Growing up we all watched television shows and movies pitting the good guy against the bad guy. Often the bad guy held some power over the good guy, either as the boss, the holder of all the money or the mortgagee. A level playing field did not exist. The good guy was at a major disadvantage.
Unfortunately, this same scenario sometimes exists in insurance claims. The carrier has power over the insured in the form of the checkbook coupled with being the sole power making coverage decisions (until courts, regulators or the press get involved).
Thankfully, though, most insurance carriers do the right thing and adjust claims properly and fairly. Don’t misunderstand, a proper and fair claims settlement does not always mean the insured gets every penny they think they deserve. A proper and fair claims payment means the insurance carrier paid every penny that was owed, but no more.
It’s when carriers pay far less than is fairly owed that the good guy/bad guy scenario arises. And in cases like these, the bad guy has the power – at least initially.
We Have Addressed the 180-Day Myth Before
We have addressed the 180-day myth on several prior occasions; sadly, though, the 180-day myth has become a much more common issue in recent years. Insureds are more and more being victimized by the misapplication of this policy provision.
Following is yet another example of an insurance carrier improperly victimizing an insured by paying only ACV because the loss was not discovered until more than six months after the damage occurred. In this case, the victimizer is Farmers Mutual Hail Insurance Company of Iowa. In this case, the damage was discovered in Spring of 2024 and the best date of damage that the insured can determine is around July 13, 2023.
When the insurance carrier reviewed the claim, they used the following policy provision to limit payment to Actual Cash Value (certain words in bold for emphasis):
Replacement Cost Terms—Coverage A Only
When the cost to repair or replace exceeds the lesser of $2,500 or 5% of the “limit” on the damaged building, “we” do not pay for more than the actual cash value of the loss until repair or replacement is completed.
“You” may make a claim for the actual cash value of the loss before repairs are made. A claim for an additional amount payable under these “terms” must be made within six months after the loss.
There are two key problems with the carrier’s stance on and application of this provision to arrive at their conclusion:
- Using one subparagraph outside the context of the entire replacement cost policy provision violates the rules of contract interpretation. Text without context is a pretext for a proof text. The qualifiers must be taken as a whole; and
- This provision gives no authority to the insurance carrier. All authority is given to the insured.
Context of Replacement Cost
Within the subject policy, the Replacement Cost provision contains five qualifiers, stating:
- Which property is eligible for replacement cost coverage;
- What costs are not considered in the determination of replacement cost;
- When replacement cost is paid (the provision referenced previously and the focus of this claim denial);
- How losses are settled if the limit on the damaged building is less than 80% of the replacement cost at the time of the loss (the insurance-to-value provision/”penalty”); and
- How losses are settled when coverage is 80% or greater than the replacement cost at the time of the loss.
If/when the insurance-to-value condition is met (qualifier #5), the policy states that the insured is owed replacement cost up to the lesser of:
- The cost to repair or replace the damage on the same premises using materials of like kind and quality, to the extent practical; or
- The amount spent to repair or replace the damage.
In reviewing the subject case, we discover that:
- The property damaged by the hail qualifies for replacement cost protection as per the first qualifier; and
- The property is insured at greater than 80% of its replacement cost (fifth qualifier) meaning it is eligible for replacement cost up to the lesser of the two prescribed limits.
Undoubtedly the insured is eligible for replacement cost to this point. Only one qualifier remains to be met for the insured to garner replacement cost coverage. To meet this qualifier requires eliminating bad claims practices.
The 180-Day Myth: Rehashing – Again
Again, the coverage provision in question reads:
Replacement Cost Terms—Coverage A Only
When the cost to repair or replace exceeds the lesser of $2,500 or 5% of the “limit” on the damaged building, “we” do not pay for more than the actual cash value of the loss until repair or replacement is completed.
“You” may make a claim for the actual cash value of the loss before repairs are made. A claim for an additional amount payable under these “terms” must be made within six months after the loss.
The first paragraph sets the parameters regarding when replacement cost is paid; specifically, replacement cost is not paid until the repair or replacement is completed. This is a wholly reasonable condition. If the insured does not repair the damaged property, a replacement cost settlement would violate the principle of indemnification.
In the subject loss, the insured is repairing or has repaired the damaged property – meeting the requirement for replacement cost. This part of the qualifier is met. At issue is the carrier’s improper application of the second paragraph within this provision. The carrier’s ACV-only payment letter states:
“Per the policy language…, any claim for an amount greater than actual cash value MUST be made within six months after the loss…. Since repairs were not made prior to the six month limitation, we are unable to pay additional amounts on this claim.” [Emphasis is the insurance carrier’s.]
Did you note that the insurance carrier not only misapplied this policy provision, but the carrier also ADDED a requirement not supported by the policy language? Notice that the claims letter changes the conditions spelled out in the policy essentially stating that repairs have to be made within six months – “Since repairs were not made prior to the six month limitation….” Where in the policy is this requirement located?
Now there is an extra-contractual conditions being applied by the carrier. Taking this statement to its logical conclusion means that if the house was destroyed, it would have to be built back within six months of the loss to qualify for replacement cost. Again, where is that requirement in the policy?
Even more ludicrous than this new non-policy condition found in the claim letter is the idea that the carrier is granted any power or options within this subparagraph. Within this provision, there is NO authority for the insurance carrier to make any decision or take any action. All authority is given to the insured. Note who can disregard the replacement cost loss settlement provision – the YOU (the named insured). The insured can opt for ACV settlement. And if this is the decision made, the INSURED can return to replacement cost – provided they do so within 180 days of the loss.
Nowhere within this provision does it state that the insured must discover the loss within 180 days of the damage to get replacement cost. Such wording is simply NOT present.
In the subject claim, the insured made NO decision regarding ACV versus replacement cost because the insured was not given an option. The insurance carrier made the decision based on its own misapplication of the policy provision.
How do we know it’s a misapplication? We know because there are specific proprietary endorsements used by various carriers that do exactly what the insurance carrier claims this language does. If this language applied in the way the carrier claims, there would be no need for such endorsements.
A Similar Court Case
This claim came out of the state of Minnesota. A review of Minnesota case law produced a similar case. Although Construction Systems, Inc. v. General Cas. Co. of Wis., 2010 WL 11575518 (D. Minn., August 31, 2010) involves a commercial property policy, the language is essentially the same. The policy language at the center of this case reads:
Optional Coverages
Replacement Cost
Replacement Cost (without deduction for appreciation) replaces Actual Cash Value in the Loss Condition, Valuation, of this Coverage Form.
- You may make a claim for loss or damage covered by this insurance on an actual cash value basis instead of on a replacement cost basis. In the event that you elect to have loss or damage settled on an actual cash value basis, you may still make a claim for the additional coverage this Optional Coverage provides [i.e., the Replacement Cost] if you notify us of your intent to do so within 180 days after the loss or damage.
The district court concluded that the 180-day notice requirement applies only if the insured first seeks actual cash value benefits and then later seeks replacement cost value benefits. As previously stated, the insured in this discussion made no such decision and was not given an option to make such a decision.
Lacking any endorsement altering or adding to the referenced provision, the insurance carrier in this subject case owes replacement cost as per the Replacement Cost policy language within the Loss Settlement Provisions.
Let’s End This Debate
When damage is discovered more than six months (180 days) after the event that causes the loss, the insured is STILL eligible for replacement cost provided all other key replacement cost conditions have been met. The 180-day myth that carriers continue to attempt to use may not be bad faith, but it gets very close – especially given the number of articles that have been written on this topic.
Neither ISO nor AAIS policy language supports what the carrier is attempting. Further neither “bureau” offers endorsements to accomplish what this carrier is doing. And in Minnesota, the court doesn’t support the carrier’s interpretation of similar language either.
Insurance carriers have the option to develop and use proprietary endorsements that can limit the policy to ACV if the loss is discovered more than 180 days after the damage. However, in this subject case, no such endorsement was attached.
How should this end? Two things need to happen:
- In our subject case, the insurance carrier should do the right thing and pay replacement cost.
- Overall, the industry should stop misusing this policy language.
