In Property & Casualty Insurance Procurement & Litigation (Ten Recurring Themes Every Lawyer Should Know) insurance expert witness David L. Stegall, CPCU, ARM, ARe, RPA, of Risk Consulting & Expert Services writes on ten recurring themes that often lead to litigation. Attorneys either dealing in insurance procurement litigation issues or with clients who purchase insurance may want to consider these ten themes:
Theme 8 of 10 Property values matter and vary based on the purpose of the valuation. Although this issue seems easy, there is more contention at the time of a property claim on this issue than practically any other issue. The problem is usually the misunderstanding on the part of property insurance buyers as to the relationship between “Market Values,” which is usually how much they paid for the property, versus an insurance contract’s definition of property value. In a property insurance policy, usually there are two ways and sometimes three ways of purchasing the correct value. The first is “Replacement Cost,” which is the cost of repairing or replacing the property with like or similar materials or paying cash for up to the replacement cost designated on the policy. The second is “Actual Cash Value” meaning replacement cost minus depreciation and the third is “Stated Amount Value” meaning an agreement is made up-front with the insurance buyer and the insurance company as to how much the property is worth and the valuation basis at the time of a claim.
Confusion often arises for two reasons: First, over the difference between the Replacement Cost Value (what it would cost to repair or replace with like materials) or Actual Cash Value (replacement cost minus depreciation) of a structure and its market price. Market price has nothing to do with the insurable value and is based on a completely separate set of criteria. Primarily, it is based on location and real estate market forces; secondly, the amount borrowed from a lender to purchase the structure and the lenders’ contractual requirements for purchasing coverage to protect their interest.