Q We are in the process of selling coverage to a risk. The risk has one building. The requirements are to have both an agreed value amount (to eliminate coinsurance) and replacement cost.
The insurance carrier indicates that we cannot have both agreed value and replacement cost applicable at the same time for this building. We are using ISO Form CP 00 10 06 95.
ANGEL T. CASTRO
A We have checked the ISO eligibility rules regarding agreed value and the coverage form itself. The only property not eligible for agreed value is that property--real or personal--that is written on a reporting form basis or as a builders risk. We could not locate any section or rule in the manual stating that replacement cost cannot be written with agreed value.
Without having a chance to question the insurer, it would be difficult to determine the line of reasoning, but we will try to offer some things to think about.
When the agreed value coverage is used, the coinsurance condition is waived because the value has already been established. Both the insured and the insurer have reviewed and have set a fair and reasonable limit of insurance based upon an established value of the property. That limit is agreed to upfront by both parties, so no coinsurance is necessary. Replacement cost coverage would also be unnecessary if all losses were total losses. But all losses are not total losses; in fact, most losses are partial losses.
So, how would a partial loss be valued? If the agreed value limit selected was based upon the total replacement cost limit, the insured would have every reason to believe that a partial loss should be settled at replacement cost coverage. But if the replacement cost option has not been selected (and so noted on the declarations for the specified item), the policy valuation would be actual cash value. In a standard commercial property policy that has not been designated with the replacement cost option, losses are settled on an actual cash value basis. The policy explicitly states that all items on the declarations page will have actual cash value coverage unless the replacement cost option shows specifically on the declarations page.
It is important to note that there are several types of items that the replacement cost coverage does not apply to, such as:
* personal property of others
* contents of a residence
* manuscripts
* works of art, antiques, and rare articles, such as etchings, pictures, statuary marbles, bronzes, porcelains, and bric-a-brac
* "stock" ("stock" may be covered for replacement cost in the event that a separate item with its own limit of insurance has been designated in the declarations)
This list does not include agreed value, leading one to believe that agreed value is eligible for replacement cost.
Thus we have an ambiguity. If the insured and insurer have determined a limit for the agreed value coverage that is based upon the replacement cost of the building or structure and a partial loss occurs, without the replacement cost option selected and shown in the declarations, only the actual cash value would be available. An insured that has paid a premium based upon a replacement cost limit but only receives actual cash value coverage would have legitimate grounds for appeal or other action to the insurer.
Attached are quotes from the ISO CP 00 10 06 95--Building And Personal Property Coverage Form:
"G. OPTIONAL COVERAGES
1. Agreed Value
a. The Additional Condition, Coinsurance, does not apply to Covered Property to which this Optional Coverage applies. We will pay no more for loss of or damage to that property than the proportion that the Limit of Insurance under this Coverage Part for the property bears to the Agreed Value shown for it in the Declarations.
b. If the expiration date for this Optional Coverage shown in the Declarations is not extended, the Additional Condition, Coinsurance, is reinstated and this Optional Coverage expires.
c. The terms of this Optional Coverage apply only to loss or damage that occurs:
(1) On or after the effective date of this Optional Coverage; and
(2) Before the Agreed Value expiration date shown in the Declarations or the policy expiration date, whichever occurs first.
3. Replacement Cost
a. Replacement Cost (without deduction for depreciation) replaces Actual Cash Value in the Loss Condition, Valuation, of this Coverage Form.
b. This Optional Coverage does not apply to:
(1) Personal property of others;
(2) Contents of a residence;
(3) Manuscripts;
(4) Works of art, antiques or rare articles, including etchings, pictures, statuary, marbles, bronzes, porcelains and bric-a-brac; or
(5) "Stock", unless the Including "Stock" option is shown in the Declarations.
c. You may make a claim for loss or damage covered by this insurance on an actual cash value basis instead of on a replacement cost basis. In the event you elect to have loss or damage settled on an actual cash value basis, you may still make a claim for the additional coverage this Optional Coverage provides if you notify us of your intent to do so within 180 days after the loss or damage.
d. We will not pay on a replacement cost basis for any loss or damage:
(1) Until the lost or damaged property is actually repaired or replaced; and
(2) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.
e. We will not pay more for loss or damage on a replacement cost basis than the least of (1), (2) or (3), subject to f. below:
(1) The Limit of Insurance applicable to the lost or damaged property;
(2) The cost to replace, on the same premises, the lost or damaged property with other property:
(a) Of comparable material and quality; and
(b) Used for the same purpose; or
(3) The amount you actually spend that is necessary to repair or replace the lost or damaged property.
f. The cost of repair or replacement does not include the increased cost attributable to enforcement of any ordinance or law regulating the construction, use or repair of any property."
We could not find where there is an ISO prohibition against combining replacement cost coverage and agreed value coverage. More important, in those cases where the replacement cost limit is used as the agreed value limit, replacement cost coverage may be necessary to avoid any confusion and possible claims handling problems.
Although we could find no ISO prohibition against offering both replacement cost and agreed value, it may be that the insurer does not wish to offer replacement cost on a specific account due to that insurer's underwriting standards or guidelines based upon the age/uniqueness/condition of the property. Thus, there may be underwriting restrictions with an individual insurer applying to an account but not necessarily based on ISO rule or regulation restrictions.
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