Terrey purchased replacement cost coverage in the amount of $193,000 on a historical building he wanted to restore. It was usable property as evidenced by the rent he received from his tenant. A fire in November 2000 damaged the building to the extent that it could no longer be occupied.

Rockford Mutual offered $80,000 in January 2001 to settle the claim. Terrey refused the offer. Rockford made a second offer in May 2001 for the policy limit to be paid when the property was repaired or replaced but only $69,874 as ACV until then. Terrey sued for bad faith in September 2001. Rockford paid $86,146 in March 2002, based on an independent contractor's estimate of ACV. Unfortunately, Terrey had to use that money to pay his creditors and did not have anything left to begin repairs to the building.

Terrey sued for full replacement cost and consequential damages and was awarded both. The court held that Rockford prevented Terrey from completing his portion of the contract by refusing to advance the fair ACV to him at the beginning of the project. Doing so would have enabled him to begin construction and eventually repair and replace the structure.

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Most coverage forms define replacement cost valuation as the cost to replace with items of like kind and quality. The property is not subject to any reduction for depreciation and the claimant essentially receives new for old. However, there is a catch. The coverage form states that this valuation applies after the fact. The item must first be repaired or replaced. It is only then that the insurance company is required to pay on that basis. The insured can choose to receive an initial ACV settlement to start repairs.

Click here to review an analysis of the replacement cost valuation in the Insurance Services Office (ISO) Commercial Property Coverage Form.

Once a loss occurs and the insured submits a claim to the insurance company, the insurance company controls the loss process. The claimant does not choose how a loss settlement will be made. The claimant also does not decide who will be paid or how much they will receive. The insurance company controls all payment options as long as it complies with the coverage form's conditions.

The Loss Conditions explain the exact amount of control the insurance company has during the claims process. The Loss Condition also explains what the claimant must do in order to comply with the coverage form's terms and conditions.

Click here to review an analysis of the Loss Conditions in the ISO Commercial Property Coverage Form.

The insurance coverage form is a promise. When a loss occurs, your client looks to you to keep your promise. While the insurance company makes the promise, you are the insurance company to your client. Effective communication is the key to maintaining your relationship with your client, regardless of how the claim is ultimately settled.

Business Building Letters has 10 letters you can use at different phases of the process.

Click here to review one you could send to explain a delay in payment.

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