Calculating the Amount of Property Insurance Coverage – New Appleman on Insurance Law Library Edition, Chapter 47

Richard Cohen, Daniel Gerber and Michael Glascott   By Richard J. Cohen, Daniel W. Gerber, and Michael T. Glascott, Partners, Goldberg Segalla LLP

Section 47.01[1] discusses the fact that policies that insure tangible property require direct physical loss or damage to the covered property during the policy period. This section explains that there are a number of different theories used for determining when the loss takes place.

Section 47.01[2] explains the various theories of "trigger" of coverage, including the "exposure" theory, the "injury-in-fact" theory, the "manifestation" theory, the "first discovery" theory, and the "continuous trigger" theory. Section 47.01[2][b] details that under the "exposure" theory, it is the actual exposure to the loss producing agent that triggers coverage under the policy. Section 47.01[2][c] explains that under the "manifestation" trigger, the policy in effect when the loss actually manifests itself is the one looked upon to respond to the claim. It explains that the manifestation trigger is said to provide the clearest signal for coverage purposes because it is the easiest to prove. Section 47.01[2][d] explains that under the "injury in fact" theory, a policy is triggered if the damage actually took place during the policy period even if it was not discovered until after the policy had expired. It addresses the justification for this theory as it is the one most consistent with the plain meaning of the policy language. It also discusses the fact that it is the most difficult theory to use in terms of application.  Section 47.01[[1][d] explains that under the "continuous trigger" rule, every policy in effect from the time of initial exposure through manifestation is deemed to be on the risk.

Section 47.01[2] explains the actual application of the "trigger" theories, discussing the factors which go into determining which theory a court might select. It cites to and evaluates one of the leading cases on trigger of coverage for a first-party property loss and also discusses the judicial authority in those states that have addressed the issue.

Section 47.02[1] discusses the first-party claims process. Particular treatment is given to the primary conditions precedent with which the insured must comply in order to recover under the policy. It refers to the fact that the most significant conditions in the policy include the obligation to give sufficient and timely notice of loss, to provide a sworn proof of loss, and, if the insurer requires, to submit to an examination under oath. Section 47.02[2] details the fact that prompt notice of loss is the first condition precedent to coverage, and that such failure can be a complete bar to a recovery. Section 47.02[3] expands upon the requirement that the insured provide to the insurer within 60 days of request to do so, a sworn proof of loss detailing the items lost or damaged for which the insured seeks recovery. Section 47.02[4] examines the insurer's right to require the insured to submit to an oral examination under oath -- the examination under oath being very similar to a deposition.

Section 47.02[5] discusses the people whom the insurer and/or the insured might retain to provide assistance with the claims process. Section 47.02[5][a] identifies the people that the insurer might retain in connection with the loss adjustment; those include staff and/or independent adjusters; whose role it is to determine the cause of the loss; whether the policy provides coverage; the extent of the damage; which items should be repaired and which should be replaced; the cost to repair or replace the property; and what amount the insurer should pay in connection with the claim. It also explains that for large or more complex claims, particularly those involving business interruption or extra expense losses, an insurer may hire an accounting firm to assist in the calculation of the loss.

Section 47.02[5][b][i] discusses the fact that the insured may elect to engage certain claims specialists to assist in resolving a property claim. Section 47.02[5][b][ii] details the nature and extent of assistance an agent or broker may provide to the insured in connection with the claim adjustment process. It further discusses the fact that that the agent's role includes notifying the insurer of the loss and attempting to intervene on the insured's behalf if it appears that some portion of the client's claim may be unjustifiably denied. The agent or broker might also assist the insured in preparing the sworn proof of loss.

Section 47.02[5][b][iii] explains that there are accountants who specialize in insurance claims and that engage in assistance which can include the investigation of the cause and extent of the damage; a determination of what repairs are needed; assistance  with the preparation of the sworn proof of loss; and actual negotiation with the insurer with respect to loss calculation. The section also discusses the types of claims in which involvement of the insurance claims accountant is most likely warranted.

Section 47.02[5][b][iv] discusses the role that public adjusters play on behalf of the insured in connection with the loss adjustment process. Public adjusters investigate the cause and extent of the damage, determine what repairs are needed, get estimates on the cost of repairs, assemble documents needed to prepare the sworn proof of loss, and negotiate with the insurer with respect to the adjustment of the loss. Public adjusters often handle the insured's claim from beginning to end.

Section 47.03 discusses that portion of the loss which the insured may retain responsibility for, either because the policy included a self insured retention or deductible, or because of a co-insurance requirement.

Section 47.03[1] discusses the concept of "moral hazard," which refers to the tendency of insurance protection to alter an individual's motive to prevent loss. The section explains that incomplete coverage gives an insured a motive to prevent loss by exposing him or her to some financial risk.  It also explains that moral hazard might take several different forms.

Section 47.03[2] discusses the concept of self insurance, which is when an individual or business insures itself in whole or in part, as opposed to seeking insurance from an insurance company. Individuals and smaller business generally do not self insure because they cannot afford the risk of catastrophic loss. A self insured retention, is a dollar amount specified in a policy of insurance that must be paid by the insured before the policy will respond to a loss. It can apply both to the amount of the loss and, in some cases, the costs related to the loss adjustment.

Section 47.03[3][a] discusses the policy deductible, which is the portion of the covered loss that is not paid by the insurer. The amount of the deductible will be stated in the policy's declarations pages. In a property insurance policy, it is subtracted from the amount of loss, or from the amount the insurer would otherwise be obligated to pay to the insured in connection with the loss. Deductibles can reduce the cost of the premium to the insured because they reduce the moral hazard incentives and they encourage risk control by the insured.

Section 47.03[3][b] addresses the various types of deductibles. Deductibles can be applied on a per event or aggregate basis, and may be either a specific dollar figure or percentage of the loss amount.  The type of deductible used will vary depending on the type of property covered, the frequency and severity of the loss, and the type of incentive the insurer is trying to offer to the insured.

Section 47.03[3][b][i] discusses "per event deductibles" in which a deductible applies to each item, location, claim, or occurrence. The per event deductible can be expressed as either a dollar amount, a percentage, or a time period.

Section 47.03[3][b][ii] addresses aggregate or straight deductibles which apply collectively. An aggregate deductible applies collectively to all losses that occur during a specified period which is typically one policy year. An aggregate deductible is usually stated as a dollar figure, which is called a straight deductible. The most common way of applying a straight deductible is to subtract it from the total loss amount, in which case the insurer does not pay unless the covered loss exceeds the deductible.

Section 47.03[3][a][iii] discusses "split" deductibles, in which the policy applies one deductible for most causes of loss but a different (usually higher ) deductible for other specified causes of loss.

Section 47.03[3][b][iv] addresses percentage deductibles, which are those deductibles expressed as a percentage of some amount, rather than a specific dollar amount. It could be a percentage of the insurance, or the value of the property, or the amount of the loss.

Section 47.03[4] relates to co-insurance. Co-insurance clauses are commonly used to encourage an insured to carry adequate insurance by requiring the insured to purchase an amount of insurance equal to or greater than a specified percentage of the total insured value of the property. Under a co-insurance provision, if the insured does not meet the requirement, he or she would be paid only a portion of the adjusted loss. Almost all property insurance policies contain a co-insurance clause.

Section 47.03[5] discusses the difference between self insured retentions and deductibles. Although courts frequently treat the two as interchangeable, they do have distinct differences. The most notable difference is that a deductible reduces the total amount of insurance. A self-insured retention does not.

Section 47.03[6] addresses the application of deductibles in co-insurance situations and discusses the fact that deductibles are still applied even when the insured is inadequately co-insured.

Section 47.04[1] provides an overview of the methods by which insurance policies may provide coverage for property that is lost or destroyed. An explanation is provided as to actual cash value and replacement cost coverage provisions, which are common components of an insurance contract. The means by which to calculate actual cash value is provided and the components of that analysis are explained, including the role of depreciation and how the parties determine the value of the property.

Section 47.04[2] explains the role of depreciation by defining that term in reference to age, wear and tear, market conditions, and obsolescence of the property.   Section 47.04[2][a] further details how depreciation is calculated by considering the original cost of the property along with its estimated service life. This section explains that depreciation rates based on average useful life can be a factor, but are not necessarily controlling. Testimony may be adduced as to the condition or value of property at the time of a loss, but the weight to be given such testimony depends on the circumstances in each case.

Section 47.04[2][b] explains that the determination of actual cash value is not based upon what the policyholder actually pays to repair or replace damaged property. Further, that a cash value method of adjusting a property loss includes any cost that an insured would reasonably incur in repairing or replacing a covered loss, regardless of whether the insured intends to repair or replace the property.

Section 47.04[2][b][ii] explains methods of calculating repair or replacement cost. This section observes that - depending upon the language of the policy - an insured could argue that the policy need not be an actual cash value policy because it is possible that "actual cash value" means repair costs less depreciation.

Section 47.04[2][b][iii] further details factors to be considered in calculating depreciation, such as wear and tear on the property at the time of loss. Treatment is also given to the fact that depreciation may include broader concepts with regard to the value of property, such as obsolescence or the introduction of more modern building techniques and materials.

Section 47.05[1] defines what is meant by the term "repair and replacement cost." This section explains that the term "replacement cost" generally refers to the cost to repair or replace lost property at the time of the loss or damage. This section also explains what is meant by the term "hypothetical replacement cost" which is routinely calculated prior to the determination of whether an insured is entitled to recover replacement cost.

Section 47.05[2] explains what is meant by the term "like kind and quality" as that term has been interpreted in the majority of jurisdictions. "Like kind and quality" generally refers to the likeness one thing may have to another and this term is critical in understanding the manner in which the valuation of materials are made which are used to repair or replace a loss.

Section 47.05[3] examines the complications which can arise where like kind and quality of materials is in question due to availability and what happens when technological advances in materials affect the availability of the materials originally used. This section also considers what a loss settlement provision might require if repairs cannot be made of like kind and quality because technological advancements have been made with regard to materials available. In these circumstances, like kind and quality could be interpreted to mean "equivalent construction for similar use."

Section 47.05[4][a][i] and Section 47.05[4][a][ii] discuss the variations of the "repair" scenario where a defective or insufficient repair is made to a property which is the subject of a loss, or where there is a fundamental inability to repair at the same location or in a manner which completely restores the lost property. Jurisdictions have disagreed as to whether repair or replace requires physical restoration and or whether potential diminished value in property is also included.

Sections 47.05[4][a][iii] and [iv] examine whether repairs are sufficient if there is an inability to repair and provide an identical structure or one on the same location. Generally, replacement cost coverage may not be limited to, in all instances, the cost of an actual replacement on the same premises. In addition, the cost of repairs may only apply to a partial loss where repairs can be made rather than a situation involving a total loss.

Section 47.05[4][b] explains why a limitation of liability to the cost of repairs may not apply in the event of a total loss and that, instead, such a limitation to the cost of repairs may only apply with respect to a partial loss where repairs can be made.

Section 47.05[4][c] considers the situation in which the sale of damaged property inconsistent with the terms of a policy could significantly compromise an insured's right to indemnity for a loss.

Section 47.05[5] discusses what is meant by the term "holdbacks." This section explains that a holdback is that amount which a policyholder may later claim as an added loss based on the cost to repair or replace. The term "holdback" can also refer to the supplemental claim for depreciation in the repair/replacement phase of the indemnification process.

Section 47.06 considers the issues which arise with regard to appraisals. This section provides an overview of when and how disagreements may arise among the parties involved in the repair or replacement for a loss. This section also considers the basis for the right to an appraisal and confirms that most aspects of the appraisal process, although not expressed in detail, are laid out generally by the provisions contained in most insurance policies.

Section 47.07 examines what expenses other than materials and labor may be included in the cost to repair or replace. Additional expenses such as lost profit, overhead and taxes may also be included as such costs under certain circumstances.

Section 47.08 addresses coverage for professional fees associated with the presentation of the claim. Although standard Insurance Services Office ("ISO') forms do not include coverage for claim preparation expenses, endorsements can be purchased which provide for such coverage.  The section discusses certain situations in which courts have had the opportunity to address such coverage.

Section 47.09 defines stated value coverage and discusses disputes over stated value. Policy language examples are provided and discussed. Disputes over the scope of property actually included in the stated value of the policy are detailed.

Sections 47.09[1] provides greater detail and example of stated value policies. Premium and claim peculiarities are referenced.

Section 47.09[2] compares stated value coverage to actual cash value and agreed value coverage. The section details how stated value policies allow the insured to state a value for the property that is greater than its depreciated "book" value, while only agreed value insurance policies guarantee an insured will get all of the policy limits in the event of a total loss. Agreed value policies are examined and examples are provided of their application.  The agreement that must take place between the insured and the insurer on agreed value policies is also discussed.

Section 47.09[3] discusses the claims process for stated value, actual cash value and agreed value policies. Common misunderstandings are examined through example claim scenarios.

Section 47.09[4] addresses dispute resolution for stated value, actual cash value and agreed value policies in the event a claim over value cannot be easily resolved. The appraisal process and arbitration process are again explored, as is litigation strategy. Consideration is given to insureds' assertions that the insurer has waived an appraisal or arbitration procedure.

Section 47.10 explains the effect of policy limits. Section 47.10[1] frames up further discussion concerning the two most common issues that affect limits - occurrence issues and non-cumulation issues.  Section 47.10[2] continues this discussion addressing occurrence issues.  Single limit endorsements and their impact are discussed. Examples of courts' treatment of single versus multiple occurences are provided. Section 47.10[3] addresses non-cumulation policy language.  Non-cumulation clauses indicate that if the occurrence falls during one or more policy period, the amount paid will reduce the limit on any other policies. Sample policy language and examples are presented.

Section 47.10[4] continues with a discussion of the application of policy limits and the interrelation of geographic spread, co-insurance and diverse types of limits.  Section 47.10[4][b] breaks down the effect of geographic spread discussing the effect of the insured's claim on limits when the insured has multiple locations.  Section 47.10[4][c] addresses the impact of co-insurance requirements on policy limit calculations. Detailed examples are provided contrasting co-insurance provisions in replacement cost and agreed value situations. 47.10[4][d] addresses the various types of policy limits, including blanket and scheduled limits.  A scheduled limit is a limit of insurance that applies to a particular type of property at a particular location. A blanket limit is a single limit that applies to more than one category of property, more than one location, or both. Detailed examples are provided showing the difference in application of these types of limits to similar losses.

Section 47.10[4][e] details the effect of a loss limit in a policy. A loss limit is a limit of insurance that is less than the total values at risk but sufficient to cover the total values actually exposed to a single loss occurrence. An example of a loss limit is provided. The implications and application of a loss limit are also addressed.

Section 47.10[5] details and explains the purpose of sublimits for certain types of exposures and the effect of various sublimits in calculating the amount of coverage.  The reasoning behind sublimits is outlined, and common sublimits are referenced, including: earth movement; flood; personal property; valuable papers and business equipment; expediting expenses; and debris removal.

Section 47.10[5][a] discusses a business personal property sublimit and offers examples for calculating. An illustrative example is provided discussing how many disputes over this sublimit arise out of what qualifies as "business" property.

Section 47.10[5][b] discusses the valuable papers and records sublimit. Disputes over this coverage often focus on what constitutes a valuable paper or record. Another issue discussed is whether the insured took appropriate measures under the policy to secure the items. Failing to do so may affect coverage.

Section 47.10[5][c] explains the debris removal sublimit. Current ISO forms are addressed including a 25 percent sublimit for debris removal with an additional potential $10,000 often available in coverage. Examples of this sublimit's application are provided. Also examined is whether cleanup costs fall within this sublimit.

Section 47.10[5][d] examines extra expense sublimits. Extra expense insurance covers expenses over and above the insured's normal expenses that are incurred to continue operations after a direct damage loss. This section includes discussion of whether physical loss is required to make an extra expense claim. Monthly limitations, as well as "40-80-100" limitations, are addressed. A comparison with expediting expense is also provided.

Section 47.11 explains the effect of the value of recovered and salvaged property in the loss calculation. The "sue and labor clause" in typical policies is discussed in Section 47.11[1] as are insured obligations to preserve property. Section 47.11[2] explains how to determine salvage value, explaining that the level of depreciation must be calculated first. Section 47.11[3] analyzes the measure of repairing and returning property to a restored condition. Whether an insured must actually commence repairs before being paid the replacement cost is examined in detail.

Section 47.12 addresses the effect of multiple insurers on a property damage claim and the impact this may have in the loss calculation. Section 47.12[1] explores the situations that arise when insurers have overlapping coverages. Also explained is the conflict that arises between various insurer "other insurance" clauses.  Section 47.12[2] addresses the impact of excess insurance in calculating a loss. Situations addressing multiple policies are addressed in the context of when excess coverage is truly excess. Section 47.12[3] discusses multiple insurers on the same potential risk and how disputes over coverage may be assessed by the courts. Section 47.12[3][c] analyzes the types of "other insurance" clauses in various policies that effect the disputes among insurers on the same risk, while Section 47.12[3][d] assesses resolving conflicts in "other insurance" clauses among the various insurers on the same risk.

Cross References: See New Appleman Premium Online Checklists § 31.01: CHECKLIST: Evaluating Commercial Property Insurance Policy Documents to Determine Coverage; § 31.08: CHECKLIST: Assessing Damages Covered by Commercial Property Insurance Policy.

Richard J. Cohen, Esq. is the managing partner of Goldberg Segalla LLP, across the firm's ten offices in New York, Pennsylvania, New Jersey and Connecticut. Mr. Cohen chairs the firm's Professional Liability Practice Group and co-chairs its Global Insurance Services Group. He is a national author and lecturer on coverage and bad faith. Additionally, he is a three-time co-author of the annual Survey of New York Insurance Law published in the Syracuse University Law Review. Mr. Cohen currently sits on the Council for Litigation Management's ("CLM") National Committee, and is co-chair of CLM's Professional Liability Committee. He has served as the National Co-Chair of the Insurance Company Relations Subcommittee of the Defense Research Institute ("DRI"), and is a former national membership chair of DRI's Life, Health, and Disability Insurance Committee. He is also a former chair of the Insurance Law subcommittee of DRI's Construction Law Committee. Mr. Cohen has been a CPCU instructor since 1999. On multiple occasions he has been named to Business First's Who's Who in the Law, and for several years has been named as one of Law & Politics' New York Super Lawyers. He is a member of the New York and Pennsylvania Bars.

Daniel W. Gerber co-chairs Goldberg Segalla LLP's Global Services Insurance Practice Group comprised of nearly 30 lawyers across the firm's 10 offices. He maintains an international practice in complex insurance coverage and reinsurance disputes. In addition, he advises insurance and reinsurance companies on the effective use of social media platforms and the mitigating risks associated with social media. Mr. Gerber has authored chapters on discovery in insurance litigation, risk shifting, life insurance and transactional insurance. He is an author of New Appleman Insurance Law Practice Guide, as well as being a regular contributor to Mealey's Emerging Insurance Disputes. Mr. Gerber is the editor of the Insurance and Reinsurance Report blog, and is the current chair of the Insurance and Reinsurance Committee of the International Association of Defense Counsel. He also chairs the Defense Research Institute's Counsel Task Force, as well as its Social Media Task Force. He has served on DRI's Annual Meeting Steering Committee, and is currently the Chair of DRI's Insurance Roundtable. He has been appointed Vice-Chair of DRI's Life Health and Disability Committee. Mr. Gerber currently sits on the Board for the Insurance Law Center. In addition, he is the past Chair of the 3,500 member Torts, Insurance and Compensation Law Section of the New York State Bar, and has served in the New York State Bar House of Delegates. He is a US-ARIAS certified arbitrator, possesses an AV rating from Martindale Hubbell, a Super Lawyer designation from Law & Politics Magazine, and has been named by his peers to Business First's Who's Who in Law. Mr. Gerber is admitted to the United States Supreme Court, as well as all federal and state courts in New York and Pennsylvania. He has received numerous awards and honors for his professional and community service.

Michael T. Glascott is a partner in Goldberg Segalla LLP's Global Insurance Services Group. His practice includes complex insurance coverage, bad faith and commercial litigation as well as personal injury defense. Mr. Glascott has successfully represented insurer clients in courts throughout New York and other northeastern states such as Ohio, New Jersey and Delaware. Mr. Glascott is admitted to practice before all State and Federal courts in New York and Oklahoma, as well as the United States Court of Appeals for the Third Circuit. He has been a member of the Federation of Defense and Corporate Counsel since 2003 and currently serves as a Chair of the Insurance Coverage Section, Vice Chair for the Task Force on Civil Discovery, Eastern Coordinator for State Representatives and Chair of the Resolution Revision Committee.  Mr. Glascott is also a member of Membership Development and Retention Committee of the Federation.

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