By Shannon Eldridge
Many property owners have had to make a claim for property damage from a covered cause of loss. While many insure their property to “actual cash value”, others purchase “replacement cost” coverage for their property. The premium for replacement cost is greater than that for actual cash value coverage due to the increased coverage amount. Of course, coverage is subject to the limits of insurance defined in the policy.
Many insureds do not realize that the work has to be completed before replacement cost is owed under the wording of most insurance policies. An insured should read the policy in question for applicable language relating to replacement cost, but many policies contain language that allows for recovery of the actual cash value of the property at the time of the loss; that is, the depreciated value of the property based upon age and condition. For a policy extending coverage for replacement cost, the value owed under the policy is intended to cover the cost to the insured to repair or replace the damaged property, subject to the limits of coverage under the policy. Recovery of the actual repair costs is subject to the terms, conditions and limitations set out in the policy in question.
Often, insureds do not read the language of the policy which most often requires that the insured actually complete the repair or replacement of the property before the insurer must pay the full replacement cost. Without actual repair or replacement of the damaged covered property, most policy language does not require that the insured pay more than actual cash value of the damaged covered property. Typical policy language does not set a deadline for repair of the property, but most often requires that the insured state its intention to recover replacement cost within 180 days. OF course, the language of the policy in question will set out any deadlines or pre-requisites for recovery of replacement cost. A prudent insured should carefully read the policy language to ensure compliance with the terms and conditions of the policy so as not to forfeit or negatively impact the ability to recover replacement cost for covered repairs. Of course, should there be a dispute relating to coverage under the policy, the insurance policy contract and Louisiana law set out a period of time for the insured to file suit against its insurer.
Insureds should be careful to have their adjusters and contractors submit estimates that outline replacement cost but also should work to apply the appropriate depreciation to calculate the actual cash value of the property. Should an adjuster for the insurer calculate replacement and actual cash value coverages, the insured should compare those values against that of their own contractors or estimators. Subject to the policy language, an insurer would only have an obligation to pay or tender the actual cash value of the property damaged until proof of repairs or replacement is submitted to the insurance company at which time replacement cost would be owed. The difference between the actual cash value of the repairs and the replacement cost of the repairs is often described as the “depreciation hold back” or “recoverable depreciation.” Should the insured fail to claim the depreciation or fail to submit proof of the repair or replacement of damaged insured property, the insured could lose the right to the additional payment of depreciation and actual costs of repair. The language of the relevant policy of insurance must be consulted so as to ensure compliance with the terms, conditions and limitations of coverage.
