Our Option Clause and Loss Settlement

My question involves the Section I – Conditions Section of the HO 00 05 10 00 Policy Form, specifically in regard to the Appraisal and Our Option clauses. Under the Our Option clause the policy specifies that upon an insurer's written notice within 30 days after receipt of a proof of loss, it has the option of repairing or replacing any part of damaged property. We have a few cases wherein we have exercised that clause relative to building damages, but at the same time the insured has asked for an appraisal. There are no disagreements as to the scope of damages, only to the cost to repair the damages. Our position is that we will retain and pay a contractor to repair the agreed upon scope of damages so therefore the appraisal clause is not triggered. We feel that as long as the insured home is put back into its pre loss condition the amount paid to perform those repairs should not be an issue.

I ask for your thoughts. I also ask for your thoughts on taking this kind of position in the event of a disagreement on the scope of damage. Does exercising the Our Option Clause negate the Appraisal Clause?

New Jersey Subscriber

The Our Option clause requires the carrier to repair/replace with like kind and quality materials; this gives the carrier the option of replacing items covered on an actual cash value basis (awnings, carpets, appliances, etc. or when the insured is under insured.) on a replacement cost basis. The appraisal clause has nothing to do with the scope of the damage, and everything to do with the amount of the loss. The appraisal clause can be invoked anytime either the insured or the carrier disagrees on the amount of the loss. Even if you repair the property exactly as it was, the insured has the right to ask for an appraisal if he has an estimate saying $30,000 was the cost of the damages and you spent $15,000.

The Our Option clause has nothing to do with the appraisal clause—the Our Option clause says how the loss will be settled, on a replacement cost basis—it does not indicate what those costs will be. The appraisal clause comes into play when there's a dispute over the amount of the loss. Is the loss valued at $15,000 or $30,000? It's possible the insured thinks the carrier is trying to replace with lesser grade supplies.

 

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