Replacement Costs under Homeowners Policy

Our insured had a fire loss to his home, which is insured on a standard HO-3. The home is an older one, with plaster walls instead of drywall, hardwood floors instead of carpeting over plywood, etc. Our insured does not want to replace the plaster walls, and wants to put in drywall, collect the difference between the drywall and the plaster, and apply the money to other items in his home. He wants to upgrade his bathroom with the money and install different windows.

The insurance company says it is only responsible for the cost of installing the drywall, if that is what the insured chooses. But we think the insurance company should pay what it would have cost to replace the plaster walls, and allow the insured to spend the money as he wishes.

What is your opinion?

Indiana Subscriber

The standard ISO forms do not allow the settlement you suggest. The policy states that the insurer pays not more than the least of: (1) the limit of liability; (2) the replacement cost of that part of the building damaged with material of like kind and quality and for like use; or (3) the necessary amount actually spent to repair or replace the damaged building.

So, in this situation, the insurer is correctly following the terms of the contract.

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