Replacement cost insurance generally allows recovery for the actual value of property at the time of loss, without deduction for deterioration, obsolescence, and similar depreciation of the property’s value. Depending on the circumstances, the difference between the actual cash value and the replacement cost value of a loss can be significant.

Policyholders and insurance companies often find themselves at odds on whether the policyholder has complied with the policy requirements for obtaining replacement cost benefits. In every case, one must be careful to note what the policy truly requires. A helpful illustration is found in Nicastro v. New York Central Mutual Fire Insurance Company.1 There, three days after his property was destroyed by a fire, the insured advised his property insurance carrier that he “elect[ed] to exercise any replacement cost options, which are or may become available.”

The replacement cost provision of the policy provided:

You may make a claim for the actual cash value amount of the loss before repairs are made. A claim for any additional amount payable under this provision must be made within 180 days after the loss.

A lawsuit followed. The insured contended that he had, in fact, made a claim in compliance with the replacement cost provision by advising the insurance company three days after the loss he would seek replacement costs for the premises. The insurance company countered and asserted that the insured did not comply with the replacement cost provision because it required that the insured make a “bona-fide” claim by “actually replacing and actually spending money in excess of the actual cash value within 180 days of the loss.” The court sided with the insured and concluded that the replacement cost provision was ambiguous because the term “claim” was not defined in the policy and, as an ambiguous provision, must be construed against the insurance company. Therefore, the insured was deemed entitled to full replacement cost coverage under the policy.

Many often assume that a replacement cost policy requires actual replacement before an insured can make a claim for the replacement cost, but like many things in the property insurance coverage arena, the ability to recover replacement costs depends largely on the language in the policy — that is, what the policy states and, sometimes, what the policy fails to state.
1 Nicastro v. New York Central Mut. Fire Ins. Co., 148 A.D.3d 1737, 50 N.Y.S.3d 736 (4th Dep’t 2017).