Law Office Report - Spring 2009
Some Perils of Homeowners/Property Owners Insurance
Attorney Russell T. GollaThe largest investment for home owners and business owners is usually their property. Far more often than not, home owners and business owners have to borrow a substantial percentage of the cost of their property to make this investment. If they do, the lender almost always requires the purchaser to secure adequate homeowners or property owners insurance on the property. Further, prudent purchasers should secure adequate insurance on their investment regardless of whether it is required by a lender.
Generally, there are two types of homeowners/property owners insurance: (1) Actual Cash Value (ACV); or (2) Replacement Cost (RC). Selecting the proper type of insurance for your needs is extremely important since the method of calculating the amount the insurance company must pay is dictated by the type of insurance purchased. If an ACV policy is purchased, then, in the event of a total loss, the insurance company must pay the lesser of the limit of liability selected for the insured property or its ACV. If an RC policy is purchased, then, in the event of a total loss and the insured elects to rebuild the property, the insurance company must pay the lesser of the policy limit selected for the insured property or the RC. If an RC policy is purchased and the insured does not elect to rebuild the property, then the insurance company must pay the lesser of the ACV or the limit selected for the insured property. Therefore, it is vitally important to make sure that adequate limits are selected. However, to do so, you must have an understanding of how the ACV and the RC are determined and how they differ from each other.
ACV is generally measured as the RC less depreciation. The RC is measured by the amount of money it would take to rebuild the property with like kind and quality materials at the cost of the same at the time of the loss. As a rule of thumb, RC insurance should be preferred over ACV insurance.
One would think that since the premium charged for the insurance is primarily determined by the limit of liability selected, the insurance company will pay that limit in the event of a total loss. Experience tells us that we would be naive to make this assumption. Insurance companies have found numerous ways to contest the amount required to be paid and therefore avoid paying the policy limit in the event of a total loss.
First, insurers have contested what the “actual” ACV or RC is. It is not at all difficult for insurers to find “independent appraisers” to create a dispute as to the ACV and RC when the insured is demanding payment of policy limits. There are cases where there may be genuine disputes as to whether the ACV or RC equals or exceeds the policy limit. However, recent experience leads us to conclude that some insurers often turn to certain “independent appraisers” who are well known to them for the sole purpose of trying to convince the insured that they are only obligated to pay tens of thousands and even hundreds of thousands of dollars less than the policy limit. If this occurs, consult a lawyer immediately.
Second, RC policies are, in actuality, reimbursement rather than replacement cost policies. This means that the insurer may insist that the insured actually replaces the property before it is obligated to pay on a replacement-cost basis. If there is a substantial mortgage on the property, the insurer will usually pay off that mortgage out of the insurance proceeds shortly after the loss. The net effect of this payment is that it will substantially reduce the insurance money available to rebuild the property, which in turn could make it impossible to secure a loan to do so. If the business owner cannot secure this type of financing, then he or she could not rebuild the property, and the insurer would only be obligated to pay the ACV. If the insurer claims the ACV at the time of the loss is either the amount of the mortgage or less, the business owner may be out of business.
For home owners, the battle should not be as difficult. Wisconsin has a valued policy law which requires payment of the policy limit in the event of a total loss. A home is defined as a total loss if the cost to repair or replace it exceeds 50% of its total value. It is important to know that up until 1976, the valued policy law applied to all property, not just that owned and occupied as a residence. In other words, until 1976, the valued policy law applied to all business property as well. Therefore, business owners should contact their State Senators and Representatives (Senator Julie Lassa and Representative Louis Molepske for most of us) to ask them to sponsor a law to make the valued policy law applicable to business premises as it was before 1976.