Under California law an insured is “entitled to receive replacement cost only if she actually repaired the damage.” ( Stephens & Stephens XII, LLC v. Replacement-cost benefits are paid on an actual-cash-value basis until the entire property is repaired or replaced. Replacement-cost policies, however, contain a loss-settlement provision that governs the payment of benefits. If an identical item is no longer manufactured or cannot be obtained, replacement cost will be the cost of a new item which is similar to the insured article and of like kind and usefulness. The definition of replacement cost is the actual cost in today’s dollars to repair or replace an item back to pre-loss condition. Even if correct policy limits have been set, payment of the claim is contingent on the policy provisions for replacement cost, actual-cash-value and how depreciation is calculated during the pendency of the claim. The dwelling limit is particularly important because the limits for other structures and personal property are a takeoff from it with other structures being 10 percent and personal property 70 percent. The extended limits should only be considered a contingency in case of unanticipated costs. The dwelling limit must be set to 100 percent of the cost to repair or replace without factoring in any sort of extended limits or code-upgrade coverage. All of these considerations must be factored into establishing dwelling limits. And, a house in a gated neighborhood or a high-end community such as Beverly Hills, with rules and restrictions for the staging of construction projects, will affect the bottom line. A house situated on a hillside may require caissons or have special soil considerations. The list goes on and on.Ĭonstruction impediments arise when a home is difficult to access with equipment due to neighbors, vegetation or environmental conditions. Lath and plaster is substantially more costly than drywall. Marble flooring is significantly more expensive than travertine. The quality of materials is a huge factor in raising the cost of construction. The coverage for replacement or repair of a dwelling should be calculated based on a square-footage price taking into consideration the quality of materials, size of the home, and construction impediments. The first line of defense against the Loss Settlement provision is establishing correct policy limits. Setting adequate homeowner’s policy limits Between depreciation calculations and policy exclusions the method of payment of policy benefits can create problems to the extent an insured has insufficient funds to complete building repairs and repurchase personal property. Rarely do insurance agents explain the distinction between replacement cost and actual-cash-value coverage, nor do they advise policyholders that some items of personal property such as watches and jewelry must be specially written for an additional premium, otherwise coverage is virtually nonexistent. Unfortunately, this assumption is incorrect.Įach time a piece of personal property is not replaced the insurance company saves money and the insured is not made whole. Many property owners believe that because they have purchased a replacement-cost policy the insurance company will pay them up front for the cost to repair or replace their dwelling and personal property. In order to understand how payments are made by the insurance company, one must understand the concepts of replacement cost, actual-cash-value and depreciation. The provision allows the insurance company to delay full payment of the claim by paying only the actual-cash-value of the loss and, in some instances, forego full payment altogether because the insured does not have sufficient funds to repair or replace. The loss-settlement provision applies to the replacement cost payment for both the dwelling and the personal property. Regardless of the limits of liability shown on the declaration page, every homeowner’s insurance policy contains a loss-settlement provision outlining how the claim will be paid subject to various policy conditions.
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