OGC Op. No. 08-10-12
The Office of General Counsel issued the following opinion on October 29, 2008, representing the position of the New York State Insurance Department.
RE: Replacement cost; payment on an “estimated claim”
1) Does the New York Insurance Law or regulations promulgated thereunder define the term “replacement cost”?
2) Does an insured’s acceptance of an insurer’s check for payment based on an “estimated claim” extinguish the insured’s right to seek additional payments from the insurer?
1) No. The term “replacement cost” is not defined in either the New York Insurance Law or Insurance Department regulations.
2) As general matter, if the payment made on the estimated claim represents payment of only the undisputed elements of the claim, the insured may accept the check, and then seek payment for the disputed amount within the limitations of the insured’s insurance policy. If the payment represents a full settlement of the claim, and the insured accepts the payment, then the insured may not seek additional payment for damages sustained.
The inquirer reports that she is an accountant, and that her client’s fine furniture, rugs, and hardwood floors sustained water damage as a consequence of a faulty air-conditioning system. The insured submitted a claim under his homeowners’ policy, which was written on “Form HO-6” covering a condominium in Manhattan. The insurance company’s adjuster calculated the “estimated claim” of damages in the approximate amount of $14,000.00. The insurance company forwarded a check to the insured in that amount based on the adjuster’s estimate. The insured maintains the actual amount of damages sustained is $20,000.00. The insurance company and the insured have been communicating in an effort to reach a mutually agreeable resolution. When asked by the Department if the inquirer would provide copies of relevant documentation, the inquirer responded that she was “not sure” if she would be willing to do so. Accordingly, the analysis that follows is general in nature. The inquirer asks about the definition of the term “replacement cost” and whether acceptance of the $14,000.00 check by the insured extinguishes the insured’s right to assert that an additional claim payment is due.
1. Replacement Cost
The New York Insurance Law and regulations promulgated thereunder do not require or provide a specific definition of the term “replacement cost.” The forms of homeowners’ policies commonly used by many insurers are those developed by Insurance Services Office, Inc. (ISO). ISO Form HO-6 is a policy designed specifically for condominiums and co-operative apartments. However, many variations of these forms are submitted to the Insurance Department on a regular basis for approval for usage by licensed insurers in connection with policies written in New York State. For a specific definition of the term “replacement cost” as it relates to an inquiry, the insured should refer to the loss settlement provisions of the policy in question.
Homeowners’ policies are typically written on a “replacement cost” basis or an “actual cash value” basis. If the policy is written on a replacement cost basis, the insurer is obligated to pay the amount it would actually cost to repair or replace the item, without a deduction for depreciation. If the policy is written on an actual cash value basis, the insurer will determine the amount payable by taking the current replacement cost and subtracting an amount for wear and tear, and/or depreciation.1 The method for the determination of amounts payable in the event of a covered loss is specified in the policy.
In many cases, homeowners’ insurance coverage will be based on the home’s replacement cost. The loss settlement provisions of replacement cost policies typically provide that in the case of property such as fixtures, balconies, additions and other such improvements, the insurer will pay for the complete repair or replacement cost if the damaged item is repaired or replaced within a reasonable time. If the damaged item is not repaired or replaced within a reasonable time, the insurer will pay only the actual cash value of the property. In the event the item damaged is personal property, such as furniture or a television, the insured is generally entitled to payment of the actual cash value of such items. However, the insured often may be able to obtain replacement cost coverage on personal property for an additional premium.
2. Acceptance of Payment on an “Estimated Claim”
The second question of the inquiry - regarding acceptance of the $14,000.00 check when the insured believes he is due $20,000.00 - actually raises two issues. The first issue involves payments made on disputed claims. The second relates to whether the acceptance of the payment extinguishes the insured’s right to seek additional payments from the insurer. 11 NYCRR § 216.6 of Regulation 64, entitled “Standards for prompt, fair and equitable settlements”, applies to all New York authorized insurers, including those that write homeowners’ policies. Sections 216.6(e) and (g) of Regulation 64 are relevant to this analysis.
The inquiry indicates that the insured disagreed with the amount of the loss estimated by the insurer’s adjuster, and that the parties have been communicating in an attempt to arrive at a mutually satisfactory settlement. Section 216.6(e) of Regulation 64 provides that insurers are obligated to make payment on any undisputed elements of a claim on the following terms:
(e) In any case where there is no dispute as to one or more elements of a claim, payment for such element(s) shall be made notwithstanding the existence of disputes as to other elements of the claim where such payment can be made without prejudice to either party.
Thus, the check received by the insured may represent payment of the undisputed “element(s)” of the claim by the insurer. If, in fact, the check represents payment of only the undisputed elements of the claim, then the insured may accept the check and seek additional payment for the disputed amount(s). Without reference to the check or accompanying documentation, the Department cannot discern whether it was the insurer’s intent to pay only the undisputed elements, or as full payment of the claim.
In any event, there are other statutory restrictions placed on insurers with respect to restrictive endorsements and documentation which must accompany payment checks or drafts. Section 216.6(g) of Regulation 64 prohibits an insurer from attempting to limit its obligation by issuing checks or drafts for payment that set forth language stating that acceptance of the check or draft constitutes a final settlement or release of any or all future obligations. Section 216.6(g) of Regulation 64 states in relevant part as follows:
(g) Checks or drafts in payment of claims; releases. No insurer shall issue a check or draft in payment of a first-party claim or any element thereof, arising under any policy subject to this Part, that contains any language or provision that expressly or impliedly states that acceptance of such check or draft shall constitute a final settlement or release of any or all future obligations arising out of the loss.
In addition, Section 216.3(c) of Regulation 64 provides that any payments to the insured that are less than the full amount of the claim must be accompanied by an explanation as set forth below:
(c) Any payment, settlement or offer of settlement which, without explanation, does not include all amounts which should be included according to the claim filed by the claimant an investigated by the insurer shall, provided it is within the policy limits, be deemed to be a communication which misrepresents a pertinent policy provision.
This opinion is limited to an interpretation of the Insurance Law and Department regulations. The Department expresses no opinion about any other laws that may be applicable to the inquiry.
For further information you may contact Associate Counsel Bradlely F. Rice at the Albany Office.
1 Section 216.6 N.Y. Comp. Codes R. & Regs. Pt 216, Tit. XI, (2005) (Regulation 64) provides the method for determining actual cash value, in the absence of a policy provision to the contrary, as follows:
“Actual cash value,” unless otherwise specifically defined by law or policy, means the lesser of the amounts for which the claimant can reasonably be expected to:
(1) repair the property to its condition immediately prior to the loss; or
(2) replace it with an item substantially similar to the item damaged