Skip to Content

Replacement Cost Endorsement: What you need to know about your insurance policy

Written by: Sill Public Adjusters

Replacement Cost Endorsement: What you need to know about your insurance policy

Replacement cost endorsement is not an easy topic to understand when it comes to your insurance policy. People feel safe thinking their insurance will cover all their losses, but they shouldn't be so relaxed. e

Clients with replacement cost insurance often believe their claims are straightforward. However, our conversations with them uncover that their losses are actually intricate and demanding. Property owners strongly believe that their coverage requires them to pay for the cost of replacing something.

Is this true? Absolutely not . . . and on several levels.

Here is where public adjusters can help property owners deal with insurance claims.

A replacement cost policy does not guarantee that the insurance company will promptly pay to replace the damaged asset. This may come as a surprising revelation to policyholders who assume otherwise. Instead, the insurance company pays according to one of these three scenarios:

  • The cost to repair the item if that cost is less than the cost of replacing the item;
  • You only incur the replacement cost if and when you replace the asset. If the carrier does not replace the asset, they only need to pay the "actual cash value" (ACV) of the damaged asset. This situation leads to more significant problems.
  • Less than replacement cost, if other common policy language exists that limits recovery.

Repair versus replacement

Standard insurance policy language grants the property owner replacement cost coverage, stating that the insurance company “shall not be liable under this [replacement cost coverage] endorsement for any loss unless and until the damaged property is actually repaired or replaced by the insured using materials of like kind and quality with due diligence and dispatch.”

This endorsement means that the insurance company will cover the cost of repairs or replacement. The company will choose the cheaper option.

However, there is a condition. The insured must fix or replace the property within the time limit stated in the policy.

The insurance company will pay for repairs instead of replacing the damaged item if it is cheaper to fix it. The benefit to the insurance company is obvious, as the savings could be significant.

How does the insurance company establish the cost of repair or replacement?

The insurance company sends its own investigator to check the claim and explore all options in the policy.

The insurance company hires experts in various fields to create detailed documents supporting their stance. This can lead to paying less than the full cost of replacement or policy limits, depending on the situation. Depending on the situation, you might pay less than the total replacement cost or policy limits.

When people ask for estimates or bids, they often find that prices can vary greatly, from the lowest to the highest. No difference exists in the construction and insurance arenas.

So, what estimate will the carrier use? The estimate prepared by its adjuster will often benefit the insurance company.

The insurance company does not typically protect the insured's best interests, which is clear. The insurance company does not protect the insured's best interests.

This occurs when the insurer assigns its own adjuster and selects an estimate that benefits them. This can happen even when there are other estimates available.

This is not good for the insured. The insured is the person who owns a business or home. They believed the insurer was there to help them. The insurer provides financial protection in case of damage.

Clearly, a property owner would be better off hiring a claims expert to represent their best interest.

A public adjuster can assess damages and fight for the rightful amount based on the policy's coverage.

RELATED | What is a public adjuster?

We often compare this to filing a tax return.

If a property owner allows the insurance company alone to assess the damages and propose a settlement amount, is that not similar to allowing the IRS to prepare your tax return and assess your tax bill?

That is why all businesses and many individuals hire accountants to assess their tax liability.

To accurately assess damages, we recommend that an insured person hires their own experienced professional advocate. This advocate will be responsible for preparing an estimate of damages.

To accurately assess the insurance company's offer, a thorough investigation and detailed appraisals of the loss are necessary. Without these, it is difficult to determine if the offer is fair or accurate.

Working with their own public adjuster gives insured persons a strong position when preparing and documenting a claim. As a result, the insured person's claim obligates the insurance company's adjuster to respond. The insurance company's adjuster then has to respond to the insured person's claim.

Settlement procedures—another reason taking the offensive is vital to a fair recovery.

The insurance company determines the actual cash value of the estimated damage. This happens after the property owner has resolved their claim based on the cost of replacing the damaged item.

RELATED | Understanding the legal aspects of property insurance claims

Different jurisdictions utilize different tests or definitions of ACV. Carriers often calculate the decrease in value of the damaged item. They then subtract this decrease from the replacement cost. This helps them find the actual cash value.

There is no scientific method for determining or calculating depreciation. Without a professional, the insurance company determines the depreciation value.

The insurance company only has to pay the actual cash value if they don't fix or replace the damaged thing. Having a fair and maximum replacement cost is important for an insured person. Even if you replace the damaged item, this remains true.

The carrier cannot give any money to the insured until they finish the whole process and agree to pay. Having a knowledgeable third-party adjuster is important.

They can assess and determine the value of the replacement cost, depreciation, and actual cash value. This will help ensure a fair and prompt initial payment. This will help ensure a fair and prompt initial payment.

Then, if and when an insured replaces the damaged asset (assuming the carrier agrees that the replacement is of “like kind and quality” and also has been done in a timely period as required under the policy), it will be necessary to submit documentation to the carrier to support the cost of repairs/replacement and recover the appropriate amount of depreciation withheld.

Proving an insured person's claim for more money than the actual cash value is challenging. It is not suitable for those who are easily scared or inexperienced. You may encounter problems when identifying costs that insurance can cover, code upgrades, additions and improvements, and similar quality. Also, we may need to examine the costs that can change to decide the right amount to recover for replacing something.

Policy language and its effect on replacement

Even if the policy covers replacement costs, the insurance company may not fully reimburse the insured. This means that the insured may not receive the entire amount spent on replacement. Insured must follow current codes and ordinances when rebuilding or repairing. However, most basic policies exclude coverage for costs associated with upgrades because of codes or ordinances.

Most policies also establish limits on the costs that may allow for debris removal. Today’s insurance policies also limit or completely exclude recoveries for mold damages, asbestos remediation, and pollution cleanup.

Many policies have a coinsurance clause, which is a confusing topic in insurance that we will discuss later. A requirement exists that requires adequate insurance, or a penalty may be incurred when a claim occurs. The penalty percentage is equal to the percentage that compares the insured's underinsurance to the actual replacement cost.

If a property owner is underinsured by 30%, the insurance company will pay the claim amount minus 30%. Hardly the full replacement an insured expected!

Another consideration is the amount spent (or not spent) to mitigate the damages after the loss.

The insurance company might not pay for the damage if they think the repair cost is too high or unnecessary. To minimize the damage, the insured individual must take prompt action. The insured person needs to act quickly to reduce the damage. On the other hand, if the adjuster feels an insured did not act promptly or do what was expected to preserve the property, approval may not be granted for payment of the resulting damages caused by the insured’s inactivity.

Professional representation

To ensure a fair settlement, it is crucial for the insured person to hire a skilled public adjuster. These professionals have expertise in interpreting policy terms, preparing and presenting the claim, and negotiating with the insurance company.

Relying solely on the insurer's adjuster may not result in a satisfactory outcome. They have expertise in interpreting policy terms, preparing and presenting the claim, and negotiating with the insurance company. Relying solely on the insurer's adjuster may not lead to a satisfactory outcome.

Sill Public Adjusters is the leading public adjuster firm in North America. We represent property owners throughout North America.

Our staff includes personnel qualified in building reconstruction, contents and equipment appraisal, accounting, and property insurance claim adjusting. Our services include total claim preparation and adjustment discussions with the insurance company’s representatives.

Our goal is to assist you every step of the way when you file a claim. Hiring a public adjuster means you have an insurance expert on your side during the claims process.

At Sill, we specialize in large homeowners insurance claims, commercial property claims, and business interruption claims. We offer insurance claim help for those who don't want to take on the insurance company by themselves.

Consider discussing the details with us if you face a major property insurance claim. We can review your policy and offer advice without commitment or cost. Speaking with a knowledgeable public adjuster immediately after the incident can help you make informed decisions. These decisions can significantly impact the amount of money you receive for your claim.

Our team is available 24/7 at 844.650.7455.