Replacement Cost and the 180-Day Limitation Myth

What’s the best way to launch this article? Don’t know if I should say I’m itching for a fight or if it’s better to say insurance carriers are misinterpreting coverage forms and I am trying to stop them. You decide. Here’s the situation, the insured suffered loss to an building eight months ago but did not discover the damage until yesterday (say it’s hail damage to the roof). Coverage is written on replacement cost basis and the insured plans to repair or rebuild. Does the carrier owe replacement cost or actual cash value?

Whether coverage is written on a homeowners’ policy or a commercial property policy, the answer is the same. The carrier owes replacement cost if certain conditions are met. “Wait a minute, Boggs,” some might say. “The policy limits the carrier’s payout to actual cash value because of the 180-day provision. Take a look at the form:” (For this discussion, debated wording from both the homeowners’ and commercial property policy are presented.)

Commercial Property Policy

Optional Coverages

3. Replacement Cost

c. You may make a claim for loss or damage covered by this insurance on an actual cash value basis instead of on a replacement cost basis. In the event you elect to have loss or damage settled on an actual cash value basis, you may still make a claim for the additional coverage this Optional Coverage provides if you notify us of your intent to do so within 180 days after the loss or damage.

Homeowners’ Policy

SECTION I – CONDITIONS

D. Loss Settlement

e. You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss to buildings on an actual cash value basis. You may then make claim for any additional liability according to the provisions of this Condition D. Loss Settlement, provided you notify us, within 180 days after the date of loss, of your intent to repair or replace the damaged building.

“You see, Boggs, damage has to be discovered within 180 days of the loss to qualify for replacement cost. It’s beyond that, so the carrier owes ACV only.”

Where does the policy state that? Unendorsed ISO policies state coverage is provided on a replacement cost basis provided certain conditions are met:

• The insured has met the coinsurance condition (in the commercial property policy) or the insurance-to-value condition (in the homeowners’ policy);
• The building/structure is actually repaired or replaced; and
• Repair or replacement must be made as quickly as possible (a CPP provision).

Nothing requires the loss be discovered within 180 days. Both policies state that if the above conditions are met, replacement cost is paid. The commercial property policy states that when the replacement cost option is chosen replacement cost replaces actual cash value in the valuation provisions. Using replacement cost in place of actual cash value, the CPP now reads:

7. Valuation

We will determine the value of Covered Property in the event of loss or damage as follows:

a. At replacement cost as of the time of loss or damage….

Likewise, the Homeowners’ Policy states:

a. If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, without deduction for depreciation….

Note the common elements: if the conditions are met and coverage is written on a replacement cost basis at the time of the loss — the carrier owes replacement cost.

“You are ignoring the 180-day limitation.” It doesn’t apply to the situation. Did the insured meet the conditions and have replacement cost at the time of the loss? If “Yes,” the carrier owes replacement cost.

Don’t believe me just yet. Look at the “180-day” provision. Look at both provisions and note who makes the choice of ACV versus replacement cost. See it? Both forms say “You” (the insured) can disregard or make a claim on an ACV basis in lieu of replacement cost. It doesn’t say the carrier has this option. But if the “You” does make this choice, wording says they have 180 days from the date of loss to re-chose replacement cost. This is under scrutiny by ISO and will likely be changed to 180 days from the date the insured learns of the loss. Nothing in either form allows the carrier to make this decision. If the insured has met all the other provisions, they are owed replacement cost — even if the loss is discovered more than 180 days after the event.

If the “You” doesn’t opt for ACV in lieu of replacement cost, no wording in either of these unendorsed ISO forms allow the carrier to limit payment to ACV.