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



Item 2 is often misunderstood to mean that the insured has to replace property with an identical building at the same site. This clause only serves to establish the theoretical cost to repair or replace the damaged property with like kind and quality at the insured premise. It establishes the limit of liability for the replacement value at the insured site, not the replacement values at another site.

For example, the costs used in determining replacement cost for a loss in Albuquerque, New Mexico, would be the cost of rebuilding or repairing that property in Albuquerque — not Honolulu, Hawaii, if the insured elected to rebuild there. The insured may replace the property in Honolulu, but their recovery cannot exceed the theoretical cost to repair or replace the property in Albuquerque.

The courts have long supported an insured’s option to rebuild elsewhere. In Blanchette v. York Mutual Insurance Company, 455A2d 426 (Me. 1982), where the insured was not able to rebuild on the property and the insurer tried to hold that the insured could not recover replacement cost dollars, the court ruled that building elsewhere did constitute replacement under the insurance policy. Current ISO policy forms incorporate the option to build elsewhere by stating, “If a building is rebuilt at a new premises, the cost described in (2) above is limited to the cost which would have been incurred if the building had been rebuilt at the original premises.”

Buying Rather than Rebuilding

Does the insured have to rebuild to collect replacement cost — or can they buy an existing building somewhere else? The ISO policy forms provide “… The amount actually spent that is necessary to repair or replace the lost or damaged property.” 7 A key phrase is “amount actually spent.” It is the responsibility of the insured to provide the documentation establishing the historical cost and the capital improvements and/ or repairs/upgrades made to the property. Another key phrase is “repair or replace.” It does not say specifically “rebuild.” Replace can be to rebuild or to purchase another existing property. The choice belongs to the insured. The courts have ruled that the insured does not have to build or repair, but may purchase an existing property and still qualify for replacement cost.

It is important to keep in mind, however, that not all costs associated with the acquisition of the new property may be eligible for coverage. As the policy refers to “the lost or damaged property,” insurers do not generally include the land value in a replacement cost transaction. There is debate if the...