Understanding the Insurance Replacement Cost Coverage Endorsement
This endorsement provides Replacement Cost Coverage, describing the stipulations and conditions for application. Virtually all policies contain the following language.
“The Company shall not be liable under this endorsement for any loss unless and until the damaged or destroyed property is actually repaired or replaced by the Insured with due diligence and dispatch.”
After you have prepared, presented and negotiated your claim with the insurance company and a replacement cost loss has been determined for the building, a rate of depreciation must be established between the involved parties. The insurance company will deduct the agreed rate of depreciation from the agreed replacement cost loss and pay the actual cash value loss.
If and when you repair or replace the property, it will be necessary to submit documentation to support the cost of repairs. Substantiating your claim for withheld depreciation can be involved and complicated. There may be issues involving the identification of insurable costs. Code upgrades, additions and improvements and variable costs to the original agreed figures may need analysis for purposes of determining recovery of withheld depreciation.
An Insurance Replacement Cost Coverage Endorsement Example
Agreed building repair cost $100,000 less 30% depreciation (rate of depreciation is negotiable and open to differences of opinion) = $70,000 actual cash value loss.
In the above example, you would be entitled to collect an actual cash value loss of $70,000 from the insurance company. Should you replace or repair the damaged property — and considering the cost exceeds the actual cash value loss of $70,000 — you would submit invoices and documentation to the insurance company in order to recover withheld depreciation. Withheld depreciation recovery is based on the difference between the cost of restoration and actual cash value payment, but in no event can you collect more than the amount of withheld deprecation. In the above example, to collect the full amount of the withheld depreciation, you would need to substantiate renovation costs in the amount of $100,000 or more.
If for any reason, the property is not restored, or your expenditures are less than the $70,000 actual cash value loss payment, you would not have a claim for withheld depreciation.
The same procedures apply to the recovery of depreciation on contents coverage. There is a possibility that the claim for withheld depreciation would be analyzed on even a more itemized basis than the building claim.