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



...closing costs can be included or not. One can reason that the property cannot be purchased without incurring closing costs. Therefore, the insured can elect not to repair or replace (rebuild) the existing lost or damaged building.

What if Replacement is Less than the Available Limits?

The insured is limited in recovering the theoretical cost of what it would take to repair or replace the lost or damaged property with property “(a) of comparable material and quality; and (b) used for the same purpose” 8 on the same premises. Of course, this assumes that the amount does not exceed the applicable limit of insurance. Remember — the amount actually spent to replace the property does not always become the threshold for recovery.

Sometimes, if the cost of the replacement property is less than that which was lost, the insured may elect to add improvements or enhancements to the replacement building. The insured must actually incur the costs for these additions and they must be permanently attached to and part of the building structure.

For example, the insured’s original building consisting of 4,000 square feet had a replacement cost of $100,000. The ACV was agreed to be $75,000. If the insured decides to rebuild only 3,000 square feet for a cost of $75,000, the insured could add a large front porch, handicap accessible ramps, and expanded bathroom facilities that were not part of the damaged building, and receive an additional payment up to $25,000. It is important to remember that the dollars must actually be incurred on the physical upgrades.

An interesting option related to this is whether the insured is limited to purchasing one building only. There are several losses in which the insureds acquired several buildings to replace the one lost — to qualify for all available replacement cost dollars.

Be Careful of Values and Coinsurance Requirements!

One of the most important things to watch when purchasing the policy for replacement cost coverage is to have an adequate amount of insurance. If the policy contains an 80 percent coinsurance clause to qualify for full replacement cost benefits, then the insurance requirement is based upon 80 percent of replacement cost of the property of like kind and quality.

Newer ISO forms make the valuation method used (replacement cost vs. actual cash value) the option of the insured and the coinsurance applicationwould follow accordingly. In the example above, the actual cash value claim yields a larger recovery than the replacement cost claim; consequently, the insured should not elect replacement cost in this case.

Example: Insurable Replacement Cost Value: $2,000,000 Insurable Actual Cash Value: $1,700,000 Replacement Cost Loss: $ 100,000 Actual Cash Value Loss: $ 90,000 Insurance Amount: $1,000,000 Coinsurance: 80% Actual Cash Value Settlement with Coinsurance 1,000,000 x 90,000 = $66,176 80% of 1,700,000 Replacement Cost Settlement with Coinsurance 1,000,000 x 100,000 = $62,500 80% of 2,000,000