In his blog on August 10, 2021, Chip Merlin discussed the latest FC&S Bulletin on the relationship between compensation cost recovery and the increase in construction costs. For the sake of this discussion and to better understand the importance of the FC&S bulletin, I suggest you read his blog post, Can you get paid more for your insurance claim when prices rise after a loss?
The primary investigation was whether the Insured is entitled to cost increases after the loss date according to an insurance that provides compensation cost coverage. In FC&S Bulletin this issue was addressed as follows:
The policy states that when the repair is completed it will not pay more than at least of the policy, costs for repair or compensation of a similar nature and quality, or the amount actually used to repair or replace damaged property. This indicates that what the cost is at the actual repair time, not the date of loss, is what is paid out. Nothing in the policy relates to payment to costs incurred in the loss ; payment is made when it is made, to the running costs then. (emphasis added). 1
As this statement indicates, nothing in the policy relates the measurement of damages to the loss period. But what provisions that are usually included in insurance insure this interpretation / opinion?
We must first consider the standard policy that describes the actual cash value, which is generally found in the definition section. A typical definition of the actual cash value gives:
"Actual cash value" refers to the cost of repairing or replacing protected property, in case of loss or damage regardless of whether the property has suffered partial or total loss or damage, with materials of a similar nature and quality, subject to deductions for deterioration, depreciation and obsolescence in our opinion. (Emphasis added).
This standard definition specifically limits the measurement of the actual cash value to the loss period. This type of restrictive language is especially lacking from similar provisions that describe the replacement cost value in most policies. An example of that language is the following:
[W] e will pay the cost of repair or compensation, after deducting the deductible and without deduction for depreciation, but not less than the following amounts:
(a) Limit of liability according to this policy applicable to the building;
(b) the cost of repairing the part of the building damaged for similar construction and use in the same premises; or
(c) the amount actually spent on repairing or replacing the damaged building.
Provisions (a) – (c) provide limitations on payment included in the insurance. As FC&S Bulletin correctly points out, this language omits the limiting provision "date of loss", which gives a simple conclusion: the policy clearly stipulates that the cost is determined at the actual repair time, and not the date of loss. This includes any cost increase that may occur based on a change in market conditions.
This topic has become increasingly relevant over the past year. The significant increase in basic construction costs has led to reliance on rapidly obsolete and grossly inadequate Xactimate prices. As this situation becomes more common, it is important that those who advocate on behalf of policyholders emphasize the position stated in the FC&S Bulletin regarding the cost increase: "paid when it is made, at the costs incurred then. ”
1 Christine Barlow, CPCU. This week's questions and answers about insurance: loss settlement and increased costs . August 9, 2021. Available at https://www.nuco.com/fcs/2021/08/09/insurance-qa-of-the-week-loss-settlement-and-increased-costs/ (subscription).