Hawaii Insurance Adjuster License Practice Exam

Which endorsement on a dwelling policy helps keep values current with the replacement cost of buildings?

1. Inflation Guard Endorsement

2. Replacement Cost Endorsement

3. Automatic Increase Endorsement

4. Optional Replacement Endorsement

The correct answer is: Automatic Increase Endorsement

The Automatic Increase Endorsement is designed to help maintain the insured value of a dwelling in alignment with inflation and rising construction costs. This endorsement automatically increases the coverage limits on a policy at specified intervals, typically annually, ensuring that the dwelling is adequately insured against the current replacement costs over time. This is particularly important in regions or markets experiencing rapid increases in construction costs, allowing homeowners to avoid potential underinsurance in the event of a loss. This endorsement reflects the recognition by insurers that, if values are not adjusted regularly, policyholders might find themselves underinsured when a claim occurs after a period of inflation or increasing material costs. By ensuring that the policy limit automatically increases, this endorsement effectively protects homeowners from financial losses related to decreased purchasing power or increased rebuilding costs.