Will the Insurance Company Pay The Full Cost?

Home insurance companies have their own ways to avoid paying the full cost of a claim.

The company’s policy form allows it to delay payment of the full replacement cost until actual repair or replacement is complete. Until then, the homeowner is entitled only to the actual cash value of the loss, which is the depreciated value. The effect is to turn a replacement cost policy into a replacement policy. Meanwhile, the company keeps the difference and earns investment profits on it. Indeed, the company may keep the homeowner’s money forever.

Getting the Rest of the Payment

If the homeowner does not rebuild, the company never makes the final payment. The insurance company will pay only if asked, of course. Some homeowners, receiving an initial check for actual cash value from the company, do not know about their right to get the rest. Others may read the policy and, as in some policies, find a provision that the additional payment will only be made for repairs completed within 180 days; if repairs take longer, they may not understand that a court will refuse to enforce the 180-day limit if there are good reasons not to do so.

Claiming Additional Amount

In either event, the homeowner may not claim the additional amount, leaving the company with a profit at the policyholder’s expense. Not satisfied with this provision in the policy allowing them to hold back part of what is owed; insurance companies have attempted to reduce the amount that they owe as actual cash value pending the completion of repairs. Brian Salesin suffered water damage to his home from a leaking washing machine and made a claim to State Farm, the insurer from which he had bought a homeowner’s “extra” policy that provided replacement cost coverage. 1

After investigating, State Farm sent Salesin a check for $20,778.75. From the above figure was subtracted $1,048.44 in betterment and $5,581.79 in profit and overhead for a total amount withheld of $6,630.23. (Betterment here meant the difference between the replacement cost and actual cash value, consistent with a policy term like that described above.)

10 and 10

The controversial deduction was the $5,581.79 in profit and overhead. This was the insurance company’s technique of deducting from the actual cash value an additional amount often described in the insurance trade as 10 and 10. If the job was done by a general contractor, the contractor would incur overhead above the costs of labor, materials, and payments to subcontractors specific to this job, such as the expense of running an office, and also would be entitled to earn a reasonable profit; by convention in the trade, the usual figures are 10% overhead and 10% profit.

State Farm’s in-house operation guide (which the court pointed out was not part of the contract between State Farm and Salesin) justified holding back this 20%. State Farm argued, it was entitled to hold on to not just the difference between the replacement cost value and the actual cash value, but also an additional 20% of the replacement value. Hold on to that difference, that is, and profit from the float of investing it until it was eventually paid, or, if Salesin did not make the repairs, did not use a general contractor, or simply forgot to reclaim it, hold on to it forever.

Read on

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No Full Cost Payment

Even if the home is fully insured to value, the homeowner is entitled to replacement cost, and the work only involves the construction of a replacement house identical to the original. The homeowner will find that the insurance company will not pay the full cost when it initially settles the claim.

1. Salesin v State Farm Ins. Co., 581 N.W. 2d 781 (Mich. App. 1998)

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