Filed Under:Agent Broker, Agency Management

How to accurately calculate repair, replacement costs

Coverage Q&A

An appraisal may help an insured secure adequate repair costs. (Photo: iStock)
An appraisal may help an insured secure adequate repair costs. (Photo: iStock)

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Question: My client lives in Marin County, Calif., where the costs of the building trades are much higher than in other areas. A dispute has arisen because the cost of painting the house on the inside, via a contractors sub-bid, is roughly double what the Xactimate program estimated the cost to be. The insured will have actually expended an amount in excess of the settlement, based on Xactimate pricing, in doing the actual repair. The insureds position is that the insurer owes what the insured "actually and necessarily" spent for the repair of the like and kind and not what a computer platform estimates it to be, for the purpose of resolving the claim. What would the Insured be entitled to, the amount spent or the estimated amount by Xactimate for the same work? 

— California Subscriber

Answer: You don't mention the policy you're using, so I'm referring to the ISO HO 00 03 05 11; your wording may be different. Under the loss settlement condition, settlement is for no more than the least of: the limit of liability, the replacement cost with like kind and quality, or the necessary amount actually spent to repair or replace the damaged building. While an estimate is important in determining the amount of the claim and Xactimate should be using territory as part of their price determination, the policy language is the final say. If the necessary amount to repair/replace is the lesser of the limit of liability or the replacement cost with like kind and quality, then that is what should be paid. The insured always has the right of appraisal if all other conditions have been met.

Related: Avoid getting blown away by wind damage claims

Intent to repair or replace

The ISO Dwelling 3 policy provides replacement cost benefits. Please provide your interpretation of the application of benefits as it relates to the time to recover RCD. Shouldn't the 180 days apply? Does the policy condition listed on page 7, no. 5, section 5 beginning with "You may disregard..." remove the 180 day stipulation?

— Louisiana Subscriber

Answer: I’m looking at the standard ISO language from the DP 00 03 12 02 and 07 14 edition dates, the language concerning replacement cost is the same. Each policy states that the insured may disregard replacement cost settlement and opt for actual cash value. The insured has 180 days after the loss to notify (emphasis added) the carrier of their intent to repair or replace the damaged building. The repairs don’t have to take place in that 180 days, the insured just has to notify the carrier of his intent to do so. If the insured does not notify the carrier of his intent to repair the property and he later does so, he cannot collect the difference even though the property was repaired. For example the property is damaged in January. In May, the insured informs the carrier that he is going to repair the damage in August; once repaired the insured can then go back to the carrier for the difference between actual cash value and replacement cost. However, if the property is damaged in January and the insured doesn’t say anything to the carrier and repairs the property in August, and then goes back to the carrier, that is beyond 180 days and there is no coverage for the difference between actual cash value and replacement cost.

Related: When a tree falls, is there debris removal coverage?

Removal of objects to make repairs

 The insured's dwelling sustained substantial water damage. There was no insurance on the contents but the house was occupied and fully furnished. The contractor has included the cost of some contents manipulation in order to replace the floors and floor coverings. The insurance company is refusing to pay, claiming that is a contents expense. I disagree. The only way to repair the dwelling is to move the contents out of the way. Is the removal of contents covered in the cost of repair?

— Kentucky Subscriber

Answer: The cost to remove the contents should be covered; you are correct in that they have to be moved to fix the floors. The contents aren’t being replaced or repaired, they’re being relocated in order to make repairs to the dwelling – that’s a repair expense for the dwelling, and not a contents expense.

Related: Two times that flood damage was not covered

Second claim occurs before first claim repairs completed

Question: This is in reference to a non-owner occupied (rental) property. The insured sustained a fire loss at the loss location. The repairs have not commenced. The insured sustained another claim at the loss location (break-in: vandalism & theft). Using 1 room as an example- if the living room needed to be gutted of the drywall and painted due to smoke from the first loss, should the 2nd claim also include drywall repair and painting because the vandals broke into it to steal the copper pipes, even though drywall repair was covered by the first claim? 

The ACV has been paid on the first loss and now the insured may not do the repairs. Does this impact the second claim?

— Michigan Subscriber

Answer: The claims are separate and should be handled that way. However, since the property had not been repaired from the first loss, then only the increase in loss from the second claim should be covered. For example, the first loss will cover replacement of drywall while the second claim will pay for subsequent damage, the loss of the pipes. Since the first loss hadn’t been repaired, the second claim will not pay for duplicate repairs.

It also depends on the separation between the losses; if it’s been several months, the insured could have a problem since the DP 03 requires the insured to protect the property from further damage by making reasonable and necessary repairs to protect the property; coverage may be denied if this has not occurred.

Related: The trouble with property damage claims caused by rain

Subsequent damage when first repairs have not been made

 During the recent hurricane, our insured's home sustained damage to her roof. This damage has caused leaks to the interior of the home. She has a Form #3 AAIS policy. However, the company paid to have a new roof installed over a year ago, due to a hail storm that caused damage to the existing roof. The payment was issued to the insured and her mortgagee. The insured then made payment to a local contractor that never replaced the roof. Now that there is further damage, would the company be responsible to repay this claim? No temporary repairs have been done since the 1st claim and the company has never been notified of the circumstances until additional damage has occurred.

— Pennsylvania Subscriber

Answer: The carrier owes only the difference between the new claim and the old claim since the damage was not repaired. The insured should have gone after the contractor for the funds or the new roof, and that may still be possible since it’s only been one year.


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