In this case, the insured entered into a seventy-two month lease for a graphic art processing center with a buyout based on fair market value at the end of the lease term. Approximately seventeen months into the lease, the equipment was destroyed. The insurer claims that although the manuscript, replacement cost policy provides coverage for property of others, the policy only owes “to the extent of the interest of the insured in such property.” According to the insurer, this is the buyout, which is far less than the replacement cost of the equipment. We believe the interest of the insured is the legal obligation under the lease to provide insurance for the equipment and to replace the equipment in the event of a loss.

The insurer claims that a replacement would unjustly enrich the insured. Would the true measure of value under a replacement cost policy simply be a new piece of equipment providing that the equipment is in fact replaced?

Ohio Subscriber

The ISO Building and Personal Property Coverage Form, CP 00 10, contains a provision that extends replacement cost to personal property of others with a limitation that states, “If an item of personal property of others is subject to a written contract which governs your liability for loss or damage to that item [in this case, the lease requiring the insured to insure and replace the equipment in the event of loss], then valuation of that item will be based on the amount for which you are liable under such contract.” Of course, coverage is limited to the actual replacement cost/policy limit. If the lease states that the insured is responsible for insuring the entire cost of replacing the equipment, then that is the amount that would be payable via this provision.