Property Valuation. Commercial property policies provide three main types of coverage: property, business interruption, and extra expense. With respect to property coverage, most policies provide “replacement cost new” (as opposed to “actual cash value”). Thus, the policyholder is entitled to replace a used item with a new item “of like kind and quality.” So a 10-year-old wood dresser gets replaced by a brand-new wood dresser. Replacement-cost-new coverage often results in an upgrade in the property.

The insurers may attempt to decrease adjustment by arguing that the damaged property was old or defective. Policyholders argue that this is the very nature of replacement-cost-new insurance — something old is replaced with something new. Item by item, adjusters debate replacement cost valuation.


Causation of Damage. A related property-adjustment issue is causation and the scope of repairs required as a result of a hurricane. For example, a policyholder may have a building with a 20-year-old roof, five years from the end of its useful life. Before the storm, it was not leaking; after the storm, it leaked.

The policyholder’s roofing expert may believe that the roof needs to be replaced because of the storm. The insurer may argue that the roof was defective and leaking before the storm or that only a small portion of the roof needs to be replaced. Meanwhile, the policyholder may need to replace the whole roof and be left unfunded by its insurer.

Such causation issues are resolved in accordance with the “efficient proximate cause” rule, which poses a simple question: Was the hurricane the last or precipitating reason for the repair work? Perhaps the “pre-existing condition” of a building destroyed by a hurricane was very poor, with a cracked foundation in a state of near collapse. Nonetheless, if the hurricane was the “efficient proximate” cause of the collapse, there is coverage.


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