Replacement Cost Coverage and the 180-Day Notice Requirement

In my experience, one of the most misinterpreted property insurance policy provisions is the 180-day notice requirement to receive replacement cost benefits. Many in the property insurance industry interpret the provision to require actual repair/replacement within 180 days of the loss. Others interpret the provision to simply require notice within 180 days of the loss of the intent to repair/replace. And, there are those who interpret the requisite 180-day notice to be given only if the insured initially makes claim on an actual cash value basis.

What is the correct interpretation? Clearly, it depends on the policy language. Compare the following two ISO provisions.

The ISO “Building and Personal Property Coverage Form” provides as follows:

c. You may make a claim for loss or damage covered by this insurance on an actual cash value basis instead of on a replacement cost basis. In the event you elect to have loss or damage settled on an actual cash value basis, you may still make a claim for the additional coverage this Optional Coverage provides if you notify us of your intent to do so within 180 days after the loss or damage.¹

The ISO “Homeowners 3-Special Form” provides as follows:

e. You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss to buildings on an actual cash value basis. You may then make claim for any additional liability according to the provisions of this Condition C. Loss Settlement, provided you notify us of your intent to do so within 180 days after the date of loss.²

As one can see from reading both forms, there is no language requiring actual repair/replacement within 180 days of the loss as a condition to receiving replacement cost benefits.

Both forms are similarly worded, in that they state the insured can make a claim on an actual cash value basis instead of on a replacement cost basis and, in the event such a claim is made, the insured still can claim replacement cost benefits if it notifies the insurer within 180 days of the loss of its intent to claim such benefits. So, from my reading of both forms, the requisite 180-day notice must be given only if the insured initially makes claim on an actual cash value basis.

Not surprisingly, insurers have taken a different view, as discussed in Construction Systems, Inc. v. General Casualty Company of Wisconsin.³ There, General Casualty took the position that the insured was not entitled to receive a replacement cost payment for damage to certain machinery because it failed to notify General Casualty within 180 days of the loss that it intended to claim replacement cost benefits. The General Casualty policy was worded in the same manner as the ISO “Building and Personal Property Coverage Form” discussed above. Emphasizing the language that the insured may seek replacement cost benefits if it notifies the insurer of its intent to do so within 180 days after the loss, General Casualty argued that every replacement cost claim necessarily presupposes an actual cash value claim. Thus, according to General Casualty, the 180-day notice requirement was a condition precedent to receiving any replacement cost payment.

A Minnesota federal district court disagreed, reasoning that the first sentence of the provision undermined General Casualty’s argument. That sentence states that the insured may make a claim on an actual cash value basis instead of on a replacement cost basis. The district court concluded that the 180-day notice requirement attaches only to the circumstance in which the insured were to first seek actual cash value benefits and then later seek replacement cost value benefits. Because it was unclear from the record whether the initial claim was for actual cash value or replacement cost benefits, the district court denied General Casualty’s motion for summary judgment.

The district court’s analysis is spot-on in terms of interpreting 180-day notice requirement to receive replacement cost benefits. However, what constitutes making an actual cash value claim as opposed to a replacement cost claim? Under most property insurance policies, including the ISO “Building and Personal Property Coverage Form” and the ISO “Homeowners 3-Special Form,” replacement cost benefits will not be paid unless and until repair/replacement is completed, the insurer’s payment obligation being limited to actual cash value. So, is accepting an actual cash value payment before repair/replacement is completed making an actual cash value claim? I would say no, as the insured is simply accepting the contractual benefit owed at that time. In my opinion, an insured makes an actual cash value claim by electing to have the loss settled on an actual cash value basis, which is different than receiving an actual cash value payment before repair/replacement is completed.

Practically speaking, the 180-day notice requirement to receive replacement cost benefits should never be an issue. Most public adjusters I have spoken to have told me that their practice is to notify the insurer in writing well before the 180-day deadline (a) that the insured is making a replacement cost claim and (b) that the insured intends to repair/replace the damage to the insured property. Even if the insured is uncertain as to his or her future plans, I see no downside to giving such notice.
______________________________
¹ ISO Form CP 10 30 10 12 at page 15 of 16.
² Form HO 00 03 05 11 at page 14 of 22.
³ Construction Systems, Inc. v. General Cas. Co. of Wis., 2010 WL 11575518 (D. Minn., August 31, 2010).