In California, Homeowners Insurance Policies Must Disclose What Kind of “Replacement Cost” Coverage Exists for the Insured

After a property loss occurs, an insured is always responsible to show the amount of loss claimed. We are often asked whether a policy covers "replacement cost" value (RCV) or "actual cost" value (ACV). Although an insured may not be familiar with these terms, the RCV versus ACV valuation of property can determine whether an insured is made whole under their homeowners policy after a loss. California Insurance Codes Sections 10102 and 10103 require insurance companies to disclose upfront the insurer’s obligations.

The Insurance Code Section 10102 states:

(b) The agent or insurer shall indicate on the disclosure form
which coverages the applicant or insured has selected or purchased.
     *                                             *                                  *
(d) Following the issuance of the policy of residential property
insurance, the insurer shall provide the disclosure statement to the
insured on an every-other-year basis at the time of renewal.
     *                                             *                                  *
(g) Coverage provided for building code upgrades by a policy of
residential property insurance shall be applicable to building codes,
ordinances, standards, or laws only to the extent that those codes,
ordinances, standards, or laws do not impose stricter standards on
the property on the basis of the level of insurance coverage
applicable to the property.

When calculating a loss under a homeowners insurance policy, look to the policy itself and the required statutory disclosure requirements set forth under California insurance law. Upon initial issuance of the policy and every second year on renewal, the insurance company must provide a disclosure form that describes the principal forms of insurance coverage for residential dwellings available in California. This form must disclose and identify the form of dwelling coverage that the insured has purchased. The Code is clear in that the insurance company is specifically responsible for clearly and unambiguously stating whether the insured has purchased "replacement cost coverage," "guaranteed replacement cost coverage," or "actual cash value" coverage. Additionally, the Code requires that these disclosures indicate whether or not the homeowner’s policy covers "costs resulting from code upgrades."

It’s important for every insured to ask questions and to know upfront what kind of coverage they are purchasing. Knowing the type of coverage prevents issues with underinsured and coinsurance issues, depending upon the policy.