In my experience, one of the most misinterpreted property insurance policy provisions is the 180-day notice requirement to receive replacement cost benefits. Many in the property insurance industry interpret the provision to require actual repair/replacement within 180 days of the loss. Others interpret the provision to simply require notice within 180 days of the loss of the intent to repair/replace. And, there are those who interpret the requisite 180-day notice to be given only if the insured initially makes claim on an actual cash value basis.

What is the correct interpretation? Clearly, it depends on the policy language. Compare the following two ISO provisions.

The ISO “Building and Personal Property Coverage Form” provides as follows:

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.1

The ISO “Homeowners 3-Special Form” provides as follows:

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 C. Loss Settlement, provided you notify us of your intent to do so within 180 days after the date of loss.2

As one can see from reading both forms, there is no language requiring actual repair/replacement within 180 days of the loss as a condition to receiving replacement cost benefits.

Both forms are similarly worded, in that they state the insured can make a claim on an actual cash value basis instead of on a replacement cost basis and, in the event such a claim is made, the insured still can claim replacement cost benefits if it notifies the insurer within 180 days of the loss of its intent to claim such benefits. So, from my reading of both forms, the requisite 180-day notice must be given only if the insured initially makes claim on an actual cash value basis.

Not surprisingly, insurers have taken a different view, as discussed in Construction Systems, Inc. v. General Casualty Company of Wisconsin.3 There, General Casualty took the position that the insured was not entitled to receive a replacement cost payment for damage to certain machinery because it failed to notify General Casualty within 180 days of the loss that it intended to claim replacement cost benefits. The General Casualty policy was worded in the same manner as the ISO “Building and Personal Property Coverage Form” discussed above. Emphasizing the language that the insured may seek replacement cost benefits if it notifies the insurer of its intent to do so within 180 days after the loss, General Casualty argued that every replacement cost claim necessarily presupposes an actual cash value claim. Thus, according to General Casualty, the 180-day notice requirement was a condition precedent to receiving any replacement cost payment.

A Minnesota federal district court disagreed, reasoning that the first sentence of the provision undermined General Casualty’s argument. That sentence states that the insured may make a claim on an actual cash value basis instead of on a replacement cost basis. The district court concluded that the 180-day notice requirement attaches only to the circumstance in which the insured were to first seek actual cash value benefits and then later seek replacement cost value benefits. Because it was unclear from the record whether the initial claim was for actual cash value or replacement cost benefits, the district court denied General Casualty’s motion for summary judgment.

The district court’s analysis is spot-on in terms of interpreting 180-day notice requirement to receive replacement cost benefits. However, what constitutes making an actual cash value claim as opposed to a replacement cost claim? Under most property insurance policies, including the ISO “Building and Personal Property Coverage Form” and the ISO “Homeowners 3-Special Form,” replacement cost benefits will not be paid unless and until repair/replacement is completed, the insurer’s payment obligation being limited to actual cash value. So, is accepting an actual cash value payment before repair/replacement is completed making an actual cash value claim? I would say no, as the insured is simply accepting the contractual benefit owed at that time. In my opinion, an insured makes an actual cash value claim by electing to have the loss settled on an actual cash value basis, which is different than receiving an actual cash value payment before repair/replacement is completed.

Practically speaking, the 180-day notice requirement to receive replacement cost benefits should never be an issue. Most public adjusters I have spoken to have told me that their practice is to notify the insurer in writing well before the 180-day deadline (a) that the insured is making a replacement cost claim and (b) that the insured intends to repair/replace the damage to the insured property. Even if the insured is uncertain as to his or her future plans, I see no downside to giving such notice.
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1 ISO Form CP 10 30 10 12 at page 15 of 16.
2 Form HO 00 03 05 11 at page 14 of 22.
3 Construction Systems, Inc. v. General Cas. Co. of Wis., 2010 WL 11575518 (D. Minn., August 31, 2010).

  • Edward Fako

    Excellent topic Edward!!!

    All RCV Policies have the ACV Payment occurring as a natural consequence Of the claim payments per the Loss Payment Section.

    My question then goes to timeliness. Once the proper notice stating intent is supplied within the 180 days, how long does the underfunded Policy Holder have to actually perform the RCV Repairs/Replacement?

    Let’s speak in generalities, otherwise the answer would be;
    “It Depends”

    Also, upon completion of Replacement due to the prior materials being discontinued and unavailable, yet a similar product us used, that normally qualifies as an, “Or Equal”, it seems as if a current strategy is to lower the RCV Payment with rationale that it was not similar in price or value.

    What would you suggest as an expedient method of resolving those circumstances?

    It seems most prevalent from Country Financial Insurance, American Family Insurance and Liberty Mutual Insurance.

    Respectfully,

    Edward Fako
    InsuranceClaimAppraisals@gmail.com

  • Tom Hamrick

    In PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 636 (Tex. 2008), the Texas Supreme Court reaffirmed that “[c]onditions are not favored in the law.” According to the Court, “when another reasonable reading that would avoid a forfeiture is available, [a court] must construe contract language as a covenant rather than a condition.” Id. The Supreme Court’s holding is consistent with long-standing Texas insurance law—courts should construe insurance policies so as to avoid a forfeiture of coverage. See Coker v. Travel Ins. Co., 533 S.W.2d 400, 401 (Tex. Civ. App.—Dallas 1976, no writ); see also Vernon v. Aetna Ins. Co., 301 F.2d 86, 90 (5th Cir. 1962) (Texas law) (noting that when examining an insurance contract, it is to be construed most strongly against a forfeiture).

    When coverage for bodily injury or property damage is at issue, late notice voids coverage only if the insurer establishes that the delay prejudiced the insurer’s position. PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 636-37 (Tex. 2008) (rehearing denied); Coastal Refining & Marketing, Inc. v. U.S. Fidelity and Guar. Co., 218 S.W.3d 279, 289-90 (Tex. App.—Houston [14th Dist.] 2007, pet. denied). (emphasis added)

  • Brett Joseph Ray

    Hypothetically speaking, what if the client is elderly and can not get on their roof. They are not able to inspect their roof. A roofer knocks on their door 181 days after the date of loss and files a claim.

    Insurance company pays for a full roof, but at ACV according to this policy language. Is the policy holder SOL because they didn’t file the claim “timely”?

    • Edward Eshoo

      As long as the insured is making a replacement cost claim, the 180-day notice requirement does not apply. There is a difference between making an actual cash value claim, and receiving actual cash value benefits until you replace. Receiving actual cash value benefits until you replace is not an actual cash value claim.