Replacement Cost Coverage: Why You Can Get Paid More on Your Insurance Claim When Prices Rise After a Loss

In his August 10, 2021, blog, Chip Merlin discussed the recent FC&S Bulletin addressing the relationship between replacement cost coverage and the increase in construction costs. For background on this discussion and to better understand the significance of the FC&S bulletin, I suggest reading his blog post, Can You Get Paid More on Your Insurance Claim When Prices Rise After a Loss?

The primary inquiry was whether insureds are entitled to the increase in costs following the date of loss under a policy providing replacement cost coverage. The FC&S Bulletin addressed this question as follows:

The policy states that once repair is completed it will pay no more than the least of the limits of the policy, cost to repair or replace with like kind and quality, or the amount actually spent to repair or replace damaged property. This indicates that whatever the cost is at the actual time of repair, not the date of loss, is what is paid out. Nothing in the policy ties payment to costs that existed at the time of the loss; payment is made when it is made, at the going costs at the time. (emphasis added).¹

As this explanation indicates, nothing in the policy ties the measurement of damages to the time of the loss. But what provisions commonly contained within insurance policies substantiate this interpretation/opinion?

We first must consider the standard policy provision describing actual cash value, generally contained in the definition section. A typical definition of actual cash value provides:

‘Actual Cash Value’ means the cost to repair or replace covered property, at the time of loss or damage, whether that property has sustained partial or total loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence as determined by us. (Emphasis added).

This standard definition specifically limits the measurement of actual cash value to the time of loss. Notably, this type of limiting language is absent from similar provisions describing replacement cost value in most policies. An example of that language is as follows:

[W]e will pay the cost to repair or replace, after application of deductible and without deduction for depreciation, but not more than the least of the following amounts:
(a) The limit of liability under this policy that applies to the building;
(b) The replacement cost of that part of the building damaged for like construction and use on the same premises; or
(c) The necessary amount actually spent to repair or replace the damaged building.

Provisions (a)-(c) provide the limitations on payment contained within the policy. As the FC&S Bulletin correctly points out, this language omits the “date of loss” limiting provision, which provides a straightforward conclusion: The policy unambiguously provides that the cost is determined at the actual time of repair, and not the date of loss. This includes any increase in cost that may arise based on a change in market conditions.

This topic has become increasingly relevant over the past year. The significant increase in basic construction material costs has led to the reliance on quickly outdated and grossly insufficient Xactimate pricing. As this situation becomes more prevalent, it is essential that those advocating on behalf of policyholders emphasize the position espoused in the FC&S Bulletin with regard to the increase in costs: “payment is made when it is made, at the going costs at the time.”
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¹ Christine Barlow, CPCU. Insurance Q&A of the Week: Loss Settlement and Increased Costs. Aug. 9, 2021. Available at https://www.nuco.com/fcs/2021/08/09/insurance-qa-of-the-week-loss-settlement-and-increased-costs/ (subscription).