "actual cash value," partly in response to California court decisions.

Classes of business it applies to

This endorsement is used in personal lines insurance for residential dwellings in California. It is applicable to various dwelling types, including:

• Owner-occupied homes
• Dwellings rented to tenants (covering the landlord's structure and property)
• Properties with one to four family units

This endorsement is generally not intended for commercial properties or very large multi-unit residential buildings, which would typically require different commercial earthquake coverage solutions.

Special considerations

• State-Specific (California): The DP 05 40 is tailored for California, addressing the state's unique seismic risks and regulatory environment, including specific definitions like actual cash value as mandated by legal precedents.
• Limited Coverage: It is important to emphasize that the coverage is "limited." This means it will be subject to specific, often lower, limits of liability than the main policy coverages, and will almost certainly have a separate, typically high, deductible (often a percentage of the Coverage A limit, such as 10%, 15%, or higher).
• Offer Requirements: California law has specific requirements regarding the offer of earthquake insurance. This endorsement is one mechanism insurers use to provide this offered coverage.
• Actual Cash Value (ACV) Definition: A significant feature, especially in its historical context, is the inclusion of a definition for actual cash value to ensure clarity and compliance with California's legal interpretations.
• Alternative to Comprehensive Policy: While it provides some protection, this endorsement may not be as extensive as a standalone, comprehensive earthquake insurance policy. Insureds with high-value properties or lower risk tolerance might consider broader coverage options.

Key information for agents and underwriters

• Risk Assessment: Underwriting properties for earthquake exposure in California involves detailed analysis of factors such as: proximity to active fault lines, soil conditions at the location, the dwelling's construction type and age, and whether any seismic retrofitting has been performed.
• Pricing and Deductibles: Premiums for this endorsement can vary widely based on the assessed risk. Agents must clearly explain the deductible structure, as the insured's out-of-pocket expense in an earthquake event can be substantial.
• Coverage Scope and Exclusions: Agents should thoroughly explain what is covered and, equally importantly, what is excluded (e.g., certain structures like pools or fences, landscaping, or specific types of damage). The limits for additional living expenses, if any, under this endorsement should also be clarified.
• Underwriting Guidelines: Insurers will have specific underwriting guidelines for this endorsement, including eligibility criteria, maximum limits offered, and areas where coverage might be restricted or require higher deductibles.
• Client Education: Due to the limited nature of the coverage and the high deductibles, it is crucial for agents to educate clients thoroughly. Misunderstanding the scope of coverage can lead to significant dissatisfaction following an earthquake.