Question: Under the standard HO-3, within the Loss Settlement Condition, there is the section that applies to the insured making claim for recoverable depreciation.

If the amount the inured pays for repairs is less than the amount estimated and that which settlement of the claim was based, is the insured entitle to recovery a pro-rata amount of the recoverable depreciation withheld? Or if the insured has the work repaired for less than the amount on which settlement was based, is the insured unable to collect the recoverable depreciation withheld?

— Florida Subscriber

Answer: I'm looking at the HO 00 03 05 11. While it is a replacement cost policy and paid at Actual Cash Value (ACV) until repairs are completed, when the difference between Replacement Cost Value (RCV) and ACV is returned to the insured, the language clearly states that the most paid out is the least (emphasis added) of policy limits, replacement with like kind and quality, or the amount actually spent to repair or replace the damaged building. An example works best.

If the RCV settlement is for $20,000 and the ACV is $15,000, yet the insured spends $17,000 to restore the property to its preloss condition, then the insured is only entitled to $17,000. That is the lesser of the limits, replacement cost or necessary amount to repair/replace the damaged parts.

However, if the RCV settlement is $20,000 and the ACV is $15,000 and the insured spends $20,000 to restore the property to its preloss condition, then the insured receives $5,000 for the depreciation.


Question: This is about when a dwelling with no coverage issues is deemed a total loss in a valued-policy state (not a state-specific question, so this will be left out). When the valuation's ACV amount exceeds the limit of liability, will the deductible be subtracted from the limit of liability or will the limit of liability be paid by the carrier without subtracting the deductible from that amount?

For example: Limit of liability is $100,000 and the deductible amount is $2,500. Is the insured (and any other applicable payees) given $100,000 or $97,500 for a total loss?

— Tennessee Subscriber

Answer: While the policy states that the deductible is subject to the policy limits that apply, it also states that what is paid out is that part of the total of all loss payable that exceeds the deductible. The amount over the limit is not payable, so it is not included in the calculation. Therefore, even if the total amount of loss exceeds the policy limits, the deductible is applied to the policy limit. So, if the policy limit is $100,000 and the loss is $150,000 and the deductible is $2,500, the amount paid out is $97,500.


Question: We have an insured who owns a three story apartment building insured on the ISO Building and Personal Property Coverage Form, CP 00 10 10 91. One end of the building sustained a very substantial loss. That end of the building will have to be demolished and rebuilt. The other end was not damaged.

The insured would like to demolish the damaged end of the building and instead of rebuilding that end of the building, use the insurance proceeds to purchase a different apartment building in another area of town. He could do this with the actual cash value settlement, but he would like to get replacement cost settlement and use the replacement cost settlement to purchase a different building. If the replacement building is as expensive or more expensive than the demolished portion of the original building, can he demand to get replacement cost in lieu of ACV on his claim settlement and use this for the building in the other part of town?

— Pennsylvania Subscriber

Answer: The replacement cost provision of the 1991 edition of the CP 00 10 states that the insurer may pay the least of three options:

The limit of insurance,

The cost to replace — at the same premises — lost or damaged property, or

The amount the insured actually spends to repair or replace the property.

Those options would rule out getting replacement cost for a more expensive building in another part of town, if it were even possible to get replacement cost for replacing property at a different premises. Option No. 3 might allow that, but it doesn't sound like it would be the least amount of the three options. 

The 2002 edition of the form dropped the "at the same premises" stipulation from option No. 2 and added a caveat that if the building is rebuilt at a new premises, the amount paid is limited to the amount that would have been incurred if the building had been rebuilt at the original premises. If the carrier allowed the insured to replace at a different premises, the insured would be limited to what it would cost to replace at the original premises.

Keep in mind that the replacement cost amount will not be paid in any case until the lost or damaged building is repaired or replaced, so even if the insured could collect replacement cost, he would not be able to do so before purchasing the replacement building.


Question: I need info on requirements for an insured to be paid holdback.

Our insured has a contents claim involving large and expensive manufacturing equipment, about 150 pieces.

The replacement cost and actual cash value loss and damages in whole for all 150 pieces are agreed and depreciation, on the RC policy, was taken on a line item basis. ACV was paid.

The insured has purchased several large pieces, but not all of the 150 damaged pieces have been replaced.

On the twenty large pieces purchased so far, the insured spent exactly the amount that was settled for on the RC basis for each of the pieces purchased.

The insured has proved the expenses incurred through checks and invoices for the pieces and there is no dispute by the carrier that the insured spent what was agreed for the same as the RC settlement for that piece. The insured has filed a claim for the holdback for each piece that was bought.

The insurer said that the insured must spend at least the aggregate ACV amount of the total claim before holdback claims per piece can be made.

I have never heard of such a thing but cannot locate anything that addresses this. Do you have anything?

— Texas Subscriber

Answer: The form does not address the loss of multiple items. It just states that if the insured wants to make a claim on a replacement cost basis, the replacement cost will not be paid until the lost or damaged property is actually repaired or replaced. In the situation you describe, the property has been replaced, so, in our opinion, the insured should receive the holdback amount on those items. Since the form does not address how replacing some of the items in a multiple-item loss will be paid, the benefit of the doubt should go to the insured.


Question: The insured has a claim on a CP 00 10 04 02 policy. The insured had an ATM machine in her establishment that was not owned by her. The establishment was broken into, and the ATM was stolen. The client said that this is a business personal property claim under the policy and that we need to take a deductible. We feel that that, since the insured does not own the ATM, the settlement should be at ACV with the ATM owner and no deductible applied. Who is right??

— Georgia Subscriber

Answer: We agree that the loss should be settled with the ATM owner for ACV, as replacement cost coverage does not apply to personal property of others unless the policy's extension of replacement cost coverage for the personal property of others is shown as applicable in the declarations.

The extension states that if personal property of others is subject to a written contract that governs the insured's liability for loss or damage to that item, the valuation will be based on the amount for which the insured is liable. Otherwise, it is valued at ACV. However, we do not see anywhere in the policy that states that a deductible would not apply. So, settlement should be at ACV with the ATM owner with a deductible applied.

Analysis brought to you by the experts at FC&S Online, the unquestioned authority on insurance coverage interpretation and analysis for the P&C industry. To find out more — or to have YOUR coverage question answered — visit www.nationalunderwriter.com/FCS.

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