E. Loss
Settlement
The settlement provision
of the DP 00 03 policy depends upon the class of property that suffers a loss.
1. Settlement
on damage to:
- Personal property
- Awnings, carpeting, appliances, outdoor antennas
and outdoor equipment, and
- Structures that are not buildings
If items such as the
above covered property are damaged, the loss is settled at actual cash value at
the time of loss. However, the settlement will not be more than the amount necessary
to repair or replace the property.
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Example:
Your client has a ten-year-old sofa that is destroyed in a fire. The
insurance company discovers that the same model costs $1,700 today. However,
they consider the age and information from the insured about its condition,
stains, etc., and determine that its actual cash values is
only $319 and that is all that will be offered.
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Remember, the purpose of
insurance is to restore an insured to approximately the same position they
enjoyed before the loss. Without this provision, an insured whose loss was
based on new or replacement value would be financially enriched by a loss.
2. Settlement
on damage to dwelling and other structures:
Loss settlement for this
type of property is more complicated. If such property is damaged, settlement
may be based on replacement cost (where no deduction is made for depreciation).
However, the use of replacement cost is conditional upon the following:
The limit of insurance
written on the damaged property must equal at least 80 percent of the
structure’s full replacement value.
Although the loss is
settled according to replacement cost, the maximum to be paid under the policy
is the least expensive among the following:
- The limit of liability shown on the declarations for the covered
property
- The replacement cost of the portion of structure damaged (using
similar materials)
- The amount necessary to replace or repair the damaged structure
Regardless the option,
there will be a deduction for the policy deductible.
The settlement is
different when the limit of insurance at the time of loss is less than 80% of
the structure’s full replacement value. Under this circumstance, the policy
will pay the greater of:
- The actual cash value of the damaged structure
- The proportional replacement cost value of the damaged structure.
The proportion is based upon the relationship between the actual percentage represented by the limit of insurance to the 80% required to
trigger full replacement cost coverage.
IMPORTANT: The loss payment will still subtract the deductible and it will be no
more than the actual limit of insurance.
In
order to determine the amount needed to meet the 80%
of full replacement cost requirement, only include the value of the structure
that is above the structure’s foundation walls or the lowest basement floor,
whichever is applicable.
Only actual cash value of
the loss will be paid unless one of the following applies:
a. the damage is fixed
b. the loss amount is less than $2,500 AND less than 5% of the limit of
insurance.
Finally, the policy owner
has the right to have the loss settled on an actual cash value basis and has up
to 180 days (from the loss date) to make claim for any additional amount on a
replacement cost basis.
