If you have ever had to file a claim with your insurance company for damages you suffered to your home, you may have been presented with various terms concerning coverage under your policy. You may also be wondering what these terms mean and how do they apply in your unique situation.
The Massachusetts homeowner insurance policy provides insurance coverage for homeowners in two sections of the policy. The first section of the policy generally provides coverage for the property of the homeowner including the building and contents. This is subject to various limitations and exclusions. The second section of the homeowner policy generally provides a coverage for the homeowner in the event that a claim or litigation is brought against the homeowner or insured.
When an insurance claim is brought under the first section of the policy, an issue that sometimes arises is whether the insured is entitled to payment for the replacement cost value of their damages or for the actual cash value of their damages.
Replacement cost value, sometimes abbreviated as RCV, is the cost to replace the item that was damaged or destroyed. Replacement cost is sometimes explained as what a willing buyer will pay a willing seller for the item.
To illustrate this, think about a person that goes to the car dealer. The person selects a car and the dealer says they want $50,000 for that car. In response, the buyer says that they will pay $30,000 for the car and then they both agree on $40,000 as the price for the car. In this example, the $40,000 figure is the replacement cost for that particular car as the $40,000 figure is what a willing buyer will pay a willing seller.
Another example is when a person walks into a large department store and selects a laptop computer that has a price tag of $1,400. The person takes the laptop to the cash register and pays the $1,400 plus tax to complete the transaction. In this example, the $1,400 plus tax is the replacement cost for that computer.
In the event of an insurance claim, it is not unusual for insurance companies to have arrangements with various companies for pricing of various items. These arrangements affect the replacement cost value.
In the first example, the insurance company may be able to obtain the car for $35,000. The $35,000 figure would then become the replacement cost value as this is the amount which the insurance company can obtain for that car which a willing buyer would pay.
In the second example, the insurance company may have preferred vendors which may provide the same laptop for $1,200. In the second example, the replacement cost of the laptop would be $1,200.
If you are faced with having an insurance claim, the establishment of the replacement cost value is the first most important step in trying to determine what the actual cash value is. In simple terms, actual cash value is the value of an item while taking into consideration its replacement cost value, its age condition, lifespan, and possible obsolescence.
In the first example discussed above, the actual cash value of the car would take into consideration the age of the car, the mileage, the condition, and whether it had prior damage. A car that was purchased at $40,000 is not worth $40,000 three years later as a result of these various factors.
In the second example involving the laptop computer, the actual cash value would take into consideration the condition of the laptop computer. It would also take into consideration the issue of obsolescence. A $1,400 laptop computer three years after purchase could have a value of $400 or less because of the fact that it is outdated or maybe even be no longer used/sold by the company.
While the above were relatively simple examples concerning replacement cost value and actual cash value for items, where building damage is involved and the extent of damage is significant, there may be a question as to whether the building is a total loss.
In this case, an additional factor enters the picture which is known as the “brought evidence” rule. In Massachusetts, all evidence of value can be considered. This becomes significant in the event that there is a major loss to a building or structure and the issue becomes whether the building is a total loss under the insurance policy.
When this type of situation arises, a controversy generally occurs as to what is the replacement cost value of a specific building. Various values need to be considered in determining the value of the building including the age and condition, the assessed value, the market value, the reconstruction value, and with the replacement with a similar structure in a similar neighborhood.
As you can see, very quickly when there is an insurance claim the establishment of value along with issue of replacement cost value and actual cash value under the homeowner’s insurance policy can be very confusing. If you are having issues with your insurance policy and damages you suffered, please consult with an attorney who is familiar and experienced with homeowner insurance policies and claims to advise you on your legal rights and offer you alternatives to protect those rights.
DISCLAIMER: This and other segments posted on this website are offered for informational and discussion purposes only and is not offered as legal advice. This office only represents homeowners and property owners. We do not represent insurance companies. The information contained in this segment should not be considered to be legal advice.