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.