Interpreting guaranteed replacement cost coverage

Coverage Q&A: How should insurers approach settlement and matching when a guaranteed replacement cost provision is applicable?

The insured suffered a loss when a tree crushed one side of his home, requiring extensive demolition and rebuilding, and his insurance policy contains a Guaranteed Replacement Cost Coverage provision. (Photo: Shutterstock)

Every claim is different, and some insurance policies can be difficult to interpret for unique situations. FC&S Expert Coverage Interpretation, the recognized authority on insurance coverage interpretation and analysis for the P&C industry, makes it simple to find credible answers to your complicated coverage questions. Analysis brought to you by our FC&S experts. 

Editor’s Note: Understanding the covered perils in conjunction with the loss settlement provisions and any exclusions can often be confusing. We run into that scenario in this week’s insurance coverage question.

Question: Our insured suffered a covered loss when a tree crushed one side of his home, requiring extensive demolition and rebuilding.

The insured has Guaranteed Replacement Cost Coverage as the coverage basis. It is listed on the declarations page, and he continues to qualify for this, which the insurer does not dispute. They acknowledge this is the coverage basis that governs his loss.

The issue concerns cosmetic matching. If you do not purchase or fail to maintain qualification for Guaranteed Replacement Cost, you become insured at Replacement Cost Without Deduction for Depreciation. The Replacement Cost Without Deduction For Depreciation is the only place you will see language excluding cosmetic matching. The language is not found in the Guaranteed Replacement Cost Coverage or anywhere else in the policy.

When challenged, the insurer cites the Perils Insured Against language, which states, “We insure for direct physical loss to property described in Coverages A and B” to mean all the cabinets, siding, shingles, flooring, etc. must be damaged in order for them to be included in the settlement.

I disagree based on the language. If the language in the Perils Insured Against meant what they say there would be no reason to have “cosmetic matching” excluded in the lesser coverage of Replacement Cost Without Deduction For Depreciation, it would already be excluded. Your thoughts are appreciated. 

— New Jersey Subscriber 

Analysis: The principle of indemnity is that the insured should be returned to pre-loss conditions. Nothing brings this to the forefront more than partial damage to a dwelling. When part of a roof or siding is damaged, the issue of matching the replacement roof or siding to the existing undamaged roof or siding often becomes an issue. To further complicate the situation, some policies have parameters for Guaranteed Replacement Cost Coverage, as well.

Answer: To learn the answer to this week’s coverage Q&A, please log into your FC&S Expert Coverage Interpretation account.

Related:

Recommended Stories