Your questions answered: Replacement cost vs. cash value

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Question: As part of a loss settlement, covered damage to a building is reported in excess of 180 days from the date of loss (but within two years). The delay is not prejudicial to the company. Sections “d” and “e” of the loss settlement are creating some confusion. Is there a way for the insured to be eligible for replacement cost since they cannot notify us of their intent to do so within 180 days? Where would an actual cash value payment fall into this?

— Illinois Subscriber

Answer: The option to take actual cash value instead of replacement cost, with claiming replacement cost within 180 days of the date of loss, is a conscious decision by the insured. Look at the wording. It states that the insured may DISREGARD the replacement cost settlement and opt for actual cash value, and that he can change his mind with notification to the carrier within 180 days of the loss. The carrier pays actual cash value until the repairs are complete, but then the replacement cost difference is paid. For example; an insured has a fire, and begins repairs. He is paid actual cash value until the repairs are complete, and then is paid the difference. His neighbor has a fire and says no, he's not claiming replacement cost; he may do something different with the porch that burned so he opts to take actual cash value and call it a day. The neighbor then has 180 days from the date of the loss to change his mind and tell the carrier Hey, I'm going to repair it after all, and I want the replacement cost on the porch. That's the difference between “d” and “e.”

See E below…

e. You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss to buildings on an actual cash value basis. You may then make claim for any additional liability according to the provisions of this Condition D. Loss Settlement, provided you notify us, within 180 days after the date of loss, of your intent to repair or replace the damaged building.

Settlement amount only paid for repairs

Question: Under the standard HO-3, within the Loss Settlement Condition, there is the section that applies to the insured making claim for recoverable depreciation.

If the amount the inured pays for repairs is less than the amount estimated and that which settlement of the claim was based, is the insured entitle to recovery a pro-rata amount of the recoverable depreciation withheld? Or if the insured has the work repaired for less than the amount on which settlement was based, is the insured unable to collect the recoverable depreciation withheld?

— Florida Subscriber

Answer: I'm looking at the HO 00 03 05 11. While it is a replacement cost policy and paid at actual cash value until repairs are completed, when the difference between RCV and actual cash value is returned to the insured, the language clearly states that the most paid out is the least (emphasis added) of policy limits, replacement with like kind and quality, or the amount actually spent to repair or replace the damaged building. An example works best.

If the RCV settlement is for $20,000 and the actual cash value is $15,000, yet the insured spends $17,000 to restore the property to its preloss condition, then the insured is only entitled to $17,000. That is the lesser of the limits, replacement cost or necessary amount to repair/replace the damaged parts.

However, if the RCV settlement is $20,000 and the actual cash value is $15,000 and the insured spends $20,000 to restore the property to its preloss condition, then the insured receives $5,000 for the depreciation.

Replacement cost for specific belongings

Question: I have on my desk today three claims that involve other structures, and all of the homeowners (and agents) have requested that we pay replacement cost for the items that are not buildings.

…Why we do not owe for replacement costs for:

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      1. Pool equipment from a fire?
      2. Awnings attached to the home destroyed by wind?
      3. Pump houses destroyed by a tree that fell onto the pump house building and then required replacement of the tank and all related equipment.

The HO-3 (04-91) notes that the awning, carpet, and the like. are actual cash value payments. However, we pay carpet replacement cost value (RCV) when completed as part of the dwelling. So, if the language says: we owe actual cash value for the list of items, and they are replaced, we pay the RCV for carpet and appliances, but we do not for outdoor equipment or pool equipment? I cannot explain this when the policy reads we owe for the cost to replace. We use the terminology: “Structures that are not buildings; at actual cash value at the time of loss but not more than the amount required to repair or replace.”

The term “replace” seems to denote we owe replacement cost at the conclusion of the claim and owe actual cash value unless it is a building settlement for less than $2,500, provided all other provisions have been met and as long as limits have not been exhausted.

Please advise when, if ever, replacement costs are owed for other structures that are not buildings, like awnings, fences, sheds, pool equipment, or water tank equipment. When we use the phrase “to repair or replace at the time of the loss but not more than the amount required to repair or replace,” we seem to include replacement cost.

— California Subscriber

Answer: Other structures and carpet attached to the dwelling are two different things; just because the dwelling is covered at RC does not mean that is owed for other structures that are not buildings, especially when the policy clearly states that certain types of property are settled at actual cash value (ACV). You are misreading the policy; ACV is the most that will be paid but not more than the cost to repair or replace; this does not mean replacement cost is the standard payout. For example, an awning worth $500 ACV is destroyed; however, the cost of a new awning of the same type is available for $300; therefore, even though the policy is ACV, the cost of the replacement awning is used since it is a lesser amount. If a new awning is $800, then the ACV of $500 is what is paid out. The policy is simply stating that the lesser value is used, even if the cost to repair or replace is less than ACV. It could be phrased this way:

Settlement is for the lesser of ACV or the cost to repair or replace.

The cost to replace is a factor only when that cost is less than the ACV of the property; in most instances this is not likely.

Replacement cost, ACV and property coverage forms

Question: A contractor is insured under a CP 00 10 04 02, which covers his premises and contents. Tools and equipment were stolen from the premises. The insured also has an inland marine policy that covers his tools and equipment with actual cash value (ACV) coverage.

While the inland marine policy pays for the ACV of the loss, should the CP 00 10 pay the difference up to replacement cost value (RCV) since the loss occurred on premises, despite the traditional other property not covered clause, which excludes “property that is covered under another coverage form of this or any other policy in which it is more specifically described, except for the excess of the amount due (whether you can collect on it or not) form that other insurance”?

— Michigan Subscriber

Answer: One way of reading the provision is that the “amount due from the other insurer” is the amount of insurance — in this case, the actual cash value, which was paid. There would be no excess amount. But another way of reading the provision is to consider the “amount due” to be the total amount of the loss — the cost of replacing the tools.

This second reading was borne out in the case of Monumental Paving and Excavating, Inc. v. Pennsylvania Manufacturers' Assoc. Ins. Co., 176 F.3d (4th Cir. 1999). The court said, “Thus, applying standard form Exclusion (k) to the case at hand, it is clear that the Inland Marine Coverage section of the policy constituted a more specific form of insurance for the Patch Masters. The two units were there collectively scheduled as having an actual value of $75,000. Accordingly, that amount of $75,000 cannot be collected under the Blanket Policy, because it is excepted from the blanket policy under Exclusion (k). However, under the second part of that same Exclusion (k), because the blanket policy insures the personal business property in the building at replacement value, and the replacement value of the two Patch Masters purportedly exceeds $400,000, the excess over the $75,000 due under the Inland Marine part of the policy is excepted from Exclusion (k) and therefore is covered by the blanket policy.”

Other covered structures

Question: Under an HO-3 (04 91) section for replacement costs of other structures, would the following be covered? Pool equipment damaged in a fire, awnings attached to the home destroyed by wind, or pump houses destroyed by a tree that fell on the pump house building and then required replacement of the tank and all related equipment?

The form notes that the awnings, carpets. and other types of property are subject to actual cash value (ACV). However, we pay carpet at replacement cost when completed as part of the dwelling. So, if the policy language states that we owe ACV for the list of items, and they are replaced, we pay the RCV for carpet and appliances but not for outdoor equipment such as pool equipment?

For structures that are not buildings, the policy states: “Structures that are not buildings; at actual cash value at the time of loss but not more than the amount required to repair or replace.”

The term “replace” seems to denote that we owe replacement cost at the conclusion of the claim and owe ACV unless it is a building settlement for less than $2,500, provided all other provisions have been met and as long as limits have not been exhausted.

Please advise when, if ever, replacement costs are owed for other structures that are not buildings like awnings, fences, sheds, pool equipment, and water tank equipment. When we use the phrase “to repair or replace at the time of the loss but not more than the amount required to repair or replace,” does this include replacement cost?

— California Subscriber

Answer: Other structures and carpet attached to the dwelling are two different things; just because the dwelling is covered at RC does not mean that is owed for other structures that are not buildings, especially when the policy clearly states that certain types of property are settled at ACV. You are misreading the policy. ACV is the most that will be paid but not more than the cost to repair or replace: this does not mean replacement cost is the standard payout. For example, an awning worth $500 ACV is destroyed; however, the cost of a new awning of the same type is available for $300. Even though the policy is ACV, the cost of the replacement awning is used since it is a lesser amount. If a new awning is $800, then the ACV of $500 is what is paid out. The policy is simply stating that the lesser value is used, even if the cost to repair or replace is less than ACV. It could be phrased this way: Settlement is for the lesser of ACV or the cost to repair or replace.

The cost to replace is a factor only when that cost is less than the ACV of the property; in most instances this is not likely.

Expenses incurred to minimize loss should be covered

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