Our insured's structure was completely destroyed by fire, and the replacement cost was determined through appraisal to be $1 million. The insured rebuilt and spent $ 1.5 million. Assuming the replacement cost cap in the CP 00 10 04 02 is the lowest of the three possible tiers for determining insurer liability, does the insurer have the right to contest the extent to which the insured builds a newer and better structure?

The insurer claims that if the insured did not use top-of-the-line materials or make improvements not covered under the policy, such as code upgrades, the insured would not have exceeded the replacement cost cap. The insurer also argues that the structure—because it is several floors shorter than its predecessor—should have involved an actual expenditure less than the replacement cost. As a result, the insurer seeks to challenge each line item of the rebuilding process to determine whether it was permitted or covered. They are attempting to show that the insured is entitled to something less than replacement cost.

We believe that, as long as the building is a functional equivalent, the only time an insured is not entitled to the replacement cost is when it doesn't actually spend that much money. But, can the insurer demand appraisal or court determinations regarding how the insured spent its rebuilding money?