# Coinsurance/Insurance to Value Revisited

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- (3) The amount actually spent to repair or replace the damaged building.

It is noteworthy that the insured is not restricted to rebuilding at the same site and may rebuild elsewhere, but the most the insurer will pay is what it would cost to rebuild at the original location.

In both the AAIS and ISO forms, the cost of such property as excavations, piers, other supports, and underground pipes, wiring, etc., is not included in determining the replacement cost. This provision is added because this property ordinarily survives a loss. Let’s use an example of damage to a roof to demonstrate how the insurance to replacement value provision is applied, first addressing a loss situation in which the insured has not met the insurance to replacement value requirement.

Suppose, for example, the following facts apply:

- The replacement value of the house is $400,000;
- The amount of insurance is $275,000;
- The full cost to replace the wind-damaged roof, without deduction for depreciation, is $9,000;
- The actual cash value of the roof (after depreciation) is $8,000;
- The insured carries a deductible of $500.

In order to comply with the insurance to replacement value provision, the insured would have had to insure the home for $320,000 (80 percent of $400,000). The limit carried is $275,000 and, as a result, the insured did not meet the insurance to replacement value requirement and will incur a penalty. The insurer therefore will pay the larger of the actual cash value or the fraction or proportion of insurance carried to insurance required. The actual cash value of the damaged roof is given as $8,000.

In this first example, we need to determine the proportion of the loss that the amount of insurance carried bears to the amount of insurance required to determine if that amount is larger than the actual cash value of $8,000.

To determine that proportion, the following formula applies:

Insurance Carried Replacement Amount Insurance Required* x Cost of Roof = Payable

*80 Percent of Replacement Cost of Building

## “It must be emphasized that a loss will not be paid on a replacement cost basis (without deduction for depreciation) unless the damages are actually repaired or replaced.”

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