1. Forms
2. HO
3. HO-04-81

What the Form Is

The HO 04 81 Actual Cash Value Loss Settlement endorsement is designed for homeowners insurance policies. Its primary function is to change the basis upon which losses to covered property (typically the dwelling and other structures) are settled. Instead of paying the full replacement cost (RC) for damaged or destroyed property, this endorsement stipulates that the settlement will be based on the Actual Cash Value (ACV) at the time of loss, unless the cost to repair or replace the damaged property is less. ACV is generally calculated as the replacement cost of the property minus depreciation due to age, wear and tear, and obsolescence.

Classes of Business It Applies To

This endorsement is used within personal lines homeowners insurance. It is particularly relevant in the following scenarios:

• Homes Insured Below 80% of Replacement Cost: Many standard homeowners policies (like HO 00 02, HO 00 03, HO 00 05) require the dwelling to be insured for at least 80% of its replacement cost to qualify for full replacement cost loss settlement. If the insured chooses a lower coverage amount, this endorsement can be added to clarify that losses will be settled on an ACV basis. For example, if a home's replacement cost is $300,000 but it's only insured for $200,000 (less than 80%), the HO 04 81 would stipulate an ACV settlement.
• Older or Historic Homes: For very old homes or those with unique, hard-to-replace features, the replacement cost can be exceptionally high and may significantly exceed the property's market value. In such cases, both the insurer and the insured might agree that ACV is a more appropriate and affordable basis for loss settlement.
• HO 00 08 Policies: The HO 00 08 (Modified Coverage Form) is often used for older homes and already has loss settlement provisions that are typically on an ACV or repair cost basis. The HO 04 81 may be used, and in some jurisdictions or programs, its use might be mandatory to explicitly define the settlement as ACV.
• Insured's Preference: Some insureds may consciously choose ACV settlement to obtain a lower premium, understanding that they will bear more of the financial burden in the event of a loss.

Special Considerations

• Mandatory Application: In certain states or under specific insurance programs, the HO 04 81 might be required with particular policy forms (e.g., sometimes with the HO 00 08).
• Premium Reduction/Cost: Generally, electing for ACV settlement results in a lower premium compared to replacement cost coverage because the insurer's maximum potential payout for a loss is lower. However, there might be instances where the endorsement itself has a nominal premium.
• Informed Consent: It is crucial that policyholders fully understand the implications of ACV. A payout based on ACV might not be sufficient to repair or rebuild a damaged structure with new materials or replace personal property with new items without significant out-of-pocket expenses. For instance, if a 15-year-old roof is destroyed, ACV will pay for the value of a 15-year-old roof, not a brand new one.
• Partial vs. Full ACV: This endorsement typically applies to the dwelling and other structures. Personal property loss settlement is often ACV by default in many homeowners policies unless a specific replacement cost endorsement for personal property (like HO 04 90) is added.

Key Information for Agents and Underwriters

• Risk Assessment: Underwriters should evaluate if ACV settlement is appropriate for the specific risk. It can be suitable for well-maintained older homes where RC is disproportionate, or when an insured makes a clear financial choice. The condition of the property is a key factor.
• Valuation: Accurate determination of the dwelling's replacement cost is still important, even if ACV is chosen, to ensure the ACV itself is based on a reasonable starting point before depreciation.
• Client Education: Agents have a critical role in explaining the financial difference between RC and ACV to clients. Using clear examples of how depreciation impacts a claim settlement is essential to prevent misunderstandings at the time of a loss.
• Avoiding Coinsurance Issues: For policies with an 80% insurance-to-value requirement for RC, this endorsement clarifies the settlement method if that threshold isn't met, effectively bypassing potential coinsurance-like calculations that could otherwise still provide a form of RC if not for this endorsement.
• Documentation: It's good practice for agents to document that the client understands and agrees to an ACV loss settlement basis.