We insure sixteen buildings that house 220 condominium units and a clubhouse under a blanket limit of $9.5 million. One of the buildings burned, and it was determined that the replacement cost of that one building was $2.3 million. We estimate that the total replacement cost of all sixteen buildings is $15 million.

I believe the loss should be adjusted at actual cash value because the complex is not insured at 80 percent of its value as required in the policy for replacement cost. Others in my office, however, argue that the full $9.5 million blanket limit should apply to this one building. They believe that replacement cost is payable.

My argument is that when the coverage is written on a blanket basis the loss of one building is a partial loss to the entire complex. I think that the blanket limit on the entire complex must meet the 80 percent coinsurance requirement in order to trigger a replacement cost settlement. Can you shed some light on this debate?

Kansas Subscriber

The 80 percent coinsurance requirement should be applied to the entire blanket amount, meaning that the insured should have carried $12 million (80 percent x $15 million) as a blanket limit. Since the insured carried only $9.5 million of coverage, he is entitled to either an ACV settlement on the destroyed building or 79 percent of the $2.3 million replacement value ($1.82 million), whichever is greater.

If the insured had carried the required $12 million as a blanket limit, it would not matter whether the value of the destroyed building was accurately reflected in the submitted values or not. In other words, once the coinsurance requirement is met, the entire blanket amount is available for any covered item of property that is damaged.

If this complex were insured on a blanket basis with an agreed value endorsement, the answer would differ. In that case, even if the blanket limit was rated at 80 percent coinsurance, the agreed value endorsement suspends the coinsurance clause. The insureds would then be paid the entire replacement cost in order to rebuild the destroyed building.

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