Although I retired from the Big “I” at the end of 2016, I still serve as a faculty member on their Virtual University. Three days ago, we received an “Ask an Expert” question where a delivery truck negligently backed into the door of a commercial building. The business auto adjuster says they are only responsible for the ACV of the damage, not the replacement cost.

This isn’t the first time I’ve seen this question. In my 17 years directing the VU, questions like this were routine. For example, here are four claim scenarios I wrote about during that time:

  • A tenant in a commercial building negligently causes fire damage to his leased space. His only coverage is ‘fire damage legal liability’ (FDLL) under his current ISO CGL policy. The lease he signed says that damages would be settled on a replacement cost basis. The adjuster says FDLL pays on an ACV basis.
  • A negligent motorist ran off the road and into a dwelling and garage, damaging both structures and the vehicles in the garage. The driver’s PAP insurer says they are only responsible for paying ACV, not replacement cost.
  • A faulty plumbing job resulted in water damage, including damage to an 8-year-old TV whose cost new for one of similar size and features is currently $1,000 but the ACV is virtually nil. The plumber has a current ISO CGL policy.
  • A water line on a homeowner’s property ruptured and flooded a neighbor’s basement. The homeowner’s HO insurer has accepted the homeowner’s legal liability but is only willing to pay for damage on an ACV, not replacement cost, basis.

So, for PD claims under liability policies, what valuation method is appropriate, ACV or replacement cost? Well, absent any policy language to the contrary, it depends on what the tortfeasor is “legally liable” for. Although I’m not fond of “general rules,” in general, liability policies play on an ACV, not a replacement cost basis. This is, again generally, supported by case law and established legal doctrines.

“In general, liability policies pay on an ACV, not RC, basis.”

Replacement cost coverage is usually an option available under first-party property policies that the named insured has paid extra for. This is just one reason why someone whose property has been damaged by a third party should turn the claim into their property insurer in order to receive replacement cost coverage. The property insurer can then subrogate against the liability carrier to recover at least part of their payment.

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Bill Wilson

Founder at InsuranceCommentary.com
One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America. Reprint Request Information

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