Insurance on Property - 2.6

In a policy covering a commercial or mercantile risk:
a) In the event of a fire, what other types of damage are regarded as fire losses?
b) How is actual cash value determined when a loss occurs? What qualifer governs the calculation of the actual cash value of a loss? Why is this qualifier essential?
c) What is the effect of the automatic reinstatement clause?
d) What would be the special provisions of a Replacement Cost endorsement if used in such a policy?

Answer:

a) In the event of a fire, other types of damage are considered as fire losses in that they occurred because of the fire, that is, they are consequences of a hostile fire. Such types of damage may be,

• caused by explosure to heat
• caused by smoke from fire
• caused by water or chemical foam used by firefighters or released by fire sprinklers
• caused by the action of firefighters in action to gain access to a fire, to release heat and smoke, to find the seat of a fire
• caused by the action to prevent spread of fire

b) Actual cash value is the value of the damaged property under insurance at the time of the loss. Generally, it is the cost of replacing the property, less any depreciation to it. Depreciation is determined by serveral factors, including the physical condition of the property, its resale value and its normal life expectancy, just before the loss. The qualifier is essential because values fluctuate. The cost of replacing damaged or destroyed property may be different after loss than at the ime of the loss.

c) The Automatic Reinstatement rules the insurer to remain the amount of insurance unchanged throughout the policy period, even if losses are paid, it also rules the insurer to return the insured premium calculated on a short-term rate basis for the unexpired part of the policy period if the insured cancels the policy, even after a loss, even amount of recovery has already reached the full amount of insurance.

d) If a policy uses the Replacement Cost endorsement, the special provisions include these conditions,

1. replacement must be made promptly.
2. replacement must be on the same site or an adjacent site.
3. payment will be limited to the cost of replacing, repairing, constructing or reconstructing (whichever is least) on the same site with new property of like kind and quality and for like occupancy.
4. settlement will be made only when the work is completed and then for no more than the actual cost of the work.
5. all other insurance covering the same perils (and the same interest) must have the same replacement cost provisions.