Some victims of the Ft. Collins and Colorado Springs fires who lost their homes opted to purchase a new home elsewhere. Most of their homeowners policies require their insurance companies to pay Replacement Cost Value (“RCV”), which is “the amount it would have cost to replace an identical structure to the one lost on the same premises.” If it would have cost $500,000 to replace the same home on the same premises, then the insurer owes the RCV of $500,000 to the policyholder, regardless of whether the policyholder rebuilds on the same premises, or uses the $500,000 to purchase a home elsewhere. (This example assumes that that policyholder was adequately insured with $500,000 policy limits).
Unfortunately, many fire victims who chose to use their RCV to purchase a home elsewhere have come to me asking why their insurance adjuster is deducting “the value of land” from their RCV payment.
The question is a good one—so good the insurance adjusters can’t give a straight answer. In fact, these homeowners keep asking the adjusters to explain in writing or explain where in the policy its states loss payment of RCV includes deduction for land. Again and again, the adjusters have no answers other than, “we don’t insure for land.”
This is a bogus deduction and a bogus explanation. Don’t accept it from your insurance company. Your insurance policy premiums are based on how much it will cost the insurance company to replace your house. Your premiums have nothing to do with land. The RCV amount owed by an insurance company also has nothing to do with land (either at your house that was lost or at the house you will purchase).
[R]eplacement cost … is measured by what it would cost to replace the damaged structure on the same premises. Kumar v. Travelers Ins. Co., 211 A.D.2d 128, 627 N.Y.S.2d 185, 187 (1995). “[W]hen the insured desires to rebuild either a different structure or on different premises … the company’s liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises.” Conway v. Farmers Home Mut. Ins. Co., 26 Cal.App.4th 1185, 31 Cal.Rptr.2d 883, 885 (1994).
Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds.1
Generally, the RCV you are owed is measured by what it would cost to replace the damaged structure on the same premises. If that amount comes to $500,000, then that is the insurance company’s payment obligation (assuming it is within the policy limit and minus the applicable deductible.)
The insurer must pay $500,000 whether you choose to buy a castle on land that is worth $1 Million, or whether you choose to buy a $500,000 house on land that is worth $0.
An adjuster who deducts the value of land underneath your potential new house—likely does so without authority and contrary to the language in almost every homeowners policy.
Policies differ, so it is a good idea to review your policy with an insurance professional or legal counsel with property insurance expertise.
1 Davis v. Allstate Ins. Co., 781 So. 2d 1143, 1144-45 (Fla. Dist. Ct. App. 2001) (citing Hess v. North Pacific Ins. Co., 122 Wash. 2d 180, 859 P.2d 586, 588 (1993)).