QWe would like your assistance in clarifying the word "Special." When an insurer sells a product, an insurance contract, such as the DP-3 or HO-3, with the word "Special" on it for a homeowners or mobilehome policy, it is our understanding that this form is replacement cost. Is this accurate? Can you supply us proof for the same?
--CARL ARNAL, P.A., Saguaro Public Adjusters, Inc., Tucson, Arizona
When used with property insurance, the term "Special" is most often used in connection with the perils or causes of loss covered by the insurance contract and has no relationship to the valuation methods used in determining the amount or payment of loss.
In HO 00 03, the causes of loss or perils insured against are on a "Special" basis which means the insurance provides coverage against risk of direct physical loss to the described, covered property. All perils or causes of loss are covered unless specifically excluded. This is the common property/casualty meaning of the term "Special."
As to the valuation method and your question on replacement cost coverage, often "Special" homeowners policies offer some degree of replacement cost coverage, at least for the building. You must read your policy conditions and provisions carefully. In certain cases, the replacement cost is a built-in or automatic coverage--when specified conditions are met, while in others, it is an optional coverage that may be selected instead of actual cash value.
Looking again to the treatment of replacement cost coverage in the HO 00 03, we must look under the Loss Settlement Condition.
Loss Settlement--Covered property losses are settled as follows:
The following types of property are paid at actual cash value at the time of loss but not more than the amount required to repair or replace:
* Personal property;
* Awnings, carpeting, household appliances, outdoor antennas, and outdoor equipment, whether or not attached to buildings; and
* Structures that are not buildings.
Please note: The actual cash value is the replacement cost of the item minus depreciation. If the insured has a 10-year old sofa that is destroyed in a fire, the insurance company won't just write out a check for the value of a new sofa. If they did that, the insured would actually come out ahead. The purpose of insurance is to make the insured whole again or to bring the insured back to where the insured was before . . . not make things better.
Buildings that are listed under dwelling coverage (Coverage A) or other structures coverage (Coverage B) are covered at replacement cost without deduction for depreciation, if the following conditions are met:
At the time of loss, if the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, the insurance company will pay the cost to repair or replace, after application of the deductible and without deduction for depreciation. In no case will the insurance company pay more than:
* The limit of liability under this policy that applies to the building;
* The replacement cost of that part of the building damaged for like construction and use on the same premises; or
* The necessary amount actually spent to repair or replace the damaged building.
At the time of loss, if the amount of insurance in this policy on the damaged building is less than 80% of the full replacement cost of the building immediately before the loss, the insurer will never pay more than the limit of liability under this policy but the insurer will pay the greater of the following amounts:
* The actual cash value of that part of the building damaged; or
* That proportion of the cost to repair or replace, after application of the deductible and without deduction for depreciation of the part of the building damaged, which the total amount of insurance in this policy on the damaged building bears to 80% of the replacement cost of the building.
To determine the amount of insurance required to equal 80% of the full replacement cost of the building immediately before the loss, do not include the value of:
* Excavations, foundations, piers, or any supports which are below the under surface of the lowest basement floor;
* Those supports in the above which are below the surface of the ground inside the foundation walls, if there is no basement; and
* Underground flues, pipes, wiring, and drains.
The insurance company will pay no more than the actual cash value of the damage until actual repair or replacement is complete. Once actual repair or replacement is complete, the insurance company will settle the loss according to the provisions discussed above. If, however, the cost to repair or replace the damage is less that 5% of the amount of insurance in this policy on the building and less than $2,500, the loss will be settled according to the provisions listed above, regardless of whether actual repair or replacement is complete.
An insured may disregard the replacement cost loss settlement provisions and make claim under this policy for loss or damage to buildings on an actual cash value basis. The "insured" may then make claim within 180 days for any additional liability that is incurred.
Please note: Reading over the above paragraphs emphasizes the point that it is very important to do a professional assessment of the replacement cost of the property. Many agents rely on their clients to tell them how much insurance is on the house currently. What if it is underinsured? Each home insured should have an evaluation done to determine the proper amount for which it should be insured.
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