The question, if insured buys a commercial replacement policy with 100% coinsurance, and sustains a loss and selects to recover only ACV, does the coinsurance requirement apply to RC value or ACV since that's basis of his payment provision is ACV? Since replacement coverage policy is more expensive, can the insured be paid less than ACV if he complies with coinsurance requirement on an ACV basis. Your thoughts? Example:
RC Value: $6,000,000
Coinsurance: 100%
Limit of Insurance: $4,200,000
ACV Value: $4,000,000
Replacement Loss: $3,000,000
ACV Loss: $2,500,000
I think insured can ignore replacement cost coinsurance and select ACV payment of $2.5M.
New York Subscriber
Your conclusion is accurate that if the insured elects to settle the claim on an actual cash value basis, the coinsurance requirement will be required to be met and thus will be calculated against the ACV of the property rather than the RC value. Under the ISO CP 00 10 Building and Personal Property Coverage Form, the optional coverage for replacement cost states that the insured may make a claim for loss or damage on an actual cash value basis instead of on a replacement cost basis. The coinsurance additional condition states that the insurer will not pay the full amount of a loss if the Limit of Insurance is less than the value of the covered property at the time of loss multiplied by the coinsurance percentage.
Even though the insured paid a higher premium rate for the replacement cost valuation, they will not be penalized for electing ACV at the time of loss, as long as they meet the coinsurance requirement for that ACV. Because their $4,200,000 limit is more than adequate to cover the $4,000,000 ACV of the building, they fully complied with the coinsurance condition on an ACV basis and so are entitled to the ACV payment of $2,500,000.
By choosing the ACV option, the insured will avoid the RC coinsurance penalty and in this particular loss scenario, they will recoup $400,000 more than they would have under the replacement cost settlement.