Merlin – Replacement Cost Implications by Replacing at Another Location

Chip Merlin answers a question that has been on my mind of late in his post Replacement Cost Implications by Replacing at Another Location:

Replacement at the same location or repairing the same premises has been a frequent question posed by a number of clients. In many situations, clients of older structures in areas where it is not economically feasible to rebuild wish to replace in another location. They want to know if they can replace or repair with another structure at another location and whether they can obtain the holdback of the replacement cost benefits since the insurer generally pays only the actual cash value until the replacement is incurred. Fortunately, the FC&S Bulletins has the right answer to those questions and a Florida case provides a good example of the general law to this topic.

A New York subscriber to the FC&S Bulletins asked:

One of our insureds owns a building that was destroyed by fire. Instead of rebuilding it in the exact same location, the owner wants to move it to another part of the shopping center in which it was located.

The insurance is written on a replacement cost basis on commercial property form, CP 00 10 06 95. This form states that the insurer will pay the lesser of the limit of insurance, the cost to replace the structure on the same premises, or the amount actually spent to repair or replace the property.
Does this mean that the insured must rebuild on the same site in order to receive a replacement cost adjustment?

One of the benefits to subscribing to the FC&S Bulletins is the ability to ask such questions to the editors. As many that read my Blog, I am a big fan of the FC&S and endorse its product without any benefit to myself.

The Answer:

Your insured may rebuild the structure at another location, but the amount paid to do so will be no more than the cost to rebuild it at its original premises. In other words, it may cost $500,000 to rebuild the store at its present location, the policy limit may be $550,000, and the cost to rebuild it at the new location may be $525,000.

The insured will receive no more than the $500,000 that it would cost to rebuild it at the original location. In addition, if it would cost only $475,000 to build at the new site, the insured would receive only the $475,000—the amount actually spent to repair or replace the lost or damaged property.

It is interesting to note that the 2000 edition of the commercial property form CP 00 10 06 95 has dropped the wording referencing the “same premises.

A Florida case came to the same conclusion citing decisions from New York, California, and Washington. In Davis vs. Allstate Insurance Company, 781 So.2d 1143 (Fla. 3d DCA 2001) the Court held:

“[ R]eplacement cost under the ‘Guaranteed Replacement Coverage’ provision is measured by what it would cost to replace the damaged structure on the same premises.” Kumar v. Travelers Ins. Co., 211 A.D.2d 128, 627 N.Y.S.2d 185, 187 (1995). “[W]hen the insured desires to rebuild either a different structure or on different premises … the company’s liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises.” Conway v. Farmers Home Mut. Ins. Co., 26 Cal.App.4th 1185, 31 Cal.Rptr.2d 883, 885 (1994). “Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds.” Hess v. North Pacific Ins. Co., 122 Wash.2d 180, 859 P.2d 586, 588 (1993).

We agree with the courts in Kumar, Conway, and Hess, supra. The amount owed by the insurance company toward the purchase of a different home is measured by the amount necessary to repair damage to the insured property or to replace items that cannot be repaired. The insured should pay for any costs in excess of that amount.

The ability to purchase or repair at a different location is extremely important to many policyholders. This is one reason why adjusters must fully inform policyholders of this option. For obvious reasons, many restoration companies would rather the policyholder not know of this option.

4 thoughts on “Merlin – Replacement Cost Implications by Replacing at Another Location”

  1. In a maritime context, say under a policy of hull insurance, the insured may collect the lesser of the insured value of the vessel, or the cost of repair, assuming that the cost to repair does not exceed the insured value of the vessel. However, the insured is under NO obligation to actually repair the vessel or to purchase another vessel. I’m not necessarily giving a legal opinion, since I don’t have the contract in front of me, etc., but why shouldn’t the insured be free to do whatever he or she wants with his or her money? There may be some condition of lesser payment to the insured in a homeowner context if the insured chooses not to actually “replace” the destroyed building, but this would be considered a condition of the contract, and would only result in the insured receiving a lesser amount of money than “replacement cost”. Not replacing the building “in place” should not result in a “windfall” (no pun intended) to the insurer. One man’s “shooting-from-the-hip” opinion.

  2. A major reason the policy contract is written in this manner is to prevent fraud. As was pointed out, a person no longer chooses to rebuild at the insured premises as the neighborhood is no longer desirable. In these cases the market value is probably below the cost to rebuild. That scenario could motivate an insured to have, let’s say, a convenient fire.

    Also, the money is not the insured’s, it is the insurance company’s money. The clause is a very fair clause as the contract clearly states it insures the property at the insured’s premises and it only makes sense it should be rebuilt at that location. The insured has the option of taking the ACV and building wherever the insured desires.

  3. Sup, it’s only a fair clause when there has been a fair adjustment process with claims promptly paid – something we’ve not had in the hardest hit areas along the coast.

    Holding a policyholder to rebuilding while you withhold the money they need to rebuild is what we’re seeing in current cases…and we’re into the 5th year following Katrina.

    —and it is not the insurance company’s money…it is the policyholder’s premiums which the company has invested and grown.

  4. You tell ’em Ashton…YOU DO HAVE A GREAT LEGAL MIND! WE NEED MORE LIKE YOU – TOO BAD WE DON’T HAVE THEM!

    SHIRLEY HEFLIN

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