Q

We are in the process of adjusting a large fire loss under a homeowners policy (HO 3). The estimated replacement cost is $289,450; the actual cash value, $237,400.

Early in the adjustment process, we issued a check to the insured in the amount of $237,400. He replaced the damaged property for a total of $256,450. We contend that we owe him an additional $19,050—the additional amount he actually spent for replacement. The insured (and some people in our office) believe that we owe him $52,050—the difference between the actual cash value and the estimated replacement cost.

We'd appreciate an explanation of how this process should work.

Pennsylvania Subscriber

A

Even though the estimated replacement cost of the loss is $289,450, the insurer does not owe any more than $256,450—the amount actually spent by the insured. The loss settlement condition in both the HO-3 (84 edition) and the HO-3 (91 edition) limit the insurer's payment to the smallest of the following:

1.     The limit of liability.

2.     The replacement cost of the building (or the damaged portion thereof).

3.     The amount actually spent to repair or replace the damage.

Since the insured spent only $256,450, he is entitled to an additional payment of $19,050 over the ACV payment of $237,400.