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

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...replacement cost option open, the insured merely needs to notify the insurer within 180 days of the loss date that the property will be repaired or replaced. The policy language does not specify the method, manner or format of the notification. To eliminate the possibility of misunderstandings and/or a missed deadline, a best practice is to notify the insurer in writing of the insured’s intent to exercise the replacement cost option upon being retained to perform the adjustment of the loss.

As for the time limit actually allowed for making repairs, courts in several states have ruled that the insured has a reasonable time in which to repair or replace the property. What is reasonable is based on the individual characteristics and circumstances surrounding the specific loss.

It should be noted that some policies, such as older editions of the ISO Homeowners 5, do contain a condition in the replacement cost provision to make repairs within one year from the date of loss. There is also at least one carrier that has other specific time limitations, e.g., 180 days after receipt of the ACV payment.

The Holdback

One of the basic principles of replacement cost insurance requires that the insured not receive the replacement cost amount until the property is actually repaired or replaced and done so within a reasonable time frame. Generally, the insured is not in the financial position to begin the repairs or replacement. As a result, the insured first collects the depreciated or actual cash value amount. When the property is repaired or replaced, the insured can collect an additional amount that is equal to the difference between the repair/replacement cost and the depreciated or actual cash value amount. This amount of money withheld is customarily referred to as a “holdback” or “retainage.”

A common solution, at the time of settlement, is for the insured to sign — in addition to the proof of loss — a statement as to full cost of repair or replacement, spelling out the amount that may be collected later as the replacement cost claim.

Replacing Elsewhere

Policies normally state “… we will pay the cost to repair or replace, after application of any deductible and without deduction for depreciation, but not more than the least of the following amounts:

“Courts have ruled that policy language should be interpreted in the manner that an average person would understand it.”


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