Risk & Business Magazine Cain Insurance Risk & Business Magazine Summer | Page 29

ARTICLE: COSTS
MSA
CASH VALUE & FEATURE
REPLACEMENT
that under the circumstances, assigning a value based on the
replacement costs would not be appropriate as it would far surpass
the actual value of the hotel.
When it comes to smaller-valued items — such as office furniture,
tools, etc. — actual cash value is often reached by looking at the
replacement cost and deducting for depreciation based on the
age and condition of the items. This is an inexact science, but it
will usually be based upon the regular useful life of the particular
item. For example, if a computer is expected to have a 5-year
usable life, and the computer is two years old, the actual cash
value will often be found by taking the replacement cost minus 40
percent (as 40 percent of its usable life has already been used up).
REPLACEMENT COST
When a policy provides for replacement cost, the policy normally
provides coverage on the basis that the property can be replaced or
repaired (whichever is less expensive).
The policy will provide coverage to replace the property with a
new item of similar type. Under most policies, replacement cost
is only available if the property is replaced within a reasonable
period of time. If the property is not being replaced, only the
actual cash value will be paid.
are no different.
In many cases, obtaining coverage for replacement cost will
provide the insured with more flexibility when faced with a claim;
however, those policies often come at a higher cost.
The flexibility provided is based on having the decision to rebuild
or not. In many cases, the actual cash value may not be sufficient to
replace or rebuild the property. For example, a building may have
an actual cash value of $250,000; however, the cost of rebuilding
the property may be substantially higher.
On the other side, it is possible that a business owner may be
winding down their business or may own property in an area with
a poor economy. In such a case, the business owner may be of the
opinion that if they did suffer a loss, they would be unlikely to
rebuild anyway, so the extra cost of purchasing a replacement cost
value may not be worthwhile.
While we hope this provides a better understanding of the
difference between actual cash value and replacement cost policies,
we would recommend discussing your particular business and
insurance needs with your broker prior to making a decision on
which coverage to purchase. +
Because the item is being replaced by a new item, this often leads
to a betterment issue. An extreme example of this is found in a
case from the Alberta Court of Appeal (Del Alba v. Metropolitan
Insurance Co., 1995 Carswe ll Alta 92). In that case, a company
purchased a mini mainframe computer at a liquidation sale for
$517, which was later damaged beyond repair when the building
was struck by lightning. The policy provided for replacement
cost, but that model of mainframe computer was no longer sold.
The closest model of “like kind and quality” was a far superior
system with a cost of $72,703. The Court of Appeal found that
the business was entitled to have their equipment replaced with
a new item — even if that item was more advanced and at a cost
much higher than was paid for the original destroyed item — and
awarded payment of $72,703.
When it comes to the replacement of buildings, however, there
are often conditions in the policy that the replacement has to
be at the same location, with materials of a similar quality, and
that the use of the building must be the same as prior to the
loss. This would mean, for example, that if prior to the loss, you
operated a hardware store, you cannot replace that building with
an apartment building, even if the replacement cost and square
footage were similar to replacing it with a new hardware store.
Many policies do provide, however, that replacement costs are
not available on certain types of property, generally items where
replacement with a new item would be impossible or impractical,
or where the age or other characteristic of the item is the reason
for its value. Examples of this would be collectibles, art, and
antiques.
WHAT TYPE OF COVERAGE DO YOU NEED?
The needs of businesses can vary greatly, and insurance policies
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