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?

New York Subscriber

Under the CP 00 10 04 02′s activation of replacement cost coverage provision, the form pays the least of the following: (1) the limit of insurance applicable to the property; (2) what it costs to replace the damaged property with comparable material and quality at the same location for the same purpose (though actual rebuilding need not occur at the same premises); or (3) what the insured actually spends "that is necessary" to repair or replace the damaged property (leaving the insurer some discretion over the amount of payment for costs actually incurred).

In your situation, a calculation should have been made to replace the building similar to its original design with materials of "like kind and quality." Thus, if it was a three-story brick building, that would be the basis. Then that amount should be the basis to build a structure that is "for the same purpose" (i.e., functionally equivalent).

If the owner replaces the brick with granite, only the cost of brick would be payable with the owner picking up the difference. It should not matter whether the building is the same shape or number of stories as much as that it be designed for the same purpose and use materials of like kind and quality.

Additional repair/reconstruction costs are bounded by the requirement that expenditures be "necessary" to repair or replace the damaged property. Of course, additional costs to comply with ordinance or law lie outside this parameter.

The CP 00 10 04 02 form does provide that either the insured or insurer may demand an appraisal of the value of the property or amount of the loss.

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