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Faculty Response There is no way to reliably or accurately arrive at such an estimate in my view. How do we know what type of materials will be used for replacement? And, to say to write it for at least 50 % of the RC to avoid a coinsurance penalty is a problem.... the HO policy does have a coinsurance feature, but it never pays less than ACV. Is the underwriter ' s claim of " no penalty " specified in the policy? Do you have it in writing?
I ' d err on the side of caution and insure for the full replacement cost. Better to have too much coverage as opposed to not enough.
Faculty Response I have used FRC for thirty years and will suggest you be very, very careful. The limits should be a joint decision between the agent and insured after careful consideration of the impact. Also, address the issue of debris removal for the larger, older structures.
A large loss on an older structure has surprises for everyone.
Faculty Response As for the suggestion to use regular replacement cost, this might be a problem if they expect replacement with out of style / unavailable items such as handmade wrought iron, etc. The ISO Commercial Property Rule 38 has an example of how to compute the amount of insurance needed, but it probably doesn ' t have much applicability to a home.
Regarding the underwriter ' s suggestion of using 50 % RC minimum, I would sure want this in writing! Any guidance in the company ' s manual?
Faculty Response I would be VERY suspect of a blanket statement that 50 % of RC would be appropriate. If we ' re talking about larger, older homes with heavy timber construction, ornate cornices, solid brick exterior walls, wood lath and plaster interior walls, etc., yes, it can be very expensive to insure on a RC basis. However, I think it is easy to UNDERestimate the loss even on a functional RC basis.
With older homes, you can have significantly higher debris removal costs( including asbestos abatement and disposal expenses) and ordinance or law exposures can be substantial for electrical, plumbing, and even thoroughfare offsets. When all is said and done, the total amount of insurance even on a functional RC basis( considering debris removal and O & L coverage) may be the same or even more than pure RC, so the 50 % figure is odd to me.
Faculty Response I would ask the insured to give the agent an amount they estimate it would take to rebuild the home with materials that are functionally equivalent. This would need to be obtained from a contractor or architect. Also they need to look at HO 05 31, it appears to be a little broader after loss than HO 05 30. A valued policy law could apply, depending on state law in N. D.
Faculty Response This is the first time I ' ve seen functional replacement cost used on an HO policy. I have no idea how to come up with a limit because it depends on what structural features have functional replacments. Also, I wonder how this might be affected by valued policy laws. This is the company ' s form... make them come up with a reliable way to ensure an adequate limit.
Faculty Response Be very careful... here ' s a good reason why: Shah v. Allstate Ins. Co.( filed September 12, 2005; ordered published October 31, 2005)
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