Just because you have a “replacement cost” policy doesn’t necessarily mean that you’re entitled to recover from your insurance company the cost to replace your damaged property, as the Illinois Appellate Court recently informed a no-doubt unhappy insured in the recent case of Area Erectors, Inc. v. Travelers Property Casualty Co. of America.

In that case, a crane owned by the insured, Area Erectors, Inc. (AEI), was a total loss when an unexpected microburst storm came through a construction site and toppled concrete walls onto the crane.

AEI filed a claim with its insurer, Travelers. believing that it was entitled to recover the replacement cost for the loss of the crane. Travelers, on the other hand, argued that AEI only was entitled to recover the actual cash value of the crane, relying on a “ ‘Contractors Equipment’ Coinsurance and Valuation” endorsement. AEI argued that the endorsement was ambiguous. AEI sued, but the trial court agreed with Travelers, stating:

There is no ambiguity in this policy. It is clear from the plain reading of the policy that replacement costs is applicable to items less than five years old from the date of manufacture and actual cash value is applicable to items that are more than five years old from the date of manufacture. As the [first] crane was manufactured in 1993, it was over five years old.

AEI appealed.

In addressing AEI’s claim that replacement cost was the appropriate measure of recovery, the appellate court looked to the “ ‘Contractors Equipment’ Coinsurance and Valuation” endorsement, ruling that “the endorsement is not ambiguous and the actual cash value is the proper method of valuation for the damaged . . . crane.”

We share the entire relevant provision of that endorsement so that the reader can determine whether a reasonable insured would understand the coverage he or she had bought and would find it so straightforward as to be “not ambiguous.” Here’s the relevant provision of that endorsement:

“CONTRACTORS EQUIPMENT” COINSURANCE AND VALUATION
This endorsement modifies insurance provided under the IM PAK COVERAGE FORM.
A. Listed Items
The Coinsurance Additional Coverage Condition applicable to “Contractors Equipment” in Section E—ADDITIONAL COVERAGE CONDITIONS is replaced by the following:
“Contractors Equipment” Coinsurance
a. Listed Items
The Limit of Insurance for each item shown on the list on file at our premises must equal at least the percentage of its value shown below at the time of “loss” or you will incur a penalty:
     (1) Applicable to items less than 5 years old from the date of manufacture: 80% of its replacement cost; and
     (2) Applicable to items over 5 years old from the date of manufacture: 80% of its actual cash value.

The Penalty is that we will pay only the proportion of any “loss” to each item that the Limit of Insurance for the item bears to the percentage of its applicable value.
b. Unlisted Items
The Unlisted Limit of Insurance shown in the Declarations must equal at least 80% of the actual cash value of all Unlisted Items at the time of “loss” or you will incur a penalty.

The Penalty is that we will pay only the proportion of any “loss” that the Limit of Insurance for Unlisted Items bears 80% of the actual cash value of all Unlisted Items at the time of “loss”.

The coinsurance penalty does not apply to items leased, rented or borrowed from others unless they are shown as Listed Items.

B. The Valuation Additional Coverage Condition applicable to “Contractors Equipment” in Section E—ADDITIONAL COVERAGE CONDITIONS is replaced by the  following:

“Contractors Equipment” Valuation

In the event of “loss”, the value of your “Contractors Equipment” as of the time of “loss” will be determined as shown below:
(1) Items to which Replacement Cost applies at the time of loss or damage will be the least of the following:
     (1) The cost to replace the property (without deduction for depreciation) with other property:
          (a) of comparable material and quality; and
          (b) used for the same purpose.
     (2) The cost of reasonably restoring that property to its condition immediately before loss or damage; or
     (3) The amount you actually spend that is necessary to repair or replace the property.

We will not pay on a replacement cost basis until the property has actually been repaired or replaced. If the property is not repaired or replaced, we will pay on an actual cash value basis.

(2) Items to which Actual Cash Value applies at the time of loss or damage will be the least of the following:
     (1) The actual cash value of that property; But in the event of partial “loss”, not exceeding 20% of the Limit of  insurance applicable to the Covered Property, no depreciation will be applied in the settlement of the claim;
     (2) The cost of reasonably restoring that property to its condition immediately before loss or damage; or
     (3) The cost of replacing that property with substantially identical property.

The loss suffered by AEI was large. Travelers offered AEI $379,868.75 in settlement of AEI’s claim on the damaged crane, which represented what Travelers calculated as the actual cash value of the crane, less a $25,000 deductible. The case does not say what it would have cost to replace the crane, but it is safe to assume that the difference between actual cash value and replacement cost was enough to justify AEI's suit against Travelers, and the appeal that followed. So, what lesson can we take from this?

In most cases, insureds do not see the entire insurance policy and all its endorsements prior to the policy being issued. Instead, the insured’s broker presents the insured with quotations from one or more insurers. The insured—in consultation with the broker—makes a decision based on the quotations. What follows is a “binder,” which summarizes the coverages being bought, including such information as limits of insurance, locations, types of risks, and premium. The binder typically also lists all the endorsements that will be attached to the policy.

The court does not say whether AEI had a chance to see the actual language of the endorsements prior to binding, but our experience suggests that the answer likely is “no.” But given how expensive AEI’s property was, and the no-doubt large gap between “actual cash value” and “replacement cost” for much of that property, it is reasonable to assume that AEI would have wanted to purchase full replacement cost coverage. What they got, however, was replacement cost coverage for property that was less than five years old, and only if it was “listed.” We can only speculate what AEI thought it was buying, but we can assume that AEI was taken by surprise to learn that unlisted property, and listed property that was five years old or older, would not be covered for replacement cost.

Therefore, the lessons from this case are:

• Know the values of the property you are buying insurance to protect. If necessary, get your accountant involved.
• If “actual cash value” coverage will not be enough to protect your business from economic hardship, tell your broker!
• Do not rely on a “list” of endorsements, especially as to any risk that is “mission critical” to your business and its survival. Instead, insist on obtaining and reading a copy of critical endorsements and policy provisions.
• Do not undertake this analysis alone. Involve your broker and lawyer in this analysis, so that you can lower the risk of an unhappy surprise, and winding up in lawsuit with your insurance company as a result.