The recent signing of HB 853 by Gov. Charlie Crist has had an interesting effect on the adjustment of losses for the E&S market. It has allowed us to employ the novel concept of adjusting claims based upon the policy as it is written, endorsements and all.
The most common impact from the claim adjuster's perspective is in the settlement of partial property losses caused by fire or lightning. Pre-HB 853, per the terms of the Florida Value Policy Law (627.702), these types of losses were adjusted based upon the actual cost of repair or replacement without deduction for depreciation, regardless of the policy valuation, whether it be replacement cost or actual cash value.
Most property polices written at replacement cost indicate in the loss settlement conditions that the initial indemnity payment will be at actual cash value (ACV) until the lost or damaged property is actually repaired or replaced. This ensures that in order to collect on the replacement cost benefits of the policy the insured must also adhere to the terms and conditions of the replacement cost coverage.
As an example: An insured suffers a documented $10,000 loss, at replacement cost, due to a lightning strike, and carries replacement cost coverage. The policy carries a $1,000 deductible. Instead of merely recommending payment of the $9,000, the adjuster must now evaluate the age, condition, market value, and possible functional obsolescence of the damaged property in order to determine and apply appropriate depreciation to the damaged item(s) and recommend an initial net actual cash value payment.
After application of the policy deductible, the difference between the net ACV payment and the replacement cost loss is due and payable to the insured when repair or replacement is actually made, in accordance with the terms and conditions of the policy. This difference is known as withheld depreciation, and is commonly referred to as taking a "holdback."
A Novel Concept
The effect on policies written on an actual cash value basis simply means that ACV policies are now actually ACV policies. I know that is quite a concept to comprehend, but one that I am sure we can all embrace now that indemnity payments on the above-described loss would be based upon the policy as written and the premium paid.
In the example above, I noted some of the factors that can be used in determining the ACV, rather than the standard replacement cost less depreciation formula. Using every standard of value having a bearing on a subject property is known as the application of the broad evidence rule.
Using the broad evidence rule has now become another possible option in determining the actual cash value of insured property in the event of a loss. The broad evidence rule has been used for quite some time in many states to determine the value of insured properties rendered a total loss. In some instances, this can result in indemnity payments of below the face dollar amount of the policy should it be determined that that the true value of a property is less than the insured amount.
The ramifications of the application of the broad evidence rule are many, and reviewing each would require another article. Suffice it to say that with the recent change, it is yet another tool that adjusters will carry in their chest.
This is only a brief overview of a few of the changes to the adjustment process brought about by the enactment of HB 853. The net effect from the adjuster's perspective is a return to the basics of reading and understanding the policy and relevant endorsements and determining not only if a loss is subject to coverage, but how and why a proper indemnity payment is determined. Adjusting claims based upon the policy as written may be a novel concept for some, but I am sure we can all agree it is a welcome one.
Robert DeFusco is with Wheeler, DeFusco & Associates in Ft. Lauderdale. He may be contacted at 954-332-0796.
