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.
When condominium associations suffer millions of dollars worth of catastrophic damage from a natural disaster, most associations will need to rely on insurance proceeds to start and complete repairs. Indeed, that is why they purchased insurance in the first place. Unfortunately for condominium associations in Florida without millions of dollars in reserves, recent legal opinions may not help when it comes time to make those repairs.
Most basic commercial insurance policies, including association master policies, provide coverage for the actual cash value of damages sustained as a result of a covered loss. Actual Cash Value is generally the amount it would actually cost to repair or replace the damaged property, minus depreciation.
Last week, the 11th Circuit Court of Appeals issued its opinion in Buckley Towers Condo., Inc. v. QBE Insurance Corp., No. 09-13247, 2010 WL 3551609 (11th Cir. Sept. 14, 2010). The appeal and opinion dealt mostly with actual cash value (ACV) versus replacement cost value (RCV) damages, as well as law and ordinance damages and prejudgment interest. In a nutshell, actual cash value damages cover the cost of replacing the damaged property, minus depreciation, and replacement cost value damages cover the actual cost expended to replace the property, up to the policy limits. Michelle Claverol explained ACV and RCV calculations in much greater detail in her posts on the Property Insurance Coverage Law Blog titled, Understanding Replacement Cost Coverage: Valuation Issues in Florida, Part 5, and Replacement Cost Value Coverage After a Claim Denial: Florida Valuation Issues, Part 6.
The second named storm of the year has crossed Florida, and it will only be a matter of time before another tropical system strikes the state. While there are many problems that an association can face after a loss, few are harsher than the effect of a coinsurance penalty that reduces the amount paid on an otherwise valid claim. Many policies, especially large commercial polices, contain coinsurance provisions. Unfortunately, many directors and managers do not understand what they mean or the effect that they can have.