Replacement Cost vs. Actual Cash Value in Insurance Property Claims

Insurance Property Claims

Commercial property insurance compensates policyholders for direct physical loss to their company’s property resulting from a covered peril. Depending on the terms of your policy, you may be reimbursed for property losses based on replacement cost value or actual cost value.  

Replacement Cost Value vs. Actual Cost Value

Replacement cost is generally defined as what it would cost to replace destroyed property with property of similar kind and quality, at the time of the loss. By contrast, actual cost value factors depreciation and normal wear and tear into the value. For instance, say the 10-year old roof of your building was destroyed by a storm, a covered event.* If your policy provides actual cash value, you will be reimbursed for what the 10-year-old roof was worth just before the storm (subject to policy limits and applicable deductibles). Replacement cost value, however, does not take depreciation or wear and tear into consideration. Instead, this type of coverage reimburses you based on the cost to replace, repair or rebuild your roof at today’s prices.

Disputes Over Reimbursement

When policy language is unambiguous, the law generally requires courts to enforce insurance policies as written. However, replacement cost and actual cash value provisions often contain unclear language, which leads to various types of disputes, and decisions generally hinge on an analysis of the specific terms in the policy. For instance, in a dispute concerning property loss following a fire, the policy stated that it would provide coverage for the actual cash value, which it defined as the “fair market value.” However, no definition for “fair market value” was included in the policy, and it was unclear whether sales tax should be accounted for in the cash value calculation. After a careful analysis of the policy terms and the facts and circumstances of the case, the court resolved the ambiguity in favor of the insured.1

Some disputes arise over the scope of what replacement cost includes. For instance, in a significant insurance dispute regarding the World Trade Center, the insurers argued that the replacement cost should be limited to the amount it would cost to rebuild the World Trade Center “precisely” as it existed on the morning of September 11, 2001. The insured argued that the replacement cost should also include nearly $700 million in additional expenses that would be necessary in order to adapt the new structure’s design to the “changed legal, physical, and political environment of post-9/11 New York.”2 However, the court cited the policy language in siding with the insurers, holding “…[t]here is no ambiguity in these [replacement cost] provisions. The plain meaning of each one of these provisions is consistent with the insurer’s view – and inconsistent with the Insureds’ view. … [T]he provisions unambiguously establish that the most the Insureds can recover on a replacement cost basis is the amount it would cost to reproduce the WTC beam-for-beam, pane-for-pane, as it stood early on the morning of September 11, 2001.” 

Claims for Both Actual Cash Value and Replacement Cost

Many insurance policies expressly allow an insured to initially receive compensation for damaged property at actual cash value and then, if the insured elects to repair or rebuild the property within a specified time frame, to receive the difference between the actual cash value and the replacement cost once the restoration is completed. Because insureds typically are required to make restorations before receiving reimbursement for replacement cost, the upfront actual cash value payment provides the insured with the capital needed to begin repairing or rebuilding the property. Policies that provide this option typically require that insureds meet certain conditions, including providing timely notice of their intent to make an additional claim for replacement cost and restoring the property within a specified amount of time.

In a class action brought by policyholders against Allstate Fire & Casualty Insurance Co., the Second Circuit sided with the insurer regarding subsequent reimbursements for replacement costs. The policyholders had been paid actual cash value for property damaged by fire, but they had been denied reimbursement for additional repair costs because the repairs had not been completed within 180 days of the actual cash value payment as required under the policy. The court held that Allstate complied with the terms of the contract and therefore was not liable for the repair costs.3

As with other contracts, the terms of an insurance policy dictate whether coverage applies in a given situation. 

If you are involved in a dispute with your business insurance company, contact us. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business. 

* Some storms may not be covered by the policy.  For the purposes of this example, assume the storm is a covered event.

1 Holden v. Farmers Ins. Co. of Washington239 P.3d 344 (Wash. 2010)

2 SR International Business Insurance Co., Ltd. v. World Trade Center Properties, LLC, No. 01 Civ. 9291, at *1 (HB) (S.D.N.Y. Oct. 31, 2006), opinion clarified by, No. 01 Civ. 9291 (HB) (S.D.N.Y. Feb. 16, 2007)

3 Woodhams v. Allstate Fire & Cas. Co., No. 10-4389-cv (2d Cir. Jan. 3, 2012)