If You Have A Fire Don’t Get Burned By: Peter L. Obremskey and Michael L. Schultz

IX. Actual Cash Value vs. Replacement Cost.

Insurance provided by any fire insurance policy is either an indemnification policy that indemnifies the insured for the loss, or a replacement policy. Depending on coverage, the loss can be based on the actual cash value of the property loss or on the replacement cost of rebuilding and replacing the lost buildings and property.

The actual cash value of property typically is not defined in the policy. Indiana courts employ the “Broad Evidence Rule” to determine the actual cash value of property subject to a loss. See, Travelers Insurance Co. v. Armstrong, 442 N.E.2d 352 (1982). In simplest terms, this means that any information that is available to the insured can be included in a determination of what constitutes actual cash value. The insurance company will attempt to limit the actual cash value to the cost of the item less depreciation. It is a mistake to let them determine the actual cash value on that basis. For example, a couch lost in a fire in a home with four active children has had a lot more wear and tear and the actual cash value is significantly reduced when compared to the same couch purchased at the same time by an elderly, retired couple. Actual cash value should be determined on a case-by-case, item-by-item basis and not by broad determinations of depreciation as determined by the insurance company’s adjuster for each item in the loss.

Replacement cost coverage on the other hand is coverage that each and every insured should purchase to give them greater protection. This coverage simply means that depending upon limits, the insurance company will replace each item lost at the replacement cost at the time of the fire, irrespective of the initial purchase price of the item. To be eligible for replacement cost coverage, the insured must replace the item and submit the receipt for the cost of the replacement to the insurance company. The insurance company will then reimburse the insured for the cost of the new item. For example, if an item costs $100 at the time it was purchased by the insured and $500 to replace the property at the time of the fire, the insurance company is obligated to pay the $500 value with no deduction for depreciation.

As it relates to replacement costs of buildings, the policy may call for replacement cost to be for the same or similar buildings. Some insurance companies will try to argue that they must be built on the same footprint as the destroyed buildings. It makes little difference to the insurance company; they will pay the same amount for the replacement of the building whether it is at the same location or somewhere else, so do not let this inhibit the insured from finding another location for his new building.

That is not to say that replacement cost coverage is unlimited. The contract provisions vary with regard to the amount of money that will be paid for replacement cost coverages. They generally take three different approaches:

(1) The limits of the replacement cost will be the face amount of the policy. Thus, a $100,000 policy limits replacement cost limits replacement to $100,000.

(2) Additional limits that are common are 125% of the face of the policy. Hence, with $100,000 coverage, then $125,000 coverage of replacement cost is provided.

(3) Finally, a guaranteed replacement cost is hard to find and is the best coverage available. It simply states that irrespective of what the cost is to replace, the replacement cost coverage will pick it up. Hence, with $100,000 face amount of coverage and it will cost $500,000 or more to replace the building, then coverage would be the $500,000. This, of course, is subject to the 80% co-insurance provision of the policy itself that need not be gotten into at this juncture.

Insurance calculations of actual cash value and replacement cost can be complicated. The expertise of an experienced adjustor is recommended. Do not take the insurance company’s word for either.

X. Time Limitations.

Insurance policies contain specific time limitations of which the insured must be aware. The most important one is, until recently, the time to file a claim against the company. Most contracts limited the time to bring suit to one year from the date of the loss. However, the one-year limitation has been changed by statute, and now extends the time to two years from the date of the occurrence. There are additional time limitations to present the Proof of Loss as well as to complete the replacement of the buildings or personal property.

These other time limitations are subject to extension by the insurance company if they are willing to do so. Obviously, their failure to extend any of these time limitations leaves the insured no alternative but to file a claim to protect their interests.

(Part 6 of 7. Part 7 will be posted on 6/14/10)

The statements contained herein are for information purposes only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have questions regarding this article, please contact an attorney.