Replacement Cost Coverage Under Homeowners Insurance Can Be Broader Than You Might Think

Most homeowners insurance provides what’s known as “replacement cost” coverage. Replacement cost coverage varies from policy to policy, but generally provides that the insurance company will pay to repair or replace damaged portions of the home with materials of the same or similar quality that existed before the loss. This coverage basically provides the insurer will pay to repair your home after a loss, so it’s an important component of a homeowners insurance policy.

It’s critical to keep in mind that insurance policies can use many different definitions of replacement cost coverage. The only way to know what a particular insurance policy covers is to have a qualified attorney review the entire policy and all the facts related to the loss. With that in mind, a replacement cost provision typically looks something like this:

The insurance company will pay the cost to repair or replace the damaged part of property insured with material of like construction for similar use on the same premises.

In most insurance policies, this language comes with exclusions, limitations, loss settlement provisions, and other policy language that can change how the replacement coverage applies. It’s critical to have a lawyer review the entire policy to determine how replacement cost coverage works in a particular situation.

Replacement cost coverage can involve several important issues that sometimes cause disputes between the policyholder and the insurer. The first is that the policyholder generally gets to choose the contractor who performs the repairs or replacement. In general, whatever a qualified contractor charges is the cost to repair or replace the damaged property and, therefore, what the insurer should pay under the policy. Unless the insurer hires the contractor and pays for the repairs directly, the insurer should, absent special circumstances, pay the policyholder whatever the contractor charges to repair or replace the damaged property.

Second, replacement cost typically means the cost to replace the materials that were there. If high quality materials were damaged, the insurer should pay for high quality replacements. If damaged materials cannot be repaired to the same condition they were in before the loss, the materials need to be replaced with new materials. Again, this depends on the insurance policy fine print– the devil is in the details.

Third, replacement cost generally includes all the costs to repair or replace the damaged property. These costs often go beyond the mere costs of the new building materials. For instance, replacing a leaky pipe might require removing sections of the drywall and other fixtures to get access to the pipe. In that scenario, the costs to tear out the drywall and fixtures, and to restore them to their pre-loss condition, would exceed the mere cost of the replacement pipe.

Fourth, most policies would require the policyholder to commit to actually performing the repairs or replacement before paying replacement cost benefits. If the policyholder doesn’t plan to actually perform the repair or replacement, many policies would pay only the “actual cash value” of the damaged property. Actual cash value is typically the dollar value the property had immediately before the loss. Replacement cost value is often much higher than actual cash value.

It is important to be mindful that, as with any insurance law question, replacement cost coverage and other benefits vary from case to case. Tiny nuances in the insurance policy fine print of the facts of the specific loss can make a huge difference. In some cases, removing a single word could alter the policyholder’s rights. The only way to know what a particular insurance policy covers, and what benefits the policy holder is entitled to, is to consult a qualified attorney.

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