Understanding Replacement Cost Coverage: Valuation Issues in Florida, Part 5
(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the fifth in a series she is writing on valued policy laws).
Let’s pretend you own a widget and that your widget is insured. Unfortunately, your widget was destroyed in a catastrophic fire. Let’s also pretend that your widget was worth $1,000.00, that it had a 10 year “life expectancy,” and that you owned it for 5 years before the fire. As discussed last week, under the Actual Cash Value (ACV) computation, an insurance carrier will pay you $500 and it will hold back the depreciation value ($500) until you send an invoice showing that you replaced the widget. The insurance carrier will then pay the out of pocket expenses you incurred to replace the widget--up to the amount held back. Do note that under an ACV computation, the replacement or repair must take place in order to trigger entitlement to payment of the withheld depreciation.
Traditionally, property insurance policies only offered ACV calculations to settle the amount of the loss. In the early 1990s, however, insurers began to offer Replacement Cost Coverage (RCV) as alternative products or endorsements that would require the insurance carrier to pay the full replacement value of the insured property without reservation or holdback of any depreciation in value and irrespective of whether or not the insured repairs or replaces the damaged property.
Of course, the math behind RCV is not as simple as it sounds. Generally, RCV will be calculated based on whether the policy limits are lesser or greater than 80% of the full replacement cost immediately before the loss. Arriving at these numbers is no easy feat, but with the help of computer systems and insurance valuation professionals, the insured will generally be able retain the right to collect the greater between ACV or RCV, subject to the limits of the policy.
In Florida, if an insured has elected RCV coverage, the carrier has to pay the replacement cost for a dwelling or personal property without withholding any depreciation in value, whether or not the insured replaces or repairs the dwelling property. See, Fla. Stat. 627.7011(3) (2009). According to this definition and following the example above, you should receive $1,000.00 for the widget whether you replace it or not.
In practice, however, the difference between ACV and RCV has become somewhat of a gray area, particularly in cases where the insurance carrier has paid some money to repair the damages. In State Farm Fire and Cas. Co. v. Patrick, 647 So.2d 983 (Fla. 3rd DCA 1994), the insurance company wrote a damage estimate under the policy’s RCV coverage and issued a partial payment. Mr. Patrick fully repaired his damages with the partial payment and sued to recover the amount that was withheld. The court held that under RCV coverage the insured was not entitled to recover the difference between the estimated replacement cost and the amount actually spent to repair or replace the damaged property.
More recently, in Vantage View, Inc. v. QBE Insurance, 2009 WL 536546 (S.D. Fla. 2009), a Federal Judge ruled that even when a policy provides that RCV will not be paid unless the repairs are made, if the carrier does not pay a penny on the RCV damages, the carrier cannot require repair or replacement before issuing the RCV payment. The judge noted that it is the advanced funds that generally enable repairs to occur.
In sum, under both ACV and RCV, an insured will never collect more money than what it actually costs to repair or replace the damaged property to its pre-loss condition. However, RCV will afford additional assurance and value protection that will preclude a depreciation holdback, irrespective or whether replacement or repairs occur, if the carrier does not pay any money to repair the damaged property. I will leave it at that for now. Join me next week to discuss more RCV issues, particularly in cases where the insurance claim is wholly denied. Stay tuned.
VERY GOOD POST. HERE IS AN EXAMPLE OF A RECENT LETTER DURRING APPRAISAL REGARDING DEPRECIATION:
DEAR CARRIER APPRAISER:
Attached are my findings on the JOHN DOE loss, with regard to the depreciation and additional costs associated with replacement.
Depreciation was calculated using the Broad Evidence Rule, as New Jersey law requires consideration of a broad spectrum of evidence to determine actual cash value. Elberon Bathing Co. v. Ambassador, 88 N.J. 1, 389 A.2d 439 (1978).
Evidence supporting these findings will be available upon discovery, which is available during 3-panel hearing, if umpire is needed.
With regard to additional costs, shipping costs have been calculated by standard shipping per pound/density rates, which is also available during discovery. Manual costs, such as mileage to recover, as not been included, as I am inviting you to appraise, in your opinion, the costs associated with Mr. and Mrs. DOE'S costs to transport the personal property from the retail establishment of origin to insured location, set-up in pre-loss condition. As appraisers, we must follow the simply instructed appraisal clause, which states that the appraisers and umpire are to determine the amount of loss. We do not have the authority to decide questions of coverage of liability, so we must act in compliance to the Appraisal Clause by only determining the amount of loss.
I suggest using the IRS standard mileage rate of $.45, which is a formulated value to be deducted with regard to property losses.
I eagerly await your findings, and look forward to establishing the amount of loss in a timely manner.
Warmest Regards,
DIGITORY SOLUTIONS INC.
I contacted an insurance company (in Orlando, FL) about insuring a rental property I own for a Stated Value. I only want to insure it up to what I owe on the property - not replacement. I was told he could not write such a policy, that it had to be replacement cost. Is this correct?
Same question as above (Noell - November 15, 2010 2:47 PM) with a rental property from http://www.propertyinsurancecoveragelaw.com/2009/11/articles/insurance/understanding-replacement-cost-coverage-valuation-issues-in-florida-part-5/ with some follow-ups:
1) Same scenario, but also for a primary residence
2) With primary residence, insurer also told me the standard policy had to be written with content coverage at 50% of the structure coverage. They now think my house would cost $500K to rebuild and insist that I be covered for $250K of contents, neither of which is close to reality. Do I have to carry any content coverage at all?
3) If required to cover "replacement cost new" on the structure, do I have to accept their estimate? First thing the insurer wants to do is multiply my square footage by $160, ask whether I have premium or builder grade fixtures, and then hope I go away. I would have the structure appraised for rebuild costs, but I suspect they would only accept their own appraiser's estimate, not actual costs I could get from my own builder. Is there any way to get coverage based on an an estimate that is not skewed in the insurer's favor?
Thanks very much.