Replacement Cost Coverage (coverage for the full cost of repairing and/or replacing damaged property without deduction for depreciation) is an important part of any association’s insurance policy. Whether it is the building or the personal property contained therein, most associations are required, by law or pursuant to the condominium documents, to obtain Replacement Cost Coverage for damages that may occur.

The one caveat to Replacement Cost Coverage is, however, that the cost to repair and/or replace the damaged property is not typically owed until the costs are incurred or the work is completed. This means that, under some circumstances, associations would be left with no choice but to fund the repairs themselves and seek reimbursement from the carrier later.

Realizing that this would be inequitable, not to mention next to impossible for many policyholders, most policies allow the policyholder to settle their claim on an Actual Cash Value basis (the full cost of repairing and/or replacing damaged property with deduction for depreciation). Unlike Replacement Cost amounts, the Actual Cash Value of damaged property is generally due immediately regardless of whether the work has been, or ever is, completed.

Electing to settle the loss on an Actual Cash Value basis does not preclude a policyholder from ever recovering the Replacement Cost Value. Most policies provide that even if the policyholder elects to have the claim settled on an Actual Cash Value basis, it can still recover the withheld depreciation at a later time, after the work has been completed. To do so, however, the policyholder must notify the carrier of its intent to do so.

While these provisions have been contained in policies for many years, there was little litigation about them until recently when a handful of insurers began attempting to avoid payment by claiming that policyholders had not elected to make an Actual Cash Value claim or had not notified the carrier of an intent to make a Replacement Cost Value claim within the time frame prescribed by the policy (typically 180 days from the date of loss). To avoid any of these arguments one should confirm in writing that the claim is being made on an Actual Cash Value basis for items not repaired or replaced, and that after the work is completed the insured intends to make a claim for any depreciation withheld.