Standard replacement-cost provisions on Commercial Property forms often offer the insured the option to accept settlement on an actual-cash-value (ACV) basis, but the insured can later opt to receive the replacement-cost amount.

This can cause some confusion.

The policy usually provides a time period for notifying the carrier that the insured intends to make a claim for the replacement cost. The insured must actually make the repairs before the replacement-cost amount is paid. But the amount of time given to make the repairs is generally some variation on “as soon as reasonably possible” after the loss or damage.

How soon is that?

There is no absolute answer to how long it should take to make the repairs. The only set time limit is how long the insured has to notify the insurer of the replacement-cost claim. “Couch on Insurance 3d” states that the reasonable time “turns upon the circumstances of the case and is ordinarily a question for the jury.” So, the answer is a subjective one.

Sometimes what seems like a straightforward answer to a question leads to more complex issues. For example, an FC&S subscriber recently asked us the following regarding a claim on a Businessowners form:

“Our insured is considering accepting an ACV settlement on some of the soft-metal hail-damaged fascia and gutters on his building. If the policy continues as written with replacement cost and the building sustains damage that necessitates replacement of these same items, will the company, under the language of the policy, still be required to pay for the full replacement cost of the materials that have already been paid for under this prior loss?”

Our immediate response was that if the insured experiences a subsequent, separate loss, then the full replacement cost of the damaged property should be paid.

As we continued discussing the scenario, though, another issue arose that threatened to make the solution a little more complicated. The ISO Businessowners form contains the following language in the loss-payment section:

“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 on a replacement-cost basis if you notify us of your intent to do so within 180 days after the loss or damage.”

It seems pretty clear that, in the situation that our subscriber presented, a separate loss the insured wants to adjust on a replacement-cost basis after the 180-day time limit outlined in the loss-payment section would receive the full replacement cost.

But what if the insured suffers hail damage and accepts an ACV settlement and thirty days later suffers hail damage again to the same property? If the insured submits a claim for replacement-cost coverage at that point, would the carrier consider it within the 180-day period and pay only the difference between the ACV settlement already received and the replacement cost?

Our first reaction is that our original answer to the question stands, regardless of the 180-day time period. However, we are curious if anyone has run into this situation—and if so, how it was handled? The fact that our subscriber was concerned that the insured would not receive full replacement-cost coverage for a different loss implies that someone may have experienced similar situations before.

Special Reports /

Actual Cash Value vs. Replacement Cost: Navigating the Policy

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