ISO HO 2000 SPECIAL HOMEOWNERS COVERAGE FORM ANALYSIS HO 00 03 10 00
3. Loss Settlement
In the HO 2000 edition of the Special Form policy, the loss settlement condition was revised to explain that any mention of replacement or repair cost does NOT include any expense created by any ordinance or law. The only exception is the coverage described under Additional Coverage 11. Ordinance or Law. In light of this clarification, covered property losses are settled in the following manner:
a. The following types of property are paid at actual cash value at the time of loss but not more than the amount required to repair or replace:
(1) Personal property;
(2) Awnings, carpeting, household appliances, outdoor antennas, and outdoor equipment, whether or not attached to buildings;
(3) Structures that are not buildings; and
(4) Grave markers and mausoleums.
Note: Grave markers and mausoleums are newly added items to this condition.
Actual cash value is generally considered to be the replacement cost of the item minus depreciation.
Example: Vanisha Clayman has a ten year old sofa that is destroyed in a fire. The insurance company considers the fact that the sofa originally cost $4,560, but offers to settle the loss at $372. When Vanisha complains that the settlement is so much less than the original price, the company explains that she did not lose a new sofa, but a piece of furniture she had been able to use for its entire product life. The insurer explained that its offer reflected the loss of value due to age, wear and tear, etc.
b. Dwellings and other structures are covered at replacement cost without deduction for depreciation. However, any payment would be conditional upon the following:
(1) At the time of loss, if the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, the insurance company will pay the cost to repair or replace, after application of deductible and without deduction for depreciation. In no case will the insurance company pay more than:
(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; or
(c) The necessary amount actually spent to repair or replace the damaged building.
The HO 2000 edition of the Special Form policy clarifies that it does not matter if the covered property is rebuilt at a new location. Such a move would be considered inconsequential to the operation of the policy settlement. The payment under the policy would be limited to the maximum eligible cost that would exist if damaged property were rebuilt at its original location. The additional cost would belong to the policyholder.
(2) At the time of loss, if the insurance applicable to the damaged building is less than 80% of the building’s full replacement cost (before the loss), the insurance company isn’t obligated to pay more than the limit of insurance under the policy; further, the insurer is limited to paying the greater of:
(a) The actual cash value of that part of the building damaged; or
(b) That proportion of the cost to repair or replace, after application of deductible and without deduction for depreciation of the part of the building damaged, which the total amount of insurance in this policy on the damaged building bears to 80% of the replacement cost of the building.
(3) To determine the amount of insurance required to equal 80% of the full replacement cost of the building immediately before the loss, do not include the value of:
(a) Excavations, foundations, piers, or any supports which are below the undersurface of the lowest basement floor;
(Note that the HO 2000 edition of the Special Form policy adds footings and similar building supports to items that must be subtracted from any consideration of a covered property’s replacement cost.)
(b) Those supports in the above which are below the surface of the ground inside the foundation walls, if there is no basement; and
(c) Underground flues, pipes, wiring, and drains.
The insurance company will pay no more than the actual cash value of the damage until actual repair or replacement is complete. Once actual repair or replacement is complete, the insurance company will settle the loss according to the provisions discussed above. If, however, the cost to repair or replace the damage is less than 5% of the amount of insurance in this policy on the building and less than $2,500, the loss will be settled according to the provisions listed above, regardless of whether actual repair or replacement is complete.
An insured has the option not to worry about replacement cost loss settlement provisions and ask that his or her loss or damage to buildings be settled on an actual cash value basis. However, if the “insured” changes their mind, they have up to 180 days from the date of the loss to ask for any additional amount due according to a settlement based on the replacement cost. If the insured misses this 180 day window, the actual cash value settlement basis is their only reimbursement.
This condition emphasizes the point that it is very important to accurately document the replacement cost of the covered property. Property that doesn’t comply with the Special Form policy’s replacement costs provisions is subject to a tedious and complicated settlement process.
ISO BUSINESSOWNERS POLICY COVERAGE FORM ANALYSIS – Part B
6. Loss Payment
a. The company will have the following options for the payment of any loss:
pay the value,
pay the cost to repair or replace,
rebuild with like kind and quality (except that no increased cost because of the enforcement of an ordinance or law is covered) to the extent practicable and within a reasonable time,
or, take any part of the property (for salvage) at the agreed or appraised value.
Example: If it will take an additional six months to replace the XYZ printing press with another XYZ printing press, and an equivalent FGH machine tool is immediately available. The company may pay only for the FGH press. Further loss or expense as the result of the insured insisting upon the replacement with an XYZ press may not be covered.
b. The insurance company must give the named insured notice of intent on how the named insured will be paid within 30 days of the receipt of a properly prepared and duly executed sworn proof of loss.
c. The named insured will not be paid for more than "the named insured’s" financial (insurable) interest in the property damaged.
Example: When the named insured relinquishes title, they no longer have insurable interest unless they are a lien or mortgageholder.
Example: A building in which the named insured shares an undivided 50/50 interest with another partner not insured by this policy burns. "The named insured’s" financial interest is 50% of the final loss payment.
d. (1)(a) Replacement cost valuation applies ONLY when, at the time of the loss, the Limit of Insurance is 80% or more of the full replacement cost of the property. Replacement cost is limited to the smaller of:
the Limit of Insurance,
the cost to repair or replace the damaged property on the same premises with other property of comparable material and quality and used for the same purpose,
or, the amount actually spent to repair or replace the policy.
If the decision is made to build on a premises other than the described premises, the cost is limited to the expense of rebuilding at the described premises.
Example: The policy for Marv’s Hunting Shop was written 10 years ago with a limit of $150,000. Every year it has been renewed with a modest 4% increase, so that the current limit is $$222,000. A fire destroys the building and the appraiser determines the replacement cost is $225,000. Since Marv has kept up the replacement cost increases, there is full coverage available for the loss.
Example: Marv has been noticing that the zip codes of most his customers are about 5 miles away from his current location, so he decides to rebuild closer to the customer basis. The cost will add about $10,000 to the rebuilding cost. The insurance company will not cover the $10,000.
Example: Marv rebuilds and the cost is $225,000 plus the $10,000 increase due to new location. The insurance company pays $222,000 – the limit of the policy.
d(1)(b) If the Limit of Insurance is inadequate for replacement cost coverage, the greater of the following will be paid: the actual cash value (replacement cost at the time of the loss less depreciation); or the proportion of the Limit of Insurance after the deductible and without depreciation as it relates to 80% of the cost to repair; or the amount actually spent to repair or replace the damaged property - all subject to the Limit of Insurance.
Example: Marv’s Hunting Shop mentioned above had an agent who always requested that the policy be renewed "as is." After 10 years Marv was still carrying $150,000 coverage on the building. After the fire, Marv was a little dismayed with the coverage. The appraised value of the property was $225,000. In order to have replacement cost coverage, Marv would need to have a $180,000 limit. Since he is underinsured, he will have to accept either Actual Cash Value or 80% of the cost to repair the property. The 80% is $180,000 and, since that is greater than the limit of insurance of $150,000, Marv will receive the policy limit IF HE REPAIRS or REPLACES. Unfortunately, Marv may not be able to rebuild and, in that case, would only receive the Actual Cash Value.
d(1)( c) The decision can always be made to not rebuild right away and just accept the actual cash value settlement. However, if the named insured plans to rebuild, he must notify the company within 180 days after the loss.
d(1)(d) Payment is not given under replacement cost valuation until the property is repaired or replaced. The one exception is when the loss is less than $ 2,500. In that case settlement will be made prior to completion.
d(2) The named insured can exercise the option to have the policy issued on an actual cash value basis by so indicating on the declarations page.
d(3) The following property is covered on an actual cash value basis:
Used or second-hand merchandise held in storage or for sale;
Property of others unless there is a contract which specified the insured’s liability for the items. Then valuation is based on the contract but not to exceed the lesser of the replacement cost or the limit of insurance;
Household contents except personal property in apartments or rooms furnished by you as a landlord;
Manuscripts;
Works of art, antiques or rare articles, including etchings, pictures, statuary, marbles, bronzes, porcelains, and bric-a-brac.
Used items that are not quite antiques can still be more valuable than their actual cash value. Fine arts will require special coverage. Please refer to PF&M Section 153.4-1, Commercial Fine Arts Coverage, for information on how to insure fine arts and other uniquely valued business property.
d(4) Glass is covered for the cost of replacement with safety glazing material when required by law. This is the only standard ordinance or law coverage in the BOP.
d(5) Tenants' improvements will be valued at replacement cost if repaired promptly and at the named insured’s expense.
Tenants' improvements that are not replaced after a loss are valued as a pro-rata portion of original cost as it bears to "the named insured’s" current lease. The formula involves dividing the number of days between the date of loss and the end of the lease by the number of days from the date of the installation to the expiration date of the loss, multiplied by the original cost of the tenants' improvements. (If the lease has a renewal option, use the last date in the option as the new expiration date.) If repairs are made at the expense of others, there is no payment under this policy.
Example: A loss occurs on the 200th day of a one-year lease. Improvements of $5,000 were made on the first day of the lease. There is no lease renewal option. 365-200 = 165 days remaining in the lease. There are 200 days between the date of installation (day 1) and the date of loss. 165/200 = .825 (percentage of remaining lease). .825 x $5,000 = $4,125, which is the amount of loss payment before the application of any deductible.
d(6) Valuable papers and records including paper, disks, tape, or other electronic media will be valued on the cost of blank materials for reproducing the records and the labor to transcribe or copy the records.
Example: Blank disks cost $100. It takes 3 hours of labor at $10 per hour to load tape backups onto the computer. Total payment is $130 before the application of any deductible. Pre-packaged software will be valued by the same replacement cost/actual cash value formula discussed in (1) above.
d(7) Optional coverages have their own valuation schemes.
"Money" is valued at its face value. Numismatic property, such as old coins or gold coins that are traded, not based upon face value but gold content, will only be adjusted for loss based upon their face value. There is no standard BOP endorsement that will provide coverage for collections or gold coins. Extensive gold holdings will need special coverage. For information on personal collections, please refer to PF&M Section 430.10, Stamp and Coin Collection Insurance.
If the gold or silver coin is held within a bank safe deposit box, check with the banks for limits on coverage. If held with a gold or silver broker, check with the broker on available coverage. Few insurance companies provide endorsements or separate policies for gold or silver investment coins.
The value of "Securities" are determined at the closing price at the close of business on the day the loss is discovered.
Example: The bearer bond is valued at $100 on the date of loss — 1/1/03. At the time the loss is paid, the class of bonds trades at $65 per bond. $100 per bond is paid.
Example: The bearer bond is valued at $100 on the date of loss 1/1/03. At the time the loss is paid, the class of bonds trades at $125 per bond. $100 per bond is paid.
d(8) For accounts receivable only:
(a) Whenever the insured is unable to accurately establish the amount of accounts receivable that is outstanding at the time of loss, the insurer will determine the total of the average monthly amounts for the last 12 months immediately preceding the month that the loss occurred in. The insurer will also adjust that total for any normal fluctuations that usually occur, based on any demonstrated variance from the average for that month.
(b) Certain amounts will be deducted from the total established in (8) (a) above. The items that will be deducted include any amount for which there has been no loss or damage; the amounts of the accounts the insured is able to re-establish or collect; the amount for probable bad debts the insured is normally unable to collect; and any unearned interest and service charges.
e. Payment for loss or damage to personal property of others will only be for the account of the owners of the property. The company will adjust the loss with the owners, and if the owners of the property are paid by the company, then this will satisfy "the named insured’s" claim against the company for property of others. The company will not pay more than the owner's financial interest in the property.
f. If the owner of the property sues the named insured, the company can defend the named insured if they wish and any defense is at the company's expense.
Example: The customer's riding lawn mower is in for repairs the same time that the named insured’s building burns to the ground. The insurance company offers and pays $1,000, the actual cash value it is required to pay. The customer is not happy and demands an additional $1,000 and sues the insured. The company will probably not pay the additional $1,000, but if they wish to defend the named insured, they will do so at their expense. The named insured cannot pursue the company for more "money." The named insured will have to pay the difference out of the named insured’s own policy.
A bailees policy can often provide broader coverage. For more information, please refer to PF&M Section 130.6-17, Property of Others. It may also be helpful to refer to PF&M Section 142.2, Bailees Customer Policy. There is no standard bailees form and each company will have different requirements. For information on various bailee markets, look for Bailees Customers' Insurance in The Rough Notes Company, Inc., publication of THE INSURANCE MARKETPLACE.
g. The company has 30 days to pay the named insured after receiving the sworn proof of loss from the named insured provided they have complied with all policy terms and everyone has come to an agreement on the amount of payment or an appraisal award has been made.
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