On August 27, 2020, a month ago, Hurricane Laura made a landing and caused catastrophic damage in southwest Louisiana and beyond. For those who stayed or were able to return quickly, it must seem much longer. Many of them may have been able to notify their insurance companies of their loss as soon as communication was restored. And soon the estimates of claims based on the insurer's investigation of their losses will seep in.
Many insured people have compensation cost coverage in their insurance policies. Compensation cost is defined in most policies as the cost of repairing or replacing properties with comparable materials or materials of the same type and quality. The policies do not define "comparable" or "similar type and quality." The industry standard is to replace damaged building materials that exist at the time of loss with the same material, if any.
However, most people outside the insurance industry do not know that compensation costs are generally not paid until after the actual replacement of damaged property. And further, that an insurance company is only required to pay a fair cash value before the actual exchange of damaged property is based on a jurisdictional method to determine the actual value of the property at the time of the loss.
According to Louisiana law, the method of determining fair cash value is replacement or reproduction costs less depreciation. 1
I Nguyen v St. Paul Travelers Insurance Company 2 the court in the eastern district of Louisiana agreed with the insured that the actual cash value is equal to the compensation cost value less depreciation and the compensation cost value must account for how Hurricanes Katrina and Rita affect delivery and labor costs, general expenses and profit costs.
The method used to calculate depreciation may affect the insurer's initial payment. Depreciation can be determined using a percentage deduction for physical deterioration, based on use, wear or age, taken from the compensation cost. The policyholders will receive cover letters and estimates from their insurance company and after applying the deductible and depreciation, they may find that they are extremely short in recovery funds and far from being made whole. Understanding the right methods for calculating compensation costs and depreciation is important to maximize the benefits of compensation cost policies and to determine the right amount of recoverable depreciation to be paid on compensation for damaged property. If you have questions regarding these calculations or other policy terms, we are happy to help you. Our prayers continue for a speedy recovery. Blessings to all.
1 See Hackman v. EMC Ins. Co. 984 So. 2d 139, 143 (La. Ct. App. 2008).
2 Nguyen v. St. Paul Travelers Ins. Co. No. CIV.A. 06-4130, 2007 WL 3275133 (E.D. La. 5 November 2007).