Replacement Cost Defined

Our insured has a businessowners policy, ISO special form BP 00 02 12 99. In August, lightning destroyed the computerized phone system to the extent it cannot be repaired, and must be replaced.

We have located a used reconditioned phone system of the same make and model as that which was damaged and have offered to purchase and install it. It is our opinion that this will meet our policy obligation, since the policy states “at our option, we will … pay the cost of repairing or replacing the lost or damaged property.” The insured, however, feels he has a replacement cost policy and is entitled to a new phone system.

What do you think?

Kentucky Subscriber

The policy states that the values of covered property (the phone system) will be determined “At replacement cost without deduction for depreciation, subject to the following: (a) If, at the time of loss, the Limit of Insurance on the lost or damaged property is 80% or more of the full replacement cost of the property immediately before the loss, we will pay the cost to repair or replace, after application of the deductible and without deduction for depreciation…” A reconditioned phone system is still a used phone system, and, as such is depreciated. The policy promises the insured that if he maintains insurance to value, losses to covered property will be adjusted on a replacement cost basis. Replacement cost means that the company “will pay the cost to repair or replace, after application of the deductible and without deduction for depreciation” The insured is entitled to a new phone system.