Sometimes It's What the Policy Doesn't Say That Counts!



The insured must remember, however, that simply endorsing the policy for replacement cost coverage is not sufficient to keep it in line with actual replacement costs; the limits must be increased as well.

How is Replacement Calculated when there are Many Items?

As stated previously, the definition of what constitutes replacement is very vague in most insurance policies. Therefore, it is what a reasonable person would expect. In other words, if the insured can reasonably expect recovery, they are entitled to it.

In the majority of today’s policies, it is the insured’s option to select replacement cost or actual cash value. In a building claim, it is best to use an itemized estimate and not a lump sum estimate. This would allow the insured to replace the carpet with hardwood flooring and collect that portion of the hardwood that equals the cost to replace with carpet. Experience has shown that a larger payout is achieved when each item is identified and separate calculations are made.

When making claim for contents, the insured retains the option to make the replacement cost claim decision on an item-by-item basis. An example involved a contents loss for a school district that carried replacement cost coverage on its contents. Not all of the items lost were replaced, and the amount actually spent by the insured replacing those that were was less than the total actual cash value of all items lost. It was requested that the insurers pay the full replacement cost on those items that were replaced on an item-by- item basis.

At first, the insurer resisted because the insured had not spent the total amount of the actual cash value claim. In other words, each item stands on its own. Those that are replaced qualify for replacement cost. Those that are not replaced are paid on an actual cash value basis. As items are replaced individually, the line-by-line depreciation holdback should be paid to the insured, even if the dollars are spent on items different than those lost. The insurers resisted, so the question was posed to the editors of FC&S Bulletins, who provided the following response — which helped convince the insurer to accept the approach:

“An insured who has coverage for replacement is not required to replace each and every damaged item in order to receive replacement cost. … The insured is not required to replace every item that was involved in the original statement. Nor is the insured required to use any part of the ACV recovery on any one part of insured property to pay for all or part of the replacement cost of another item of insured property.” FC&S Bulletins Q & A 811.

What Constitutes Replacement?

Nowhere in the policy is the insured required to replace with identical kind and quality. In some policies, the wording used is “like kind and quality and for like use” 9 and in others, “comparable material and quality; and used for the same purpose.” 10 The words “like” and “comparable” do not mean “identical.”

An insured who lost a milk pasteurizing plant bought an orange juice plant to replace it. The insurers agreed that this met the requirement of the insurance policy and paid the claim based on the cost to replace the milk plant. Both types of plants had the purpose/ use of processing products; just different products —milk vs. orange juice.

Limit the Holdback

In prudent claim handling, the amount of depreciation withheld should always be kept to a minimum. Doing so leaves fewer points open for discussion and/ or reduces the problems later on. Just as important, when funds are withheld, the insured does not have use of them until and unless they meet the policy requirements. As a result, they must fund the actual replacement themselves before they can make claim for the holdback amount.

The Issue of Functional Replacement Cost

On one claim, the homeowner suffered a costly water loss when the refrigerator ice maker malfunctioned with a slow leak over time. The kitchen and adjoining dining room flooring...