The Truth About Home Replacement Value

Replacement value, what it takes to put your home back into the position it was in before a fire, is not as straight forward as you might think. Sometimes, the term isn’t even defined in your policy. It’s become an area where litigation is commonplace and could be avoided if insurers simply were straight forward.

We asked Dave Peterson, a fire insurance expert who has practiced insurance law for over 30 years, to explain why there is so much litigation in this area. “It used to be that the insurance industry had what they called guaranteed replacement cost. Then, the 1994 earthquake hit California and the insurance industry lost a ton of money providing it. Guaranteed replacement cost meant that the policy might have a limit of $100,000 for the dwelling, but with the guaranteed replacement cost, the coverage didn’t stop there. The insurance company was obligated to pay to repair the home even if it took more than $100,000, so after the industry lost that great deal of money, almost no insurer in the State of California writes guaranteed replacement coverage anymore.

They reluctantly started writing extended replacement cost coverage and now some of them aren’t even providing that coverage. Most policies do not require that the insurance company immediately pay that amount. They can pay what they call “actual cash value”, which may or may not be defined in the policy. If it’s not defined in the policy, then it is the reasonable market value of the home at the time.”


Replacement value isn’t the only part of a fire insurance policy that confuses policyholders. The concept of a ‘holdback’ is another area that continually brings about bad blood between insurers and insureds. Peterson explained, “It’s a very contentious area in insurance litigation but, generally speaking, actual cash value will be around a 20 percent reduction of the replacement cost value. However, the insured can get that money back by simply repairing the dwelling, so it’s what they call in the industry a “holdback”. The industry properly does this. They hold back paying the total amount to be convinced that the insured is going to repair the home and then once that happens; they get back the 20 percent. However, there are very bad feelings with insureds and insurance companies over the holdback, the reasonable amount of repair costs and what is actual cash value. It’s highly contentious.”

We asked Bob Scott, a partner with the Advocate Law Group and 30 year practitioner of insurance law on behalf of consumers, what he thought about holdbacks. “The first thing that happens is the insurance company says, ‘Well, we’re just going to pay you for essentially the 80 percent of what we really know it cost you to go replace that article or item.’ Then, if you go replace it and give them a receipt, they’ll pay the other 20 percent. However, they’ll never tell you that. The only way you’re going to learn that, I guess, is by reading an article like this or finding it out from somebody else that’s been through the process. It’s a good example of a hidden little trick that applies all the way across the board – and it’s very important.”