Replacement Cost Coverage "the Devil is in the Detail"

Posted on 16/02/2012 by George Keys

Insurance expert George Keys, of Risk Worldwide looks at some of the components of Replacement Cost Coverage in the first of a series aimed at providing investors, developers and tenants with more information. Many people who buy commercial insurance policies assume they are entitled to replacement cost coverage in the event of a loss. Their insurance companies, however, believe their policyholders are entitled to replacement cost only if certain stars are aligned in the sky.

So while it might sound overly simple, one of the most important steps – if not the most important – in the event of a loss is to ensure that you are fully informed about your coverage and the strings your insurer has, or may try to, attach.

For example, your policy may say that you have Replacement Cost Coverage. It sounds straightforward, but there are many aspects to applying the coverage that affect your settlement. Below is a list of some of the elements that make up a replacement cost claim:

Replacement Cost. Replacement Cost generally refers to the cost to repair or replace your lost or damaged property with new property, without deduction for depreciation.

Indemnity Value. You will not be given Replacement Value until you rebuild. To begin the rebuilding, you will receive Indemnity, which is substantially less money. Indemnity is either a stated value or Replacement Cost less Depreciation.
Depreciation. The amount of a property’s value used up over time by wear and tear or obsolescence, reducing the property’s value from its cost new. This amount is referred to as “Holdback” and not paid to you until you have finished rebuilding.

Buy rather than rebuild or Buy a different type of building. Nowhere in most policies is the insured required to replace with identical kind and quality. The insurance company is required to pay you for the items as they existed before the damage. Often, you have options as to how to spend the money. You may buy an existing building in another location. You may also rebuild at another location, or at your current location with changes.

Functional Replacement Cost. For older structures with ornate or obsolete features, replacement cost coverage to replace these with like, kind, and quality can be exorbitantly expensive. Functional Replacement cost allows for replacement of expensive and obsolete items with less expensive and more modern and state-of-the-art work.

The bottom line for your insurance claim is that there is more to your insurance policy than meets the eye. In addition to, and in conjunction with, the concepts discussed above, there are conditions to your recovery of the replacement cost value of your loss. Your awareness of those conditions at the earliest possible time, as well as how your actions at even the earliest stage of the claim process can set you up to recover more, or less, under your policy are essential to maximizing your chance of recovering the full extent of your loss.

Walk away number. In the end, there may be a number that you and the insurance company agree to that falls in between the Indemnity value and full Replacement cost. This is a negotiated number that can and should be advantageous to the insured. It shortens the claim process substantially.

George Keys is an insurance assessor who works for Risk Worldwide as an advocate for commercial policyholders. Risk Worldwide is an international consulting company, with a Christchurch office, that specializes in insurance recovery.