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Replacement Cost and the 180-Day Limitation Myth

Author: Chris Boggs

I don't know the best way to start this article. I don't know if I should say I'm itching for a fight or if it's better to say that carriers are misinterpreting coverage forms. I'll let you decide.

Here's the situation, the insured suffered loss to the building eight months ago (240 days) but did not discover the damage until yesterday (we'll 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 insurance carrier's payout to actual cash value because of the 180-day provision. Take a look:" (For sake of this discussion, the 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, the damage has to be discovered within 180 days of the loss to qualify for replacement cost. This loss is beyond the 180 days, meaning the carrier owes ACV only."

Where does the policy state that? The unendorsed ISO policies I have state that coverage is provided on a replacement cost basis provided certain conditions are met. These conditions are:

  • The insured has met the coinsurance condition (in the commercial property policy) or the insurance-to-value condition (in the homeowners' policy);
  • The building 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 for replacement cost to apply. In fact, both policies specifically state that if the above conditions are met, replacement cost is paid.

The commercial property policy states that when the 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 in both forms, 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 completely ignoring the 180-day limitation in both forms, Boggs." No, I'm not; it does not apply to the situation. The only question is, did the insured meet the conditions and have replacement cost at the time of the loss? If the answer is yes, the carrier owes replacement cost.

However, I sense you don't believe me just yet. Let's take a look at the 180-day provision and see how it applies. Go back and look at both provisions and pay attention to WHO makes the choice of ACV versus replacement cost. See it yet?

Both forms say the “You" (the insured) can disregard or make a claim on an ACV basis in lieu of replacement cost. It doesn't say that the carrier has this option. But if the “You" does make this choice, current wording says they have 180 days from the date of the loss to re-chose replacement cost. Even this is under scrutiny by ISO and will likely be changed to 180 days from the date the insured learns of the loss. (Hold on for this change.)

Nothing in either form allows the carrier to make this decision. It doesn't say, “We can disregard…." If the insured wants replacement cost and has met all the other provisions, they are owed replacement cost – even if the loss is discovered more than 180 days after the event.

Replacement cost is owed when all conditions are met because only the “You" can trigger the 180-day provision. If the “You" doesn't opt for ACV in lieu of replacement cost, there is no wording in either of these unendorsed ISO forms allowing the carrier to limit payment to ACV.

​So, was I itching for a fight or just trying to prevent carriers from misinterpreting the coverage forms?

​Last Updated: August 30, 2019

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