What Replacement Cost Means in Your Policy

All homeowners' policies should provide coverage for the full replacement value of the loss. The purpose of homeowners insurance is to put the homeowner back in the position they were in before the hazard such as fire or water damage occurred. The homeowner will not be able to rebuild their house from the proceeds of the insurance policy if the policy only pays actual cash value. This is because actual cash value is not the same as replacement cost.

Actual cash value is determined after deducting a reasonable allowance for depreciation. That is, an allowance for the fact that before the loss, the property was not absolutely new and had been diminished in value by age or other conditions. Simply, actual cash value is equal to replacement cost less depreciation. 

A replacement cost policy will add depreciation back to the coverage such that the money received under a replacement cost policy is absolutely equal to what it will cost to put the dwelling back in the condition it was before the loss. Of course, whatever deductible that applies to the policy will be subtracted from the check written to the policyholder.

One of the most frustrating aspects of total replacement cost coverage is what is commonly referred to as a "hold-back provision" in the policy. Under this provision, the insurance company will not pay an amount equal to depreciation to the policyholder until the dwelling is actually repaired or replaced.

Under the terms of all policies, the actual cash value must be paid immediately whether or not the property is repaired or replaced. However, if the policyholder elects not to repair or replace the damaged dwelling he can never collect for the actual cash value. 

This places the policyholder in a catch-22 position. Under no circumstances will they receive money from the insurance company to pay for the cost of repairs over and above the actual cash value until such time that the property is actually repaired or replaced.

So where does the money come from?

This situation is especially burdensome for the policyholder if, as is usually the case, the actual cash value is paid to the holder of the mortgage which is secured by the dwelling. If the policyholder does not have sufficient funds separate and apart from the proceeds of the insurance policy with which to repair the home, how will the home be completely repaired? 

In this situation it is necessary to have an understanding contractor who is willing to wait for payment until the repairs are complete. Most contractors will work with a homeowner in this situation. However, before negotiating with the contractor for repair of property, you should be sure that you have this understanding with the contractor. Otherwise, you will never be enough money to pay for a complete reconstruction or rebuilding of the dwelling. If you're in a situation where your insurance company denied your claim or is not compensating you appropriately per the terms in your policy, contact an insurance dispute attorney at Brent Adams & Associates to discuss your claim. Our insurance dispute lawyers in Raleigh, Dunn and Fayetteville know the state and federal laws that govern insurance companies and have years of legal experience with insurance company jargon.