We have an insured who owns a three story apartment building insured on the ISO Building and Personal Property Coverage Form, CP 00 10 10 91. One end of the building sustained a very substantial loss. That end of the building will have to be demolished and rebuilt. The other end was not damaged.

The insured would like to demolish the damaged end of the building and instead of rebuilding that end of the building, use the insurance proceeds to purchase a different apartment building in another area of town. He could do this with the actual cash value (ACV) settlement, but he would like to get replacement cost settlement and use the replacement cost settlement to purchase a different building. If the replacement building is as expensive or more expensive than the demolished portion of the original building, can he demand to get replacement cost in lieu of ACV on his claim settlement and use this for the building in the other part of town?

Pennsylvania Subscriber

The replacement cost provision of the 1991 edition of the CP 00 10 states that the insurer may pay the least of three options: (1) the limit of insurance, (2) the cost to replace—at the same premises—lost or damaged property, or (3) the amount the insured actually spends to repair or replace the property. Those options would rule out getting replacement cost for a more expensive building in another part of town, if it were even possible to get replacement cost for replacing property at a different premises. Option (3) might allow that, but it doesn't sound like option (3) would be the least amount of the three options.

The 2002 edition of the form dropped the "at the same premises" stipulation from option (2) and added a caveat that if the building is rebuilt at a new premises, the amount paid is limited to the amount that would have been incurred if the building had been rebuilt at the original premises. If the carrier allowed the insured to replace at a different premises, the insured would be limited to what it would cost to replace at the original premises.

Keep in mind that the replacement cost amount will not be paid in any case until the lost or damaged building is repaired or replaced, so even if the insured could collect replacement cost, he would not be able to do so before purchasing the replacement building.

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