"We will pay the cost to repair or replace with similar construction and for the same use on the premises shown in the Declarations, …"

Our interpretation is that this language establishes the measure and limitation of State Farm's replacement-cost liability. In other words, State Farm's obligation is measured by the cost to repair or replace the damaged property with similar construction, for the same use, at the insured premises.

We do not read the language as separately imposing a condition that the insured's repair or replacement expenditure must occur at that same location. Had State Farm intended to require the insured to repair or replace the dwelling only at the premises shown in the Declarations, it could have stated that requirement more directly within the provisions governing when replacement-cost benefits become payable.

The insured is relying upon the purchase price of the replacement residence, less the portion reasonably attributable to the land, to establish the amount actually spent to replace the damaged dwelling. That replacement expenditure exceeds the agreed replacement cost of repairing the covered damage at the insured premises. The insured is not seeking payment of the full purchase price or asking that State Farm's liability be measured by the market value of the newly acquired property. Rather, the purchase establishes the insured's replacement expenditure, while the amount claimed remains limited to the agreed replacement cost of repairing the covered damage at the premises shown in the Declarations.

The question, as we see it, is whether the phrase "on the premises shown in the Declarations" modifies the cost used to measure State Farm's replacement-cost liability, or whether it creates an additional geographic requirement governing where the insured must repair or replace the dwelling. Our position is that the phrase operates only as a limitation on the measure of State Farm's replacement-cost liability, not as a geographic condition governing where replacement must occur.

Do you believe the insured's purchase of another primary residence satisfies the policy's repair-or-replacement requirement and supports recovery of the withheld depreciation?
We would appreciate your interpretation of the policy language and State Farm's position.

Thank you for your review and assistance.

Michigan Subscriber

We find the policy language to be ambiguous. Standard policies have language that addresses rebuilding at another location, and such language generally reads as follows: "If the building is rebuilt at a new premises, the cost described in (2) above is limited to the cost which would have been incurred if the building had been built at the original premises."

There is no such language in this policy, nor does this policy list any sort of penalty for the insured rebuilding or buying a property elsewhere, the policy simply does not address it.

The policy states: "(2) when the repair or replacement is actually completed, we will pay the covered additional amount you actually and necessarily spend to repair or replace the damaged part of the property, or an amount up to the applicable limit of liability shown in the Declarations, whichever is less;

(3) to receive any additional payments on a replacement cost basis, you must complete the actual repair or replacement of the damaged part of the property within two years after the date of loss, and notify us within 30 days after the work has been completed; "

So, the policy agrees to pay the additional amount of repairs up to the limit, depending on which is less. However, the policy clearly states that ACV is paid until the property is replaced, then the difference between ACV and the full cost of repair will be made. Therefore, the insured is owed only the difference between the ACV cost of the repairs and the full value of the repairs of the original dwelling - if the insured paid more for the new house, which is not equal to the holdback amount. The holdback is the holdback - for example, if the cost to repair the dwelling was 300,000 and ACV was 200,000, that leaves a holdback of 100,000. If the insured's new dwelling cost 350,000, the insured is not entitled to 150,000, but 100,000, which would have been the repair cost of the original dwelling.