As kids, we all watched TV shows and movies that pitted good guys against bad guys. The bad guy often held some kind of power over the good guys, as the boss, the owner of all the money, the mortgagee. There was no level playing field, and the good guys were at a huge disadvantage.
Unfortunately, a similar scenario sometimes plays out in insurance claims: the insurance company has power over the insured in the form of a chequebook, and also the sole authority to determine coverage (until a court, regulator, or media gets involved).
Thankfully, most insurance companies will do the right thing and adjust claims appropriately and fairly. Don’t get me wrong, proper and fair claims handling doesn’t necessarily mean that the insured will get back everything they paid. think Proper and fair claims settlement means that the insurance company pays everything that is owed. But already.
A good-guy, bad-guy scenario occurs when an insurance company pays out much less than it should have, and in such cases, the bad guys have the power, at least initially.
I’ve covered the 180-day myth before.
We’ve covered the 180 day myth a few times before, and unfortunately, it has become a more prevalent issue in recent years. Policyholders are increasingly being victimized by the misapplication of this insurance provision.
Below is another example of an insurance company wrongfully victimizing an insured by paying only the ACV because the loss was not discovered until more than six months after it occurred. In this case, the victim is Farmers Mutual Hail Insurance Company of Iowa. In this case, the loss was discovered in the spring of 2024, and the most likely date of loss that the insured could identify is around July 13, 2023.
When the insurance company considered the claim, they used the following policy clause to limit their payout to the actual cash value (some words are in bold for emphasis):
Replacement Cost Terms – Coverage A Only
If the cost of repair or replacement exceeds $2,500 or 5% of the “Limit Value” of the damaged premises, whichever is less, “the Company” will not pay more than the actual cash value of the loss until the repair or replacement is completed.
“You” may claim the actual cash value of your loss before any repairs are made. Any claims for additional amounts payable under these Conditions must be made within six months after the loss occurs.
There are two key issues in the carriers’ attitude towards and application of this provision that have led them to this conclusion.
- Using one subparagraph out of context of the entire replacement cost insurance clause violates the rules of contractual construction. Text out of context becomes a pretext for evidential text. Modifiers must be interpreted as a whole.
- This provision does not confer any powers on the insurance company. All powers are vested in the insured.
Background of replacement cost
In covered policies, replacement cost clauses contain five qualifying conditions:
- Which assets qualify for replacement cost coverage?
- What costs are not considered in determining replacement cost?
- Where replacement costs are paid (the provision set out above and the focus of this denial of the claim)
- How to settle losses when the limit on the damaged premises is less than 80% of the replacement value at the time of the loss (insurance-to-value provision/”penalty”)
- How to settle damages when compensation at the time of loss is 80% or more of the replacement cost.
If the insurance-to-value condition (qualifier #5) is met, the policy provides that the insured is obligated to pay replacement cost up to the lesser of:
- The cost of repairing or replacing the damage on the same premises using materials of the same kind and quality, so far as possible.
- The amount it cost to repair or replace the damage.
After examining the case studies, we found the following:
- Property damaged by hail would be eligible for replacement cost protection according to the original terms.
- Since the property is insured at more than 80% of its replacement value (condition number 5), it is covered for replacement value up to the lower of the two prescribed limits.
At this point, the insured is definitely entitled to replacement value coverage. Only one condition remains to be met for the insured to receive replacement value coverage, and this condition must be met by eliminating abusive claims practices.
The 180-day myth: Revisited
Again, the indemnification provisions at issue are as follows:
Replacement Cost Terms – Coverage A Only
If the cost of repair or replacement exceeds $2,500 or 5% of the “Limit Value” of the damaged premises, whichever is less, “the Company” will not pay more than the actual cash value of the loss until the repair or replacement is completed.
You may claim the actual cash value of the damage before any repairs are made. Claims for any additional amounts payable under these Terms must be made within six months after the loss occurred.
In the first paragraph, when Replacement cost is paid. Specifically, replacement cost is not paid until repairs or replacement are completed. This is a perfectly reasonable term. If the insured does not repair damaged property, a replacement cost settlement would violate the principles of indemnity.
In a covered loss, the insured is repairing or has repaired the damaged property and meets the replacement cost requirement. That portion of the qualification is met. At issue is the carrier improperly applying the second paragraph of this provision. The carrier’s ACV-only payment notice states:
“According to the insurance policy, claims for amounts exceeding the actual cash value are Must Will be carried out within 6 months After the defeat… Because the repairs were not made before the six-month deadline, we are unable to pay any additional amounts on this claim.” (Emphasis added by the insurance company.)
Not only did the insurance company misapply this policy provision; Added Is this a requirement that is not supported by the insurance policy wording? Note that the insurance claim letter has changed the terms to basically state that repairs must be made within 6 months.Repairs not made within the six-month period“…”Where in the policy is this requirement stated?
Currently, insurance companies are applying extra-contractual conditions. A logical interpretation of this sentence would mean that if your home is destroyed, you would need to rebuild it within six months of the loss in order to receive replacement value coverage. Again, where is this requirement written into your insurance policy?
Even more ridiculous than this new non-policy term stated in the bill is the idea that any power or choice is given to the insurer within this subparagraph. There is no power for the insurer to make any decisions or take any action in this clause. All power is given to the insured. Notice who can ignore the replacement value loss settlement clause? That is you (the named insured). The insured can choose an ACV settlement. And if this is decided, the insured can go back to replacement value within 180 days of the loss.
Nowhere in this clause does it say that the insured must discover the loss within 180 days of the loss in order to claim replacement cost. No such language exists.
In this claim, the insured did not make a decision as to whether to go for the ACV or replacement value as he had no choice. The insurer made the decision based on a misapplication of the policy terms.
How do we know it is a misapplication? Because various insurance companies use certain proprietary endorsements that do exactly what this language purports to do. If this language were applied the way the insurance companies claim, such endorsements would be unnecessary.
Similar court cases
The lawsuit was filed in Minnesota, and a search of Minnesota case law uncovered similar cases. Construction Systems, Inc. v. General Cas. Co. of Wis., 2010 WL 11575518 (D. Minn., Aug. 31, 2010) Although it pertains to commercial property insurance, the language is essentially the same. The central policy language in this case is:
Optional Compensation
Replacement cost
Replacement cost (without deduction for appreciation) takes the place of actual cash value in the loss situation and valuation on this coverage form.
- For losses or damages covered by this insurance, you can claim on an actual cash value basis instead of a replacement cost basis. If you choose to settle your loss or damage on an actual cash value basis, you can still claim the additional compensation that this optional coverage provides. (i.e. replacement cost) If you notify us within 180 days of the loss or damage.
The district court concluded that the 180-day notice requirement applied. Only if The insured would first seek the actual cash value benefit, then the replacement value benefit. As stated above, the insured in this discussion has not made that decision, nor has he been given the option to make that decision.
In the absence of any endorsement modifying or adding to the reference clause, the insurer in this case is obligated to pay replacement costs in accordance with the replacement cost policy language in the indemnity clause.
Let’s end this debate
If the loss is discovered more than six months (180 days) after the event that caused the loss, the insured may still be able to obtain replacement value coverage if all other key replacement value conditions are met. The 180-day myth that insurers continue to use may not be malicious, but given the number of articles written on the subject, it’s awfully close.
Neither ISO nor AAIS policy language supports what the carrier is attempting to do, nor do either “office” encourage this carrier to accomplish what it is doing, nor in Minnesota have courts supported the carrier’s interpretation of similar language.
Insurers have the option to create and use their own endorsements that allow them to limit coverage to the ACV if a loss is discovered more than 180 days after the loss occurred, but no such endorsement was attached in this case.
How should this end? Two things need to happen.
- In our case, the insurance company should do the right thing and pay for the replacement.
- Overall, the industry should stop misusing this policy language.