This issue came up twice in the past week and has come up many times over the years. Many property policies written on a replacement cost (RC) basis give the insured the option of prompt claim payment on an actual cash value (ACV) basis with any balance due on a RC basis available at a later date. Using ISO forms as model language, the following are the applicable parts of these provisions in their Homeowners and Commercial Property programs.
- ISO HO 00 03 05 11
“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 D. Loss Settlement, provided you notify us, within 180 days after the date of loss, of your intent to repair or replace the damaged building.”
- ISO CP 00 10 10 12
“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.”
I have seen this issue arise most often following claims for hail damage. In many cases, the insured does not know there has been hail damage for many months when a leak finally manifests itself. Most recently this was the subject of a National Underwriter FC&S Q&A involving a North Carolina proprietary homeowners form which has language almost identical to the ISO form above:
- HE 00 07 07 13
“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 in accordance with D.2.a. above if you notify us, within 180 days after the date of loss, of your intent to repair or replace the damaged building.”
In this claim, the policyholder was not aware of the hail damage to a wood shake roof on a two-story house for many months. When the adjuster did weather research, the conclusion was that the hail storm occurred more than 180 days before the claim was made and cited this policy language as the basis for limiting coverage to ACV rather than RC.
The FC&S answer did not address the insurance contract language and based its opinion for RC coverage on the manifestation theory of occurrences. While I agree with their conclusion that RC coverage is appropriate, I base that on the actual contract language and not the occurrence theory. More on the policy language in a minute, but first a brief side step on occurrence theories. If you are not aware of these loss occurrence theories, you might take a few minutes to peruse these two articles:
- “Trigger Theories in Homeowners Insurance”
- “No Manifestation Destiny: The Seventh Circuit Declines to Set a Standard Trigger Rule for First-Party Property Policies”
If you read these articles, you can see how even the courts disagree on which theory, if any, is applicable to first-party property damage claims. But I believe there is an easier way of determining whether RC or ACV is owed to the insured. At about the same time the FC&S article was published, I received an email from an insurance company’s home office claims manager about a hail claim under the CP 00 10 12. The claim was filed on June 21, 2020 when the roof damage was discovered but the carrier’s investigation has led them to believe the loss actually occurred in 2017. The policy was in force throughout this time period. The claim manager believes RC is owed but the carrier’s legal counsel believes recovery is limited to ACV because the insured failed to report the claim within 180 days of the date of loss or damage.
I believe the answer lies in the contract language itself [emphasis added]:
- “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.”
This provision starts out by saying “You may make a claim for loss or damage covered by this insurance on an actual cash value basis….” The reality is that the insured is NOT making a claim for ACV. The insured paid for and expects RC coverage and is making the claim for RC coverage.
The second part of the provision goes on to say that “In the event you elect to have loss or damage settled on an actual cash value basis….” Again, the insured never elected an ACV recovery. Therefore, the “In the event you elect….” language required to trigger the 180-day provision is inapplicable.
The only time the 180-day limitation is triggered is IF the insured actually requests an initial ACV recovery and that is not the case for these types of claims.
I believe this reading is in keeping with the insured’s reasonable expectations for the coverage their premium paid for, is the proper interpretation as a matter of equity, and is the clear and unambiguous meaning of this language. The RTFP Doctrine prevails.
P.S. Another myth is that the insured must actually replace the property within 180 days of loss in order to recover on a RC basis. That’s not what the policy language above says. The insured only has to provide notice within 180 days that the insured intends to recover on a RC basis.
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