1. Forms
2. HO
3. HO-04-46

What the form is

The HO 04 46 Inflation Guard endorsement is designed to help homeowners keep their property coverage limits in line with rising construction and replacement costs due to inflation. It automatically increases the limits of liability for Section I coverages – Coverage A (Dwelling), Coverage B (Other Structures), Coverage C (Personal Property), and Coverage D (Loss of Use) – by an annual percentage selected by the insured. This increase is applied on a pro-rata basis throughout the policy period. For example, if an insured selects an 8% annual increase, their coverage limits would increase by approximately 4% six months into the policy term.

Classes of business it applies to

This endorsement is used with various homeowners insurance policy forms. It is specifically designed for personal lines residential properties. It generally applies to owner-occupied dwellings covered under forms like HO 00 02 (Broad Form), HO 00 03 (Special Form), and HO 00 05 (Comprehensive Form). It is typically not used with HO 00 04 (Contents Broad Form for tenants) or HO 00 06 (Unit-Owners Form for condominium owners).

Real-world example: A family owns a home insured under an HO 00 03 policy with a Coverage A limit of $400,000. Concerned about rising building material costs, they add the HO 04 46 endorsement and select a 6% annual inflation guard. If a covered major loss occurs nine months into their policy term, the effective Coverage A limit at the time of loss would have increased by 4.5% ( (6% / 12 months) * 9 months), providing an additional $18,000 in coverage ($400,000 * 0.045).

Special considerations

• Insured's Choice: The insured selects the annual percentage of increase, with common options being 4%, 6%, or 8%, though other percentages may be available.
• Maintaining Insurance to Value: Its primary purpose is to help maintain an adequate insurance-to-value ratio, which is crucial for ensuring replacement cost settlement in the event of a loss and avoiding underinsurance.
• Not a Guarantee: While helpful, the selected percentage is an estimate and may not always perfectly align with actual inflation rates, especially during periods of rapid or unexpected cost surges (e.g., due to natural disasters affecting material supply).
• Premium Impact: There is an additional premium for this endorsement, which varies based on the percentage increase selected by the insured.

Key information for agents and underwriters

• Agent's Role: Agents should proactively discuss the Inflation Guard endorsement with clients, especially in environments with rising construction costs, to mitigate the risk of underinsurance. It’s important to explain how the pro-rata increase works and help clients select an appropriate percentage based on current economic conditions and their specific property.
• Underwriting: Underwriters should note the selected inflation guard percentage as it impacts the potential maximum payout over the policy term. While it helps maintain coverage adequacy, it doesn't replace the need for periodic reviews of the base policy limits to ensure they accurately reflect the current replacement cost of the property.
• Coverage Gaps: Agents should advise clients that even with an inflation guard, significant and sudden increases in construction costs might still necessitate a manual increase in base coverage limits or the consideration of other endorsements like HO 04 11 (Additional Limits of Liability for Coverages A, B, C and D) or HO 04 20 (Specified Additional Amount of Insurance for Coverage A – Dwelling) for broader protection.
• Rating: The premium for this endorsement is typically calculated by applying a factor to the base premium of the coverages being increased. For example, a 4% annual increase might have a factor of 1.02, a 6% increase a factor of 1.03, and an 8% increase a factor of 1.04, though these factors can vary by insurer.