Whitehouse Condominium Group purchased an insurance policy from Cincinnati Insurance Company before a fire in 2010. The policy was written on an “Actual Cash Value” basis, which is cheaper than the standard “Replacement Cost”. Under a replacement cost policy the insurance company pays to rebuild the damaged or destroyed building to it’s prior state. Under actual cash value, the insurer cuts a check for the building that includes deductions for depreciation, age, condition and obsolescence.
After the fire Cincinnati sent a check for $1.2M, to which Whitehouse claimed was less than half the value of the building. Whitehouse sued, which is often the only recourse when disputing an insurance company, and won a summary judgement in their favor. Cincinnati appealed but the 6th Circuit upheld the lower court’s ruling. The complete ruling can be found here.
The case illustrates the need to understand insurance terms and to fully understand the ramifications of the coverage being purchased. When a building is properly insured for replacement cost (which is legally required of associations in Illinois) the damaged portion of the building is rebuilt. Both owner and insurance company have incentive to get the property fixed as quickly and inexpensively as possible. When insuring a building for actual cash value, the settlement can be tied up in court for years and require a tremendous amount of legal fees.
If a building cannot be insured for replacement cost, “agreed value” is a smart way to go. Both the insurer and the insured agree on a building value when the policy is put in place. If there is a fire or other catastrophic damage both sides have already agreed to the payment that should be made. This process can save years of aggravation and prevent settling for less than a building is worth to speed up payement.
Contact an expert condo insurance broker to discuss better protecting your association against property damage and legal fees. As the insurance market continues to get more competitive many carriers will continue to cut coverage to offer the lowest price. As the old saying goes – you get what you pay for.