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Compensation cost policies were originally illegal due to concerns about fraud and arson | Property Insurance Law Team Blog



The typical property insurance that allows replacement cost assessment today is often taken for granted. One hundred years ago, the product was commercially unavailable. Concerns about encouraging the policyholder to commit fraud and arson were a primary concern for not allowing the replacement cost product to be sold.

An excellent legal review article from the University of Pennsylvania from 1948, An insurance that provides compensation for fire Damaged structures with new materials discussed the change from “fair cash value” to the newer “replacement cost” forms in its introduction:

“In the broadest sense, all property insurance is a ̵

6;compensation insurance’, as it helps the insured to rebuild or replace their property. With one exception, the fire insurance contract has in theory been one of pure ‘compensation’. Therefore, in the ordinary case, if the insured’s fifty – year – old house is destroyed by fire, he is entitled to sufficient money to rebuild his property with fifty – year – old material. an amount representing depreciation caused by wear and tear on the property before the fire, and sometimes an amount representing “obsolete”. In any case, the resulting figure must not exceed the insurance on the property. it insured the amount of money required to rebuild its property with new material of a similar nature and quality, without deduction for depreciation, if he has sufficient insurance. Logically, this can be achieved through a change in the provisions of the insurance itself, or through a supplementary agreement to the insurance where the insurer agrees to include a depreciation deduction in the loss payments. Since 1946, several state legislators have approved compensation insurance. ” In at least one state, and without legislation, it has been approved by the state insurance department. The purpose of this note is to examine some of the legal issues created by indemnity insurance, and to determine the motivation and necessity of this coverage. “

In many states, it was illegal to sell property insurance. The property insurance product has changed significantly in a fairly short time.

In many states, laws had to be changed in order for the product to be sold:

A comparison of authorized indemnity insurance regulations sheds some light on the philosophy behind this type of coverage. Because there may be some incentive to arson in a “new to old” provision, more cautious jurisdictions have limited protection to factories, government buildings, public and private institutions, and buildings used for mercantile purposes if a sprinkler system is maintained. Only Massachusetts extends coverage to personality, but limits this to tools used in connection with the business. Others cover all real estate. Flexibility in issue guarantees seems to be preferred; In fact, more moral hazard seems involved in the case of some commercial real estate than in the home. Conversion is uniformly a condition for payment of compensation costs. No difficulties should lead to, as the insured should be able to get credit by having an insurance policy. Reconstruction also seems essential to measure recovery. If the insured is not rebuilt, he recovers according to the ordinary “compensation insurance”. The property is generally required to be rebuilt on the same premises, although Massachusetts has a special compromise clause that allows insureds and insurers to agree on any location within the Commonwealth. Some statutes are silent about the limitation of the time for rebuilding; second, set a period of one or two years. This will be clarified by the provisions of the inscriptions themselves. A time limit seems necessary due to changed price levels, because the insured recovers on the basis of the amount he actually spends. South Carolina has produced a strange mix by following its “valued” policy concept; in that state, the insured will regain his depreciation insurance ”. . the difference between the fair value stated in the insurance and the actual amount spent. . . ”

The point of today’s post is that compensation cost policies were not historically available. In fact, they were illegal in most states and required legislative and regulatory changes so that they could be sold. There was a concern that because the policyholder got new too old and got a better financial position, some would commit fraud. Since most of the insurances only covered the fire risk at that time, incentives for arson were a major problem when insurance companies were allowed to sell compensation costs.


Today’s thoughts

“Progress is impossible without change, and those who cannot change cannot change anything.”

George Bernard Shaw


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