Replacement Cost - Definition

[Walter]

I know this is unorthodox, but I just replied to a post in the Newbie Section on "Insurance- Replacement Cost - New Dryers." There's an article on page 43 of this month's The :eek: which seems to have a radically different definition of Replacment Cost. Could you vets & others take a look and respond?

Thanks,
Walter

[pete f]

I know there is a thread here on this subject, Sunflower brought it up awhile ago. I have read the article, depends on how you interrupt it, IMHO
It goes on to say of you have a mat with 20 machines valued at $3500 each then the cost to replace them is $70,000. Then it talks about depreciation, so someone may only insure them for $25,000. The final note is in the event of a total loss you will only get the 25k. Here is where you have to reread.. 20 washers valued at $3500, yet depreciated condition they are only worth a total of 25k, so really they are not worth 70k. If you can replace your equipment with equipment of similar condition then why buy replacement cost insurance? This is like
buying insurance a 10 year old car for replacement cost, which is not even sold because the car insurance companies don't want to buy you a brand new car when you wreck your old car, but for some reason the insurance company is glad to sell you insurance on 20 year old equipment at current replacement cost! They must know something. I buy what I want to, the equipment is worth 1/2 of what it was new in 5 years, like a car. I can take a big hit, so my strategy is not for everyone.

[The wizard]

Replacement cost. Your house, your business your "real property" you own your insurance is based on replacement cost because it seems to increase value. However, what is inside your house , business is where it gets sticky. It seems to go down in value unless it is made of gold. Therefore, you have to in my opinion wiegh the replacement cost, depreciation , your risk, and the over all chance of damage by who ever and what ever. Insurance which some people feel should replace everthing the way it was is just not being real. You make sure if a large loss occurs you can recover enough not to completely close your business or cover your balance and walk away. Remember "you" never collect on life insurance. Why buy pay for more insurance then you really need.

[Walter]

Thanks for your responses. Here's part of the thread posted by Sunshine in May:

"I was talking about insuring personal prop/equipment at Replacement Cost.

HERE'S THE DIFFERENCE - IT'S A BIG ONE. CHECK YOUR POLICIES OUT. Look on your declarations page (front page w/list of coverages). If you are insuring your equip at ACV (Actual Cash Value) you will only have coverage for the cost of replacing (for example) your 10 year old dryers w/10 yr old dryers. ACV is designed to bring you to exactly the condition you were in before a loss. REPLACEMENT COST coverage is (slightly more $) designed to replace your 10 year old dryers w/new dryers. HOWEVER, if your policy will only pay up to the coverage you selected and are paying for. So if you have only 1,000 coverage on a dryer but replacement cost is 10,000 you will have to come up with the other 9,000 (basically). If you are paying for 10,000 $ in coverage and your dryer burns down the insurance company will reimburse you or pay for upon receipt of a receipt or bill from the company you bought your new dryer from up to 10,000 but no more (unless you are also paying a premium for inflation coverage--)."

It seemed pretty clear to me then, but the page 43 article seems to contradict this. Sunshine is basically saying that with Replacment Cost coverage, if you have a store with 20 washers & 20 dryers, and assuming you've insured for current replacment cost - irrespective of the age of your equipment - then if you have a catastrophe, insurance will pay for the new equipment.

Does anyone have first-hand knowledge of how this really works? (Sunshine, I believe you! But the page 43 article has muddied the waters - its description of Replacement Cost really seems to be ACV...)

Walter

[Walter]

For those who haven't seen the article, here's the key sentence:

"Replacement cost is the amount it would take to re-open your laundry in the same condition it was in prior to the loss."


Thanks again,
Walter

[Anonymous]

Why does this surprise you?
How do you think this association / magazine, keeps in business? (Which they also push there insurance)
They are large and small time distributors who sell equipment to us.

They have the candle lit on both ends and we are the wax.

We the owners of these mats are getting burn.
That’s why I like this site they don’t have there arm twisted.
This site will contact there sponsors to help find a solution.

I’m a fan for years I'm a reader not a poster but this is a part of the business I just can't stand.
I will now end my association with the association.

Thank you Walter for opening my eyes.
I also found out there are other insurance companies out there.

Have you ever heard the association / magazine say anything BAD about a product.

once again I have talked to much Thank you coinwash

[Walter]

Water,

Thanks for your reply. In reality, I'm not trying to bash anybody - I'm just trying to figure out the facts. This insurance question is very important, especially for those of us who rent. Here's why:

Imagine a scenario in which you paid 200k for a mat with equipment that's 5 years old. (It makes no difference if you bought this mat last week or 2 years ago). The actual used equipment value may only be 100k, not counting the infrastructure, goodwill, lease, and the net cash flow which also factor into your purchase price.

Now, if there's a major fire, your landlord often has the option of pocketing the insurance money and choosing not to rebuild. Or if he does rebuild, he's under no obligation to configure a space that's suitable for you or your laundry. Basically, your lease is over. Now, if you were covered up to 100k in ACV, that's all you have to go out in the world and find another suitable spot to build a laundromat from scratch. From my perspective, it's tough enough finding good locations to rent at a reasonable price - but if you're underinsured, you could easily be facing a gap of 150k-200k in this scenario, especially if you would want to put in new equipment...

To me, that's why understanding what Replacement Cost really means is important. If I'm understanding the definition correctly, then I would want to make sure that I have enough coverage to find another retail location, put in all the necessary insfrastructure and solid equipment. Don't forget, in this scenario you've already expended 200k to buy the original business - if you don't rebuild, you're out your original investment. Insurance companies only pay when you rebuild.

Thanks,
Walter

[Silent Roo]

Walter,

You make the statement that the landlord has the right not to rebuild. You need to check your lease. It pays to hire a real estate lawyer to help you with these issues. I would never let someone sign a Long term lease that did not at least equal the risk. For the landlord to be able to walk away with the bags of money is not right. it is a 90/10 deal you need to be sure you are in a 50/50 deal. Your lease may or may not be over. I have seen instances of people having to pay for the spot they have even though there is no chance they will be in in due to damage for a number of months. I have also seen landlord have to Rebuild that did not want to because a client of mine invested in a realestate lawyer up front. The owner ended up turning over the land at a huge discount so the Mat owner could build what he wanted.

Second.

Replacement cost generaly covers to replace to the same level. However this varies widely by company and even agent as to what that means. This is why it is IMPORTANT to have ACTUAL VALUES stated. I have customers call me all the time to check what it will cost to replace and we have the conversation of how safe do you want to be. I can quote you list, or I can quote you actual. List will allow me as a distributer to bill you for equipment and install expence Actual will mean you got to find cash for shipping, Install, and such. Knowing a local Agent is a GOOD thing. Sometimes we think we will save a buck by shopping with a firm from somewhere else. Here a life lesson. Do you want to save $50 a month to find out you are about to be cheated. It is hard for an agent to stay in business expecialy in a small town who has cheated very many people.

In life you get what you pay for.....

[Walter]

Silent Roo,

Thanks for your response. I have no issues with your remarks at all, except to point out that in a very large majority of shopping center leases, and those of large strip malls, boilerplate is usually included whuch typically provides the landlord the option of rebuilding or not if the amount of damage "exceeds 30%," etc.

As a practical matter, given the inherent leverage of the situation, it is often very difficult to negotiate out these clauses. Most mat owners simply gulp and accept the inherent risk. Dealing with a single tenant landlord or small strip mall is a different matter, but even there the lease language is often copied from those of larger shopping centers, so your point is very well taken... mat owners should be careful what they sign away...

Walter

[pete f]

Walter, I have looked at some leases I have and you are correct, if a total loss to the building occurs, your lease is over within "X" days the landlord, or you, have to cancel it. I can not imagine an insurance company is going to pay for infastructure in a new leashold for you. They should provide you with new equipment to replace the old ones. To me the way to settle is in cash, they give you a check for what you bought insurance for, but it does not work that way. Also, if you have repacement value and did not buy enough insurance they will only give you a percentage of what you bought. This is where I really get mad at them, it has happened to me. You buy 100k of insurance, you have a loss, say 10,000. They come in and figure you had 150k in equipmet, they figure you underinsure for 30%, so your loss of 10k is now a payable loss of only $7000, they chop 30% off. You can only collect insurance in full if you have a total loss, and really, how often does that happen? The whole system sucks. Here in Florida it is even worse, My last store I could not even buy (personal property) insurance for fire, etc becuase they are afraid of a hurricane which they don't even insure against! I am happy to get liability insurance at this point. I probably *could* have bought a better policy if I was willing to search and pay more. Screw 'em Thank God for tax deductions! And hurricane damage will be paid by you all, thank you.

[Silent Roo]

Walter,

What I am and was saying is it may be difficult to negotiate out of a bad deal. It is not impossible. I have just help a guy deal with one of the largers Commercial Realeste Firms in the nation. It was a joke some of what they wanted (owner could not bring a Bike on the property) For some they dug in their heal for others they chuckled and said most people do not read these things. The thing to remember there is more space than renters. You are signing a long term lease and taking a huge risk, for them to take none is great for them but stand toe to toe and challenge what is in the lease.

Great life lesson they can only say yes or no....

Yes they screamed however we had the wording changed so if they or the owner build anything we are given the first option of all spaces, and are compensated if there is owner negelect or fault that causes the damage.

Second we were given a clause that states even if the improvements to the rebuild are substancial our rent is constinant or they pay relocation cost. So If they want to change what is there from a stirp center to offices they can however it should not impact us in a negitive fassion.

Remember often these guys are often dealing with a 3 year lease with an option for two more. They get promotions for 100% full strips malls. A 15-20 years lease is they most amazing thing they can hope for expecially when it is an almost imposible to move business.

Money spent on a Good Realestate lawyer is money well spent.

[Sunflower]

Hey, Why doesn't everyone call up their insurance companies (not agents) and have them fax over a definition. I called THAT company way back when I started the first discussion. I was getting nervous. I was told verbally that replacement cost is what I've purchased (as opposed to actual cash value) and that in the event that ie, I lost all my equip it would be replaced with new as in new equipment.

I'd like to read what everyone else finds out...

[mjwalsh]

For what it is worth, it is a good idea to request any addendums if you don't have them & they are just listed as refer to. As far as local adjustors, it seems on a large claim they may fly in an out of state adjustor. The local agent tends to be out of the loop sometimes & you communicate only with the out of staters or non local.

You may have a couple of weeks before they authorize major compensation as the losses are analyzed by the adjustor. Business interruption insurance can be also helpful. Sometimes specific items such as carpet etc is excluded from the replacement but depreciated by an amount at the discretion of the adjustor.

If the equipment no longer works & you feel the water or soot is the cause they may require a certified repair person of their choosing to establish whether the life of the equipment was shortened or not. You may be more familiar than the independent certified person.

One time before our alarm system someone broke into our coin op carwash & ripped a coin box off the wall ripping wires with the force of their pulling vehicle. The adjuster defined it as a theft even though there were pieces of the box strewn all over etc. He said nope theft was not included in the fine print.

An issue is that if a general contractor steps in to rebuilt the portion there is insurance software that allows for about 19 percent for profit & overhead. That can eat up the insurance money & cause you to lose more control over the processes. They have formulas in their software that makes it so certain limits can not exceed for certain items such as sheet rock & painting etc. Contractors need to work on their timetables so that can be an issue too in terms of delays.

If you settle based on an estimate & the low ball contractor becomes no longer available you may need to absorb the difference. It seems like they are withholding amounts until the work is actually done also more & more these days.

[CharlieS]

Back to the thread. I checked my Safeco policy. It is a replacement cost policy and will pay for equipment of equivalent construction and quality, without a deduction for depreciation.

In other words, I can't replace to higher grade equipment, but can get new wasco's to replace my old wascos.

Now, the catch is - I must have replacement cost coverage totals. In other words, they will only pay to the maximum insured value. So if I insure to current value, not replacement value, then I will max out on a complete loss and not be able to replace my equipment.

Charlie

Charlie

[mjwalsh]

My agent would always stress that there is a legal issue with issuring for less than 80 percent of building & equipment values. It seems like if you have a lesser but still significant claim this could nullify something or other. Maybe someone more familiar can clarify how crucial the 80% threshold can be on one of these lesser claims. It seems that it would give them an excuse to play around which wouldn't be ideal.

[CharlieS]

The 80% threshold is easy to understand.

If you have a partial loss, you will get replacement cost coverage only if your maximum coverage limit is at least 80% of the replacement cost of ALL your equipment.

In other words, they won't give you replacement cost for a partial loss unless you are nearly fully insured for a complete loss.

Otherwise, they will prorate the partial loss based on your coverage limit/total loss replacement cost.

BTW, your homeowners coverage works the same way, if you have replacement cost coverage (which you should ask for)

Charlie

[Sunflower]

Back to the thread. I checked my Safeco policy. It is a replacement cost policy and will pay for equipment of equivalent construction and quality, without a deduction for depreciation.

In other words, I can't replace to higher grade equipment, but can get new wasco's to replace my old wascos.

Now, the catch is - I must have replacement cost coverage totals. In other words, they will only pay to the maximum insured value. So if I insure to current value, not replacement value, then I will max out on a complete loss and not be able to replace my equipment.

Charlie

Charlie

Thank you for posting this. That's what I was trying to explain in the beginning. The big catch though - is - if you haven't purchased enough coverage to cover actual replacement cost, you are out of luck.

[Sunflower]

The 80% threshold is easy to understand.

If you have a partial loss, you will get replacement cost coverage only if your maximum coverage limit is at least 80% of the replacement cost of ALL your equipment.

In other words, they won't give you replacement cost for a partial loss unless you are nearly fully insured for a complete loss.

Otherwise, they will prorate the partial loss based on your coverage limit/total loss replacement cost.

BTW, your homeowners coverage works the same way, if you have replacement cost coverage (which you should ask for)

Charlie


Again, exactly right! At least the way I understand it. There's a name for this exception. Co-insurance, I think.