In Massachusetts, after a loss, the insurer first tries to determine the Actual Cash Value (“ACV”) of the damaged property. This generally allows the insurance company to apply depreciation in calculating what it initially owes. This ACV amount is due whether or not the policyholder actually repairs or rebuilds the property. But policies usually offer Replacement Cost as an added feature if the property is insured to the appropriate limits. Sounds simple, right?
For an additional premium, the Replacement Cost insurance policy states it will pay for the replacement of your damaged property with new property of like kind and quality. The only catch is that, usually, the property must be repaired or replaced at the original site or elsewhere in Massachusetts within two years of the date of loss. (Note: Read your policy because some companies permitted to issue policies in MA limit the time to rebuild to less than two years from the date of loss.) This two-year contractual limit to replace is not to be confused with the two-year statute of limitations to file suit which is contained in the standard Massachusetts fire and casualty policy.
And many people are surprised to learn the dollar amounts of coverage listed in their policies are not guaranteed to be paid in the event of a loss. Massachusetts is not a “valued policy” state. A valued policy requires insurers to pay the policyholder the full value of the policy when a covered peril causes a total loss. In Massachusetts, the insurer can dispute the amount of loss and claim it is less than the policy limits, even when the building is a total loss.
Until the property is repaired or replaced, the insurance company only owes ACV, despite the fact that policyholders believe they have purchased enhanced coverage. Until repairs are complete, the insurer keeps possession of the difference in money between the ACV and what it determines is the Replacement Cost. That difference is referred to as a “holdback.” On its face, that two-year time period should not present a problem in recovering the holdback.
But consider the following:
- What if it takes months, or even years, for the insurer to adjust the loss and come to an agreement with the policyholder as to the amount due?
- What if you have to demand arbitration, known as Reference, to determine the amount of loss and that takes time?
- What if the building department causes delays in construction by imposing burdensome requirements?
- What if supply chain issues, or a pandemic, make materials or contractors unavailable or delayed?
All of these situations can and have presented problems for policyholders trying to recover the holdback and get the actual Replacement Cost paid. In one case, a townhouse fire caused the deaths of two firefighters. The authorities took six months to fully investigate the cause of the loss and barred access to the building. During that time, no work could be done. After the authorities released the scene, the Building Department required numerous expensive repairs before it would issue a building permit. The policyholder requested an extension of the two-year contractual period to rebuild and the insurer refused. Only when suit was filed did the insurer agree to a six-month extension.
In another case, the parties agreed that it would take eight months to rebuild a house after a fire. Unfortunately, the insurer refused to pay the policyholders what they felt they were entitled to. This led to a lawsuit where the policyholder prevailed. The trial judge ruled that, although only eight months were required to rebuild from beginning to end of the project, the insurer had so hindered the policyholder’s ability to rebuild that the appropriate time to rebuild should also include the amount of time it took to adjust the claim. In this case, the judge held that the “period of adjustment” should be included and allowed the policyholders thirty-six months from the time of loss to rebuild. In an important part of the ruling, the judge held that until the policyholders actually knew how much they were going to receive from the insurer, they were under no obligation to sign a contract and begin rebuilding.
In yet another case, an 87-year-old widow had a serious steam and water loss. She was unrepresented by either a public adjuster or an attorney. The insurer made a low-ball repair offer one year after the loss. It paid what it said it owed as ACV and gave her until the second anniversary of the loss to rebuild and collect the holdback. She hired counsel and contested the insurer’s estimate. The matter was required to go to arbitration, or Reference. Because of the pandemic and other scheduling problems, the hearing wasn’t even held until the two-year period had almost run. Two years after the loss, the referees awarded almost three times what the insurer had originally offered, and there was a holdback of about $150,000. Incredibly, the insurer then claimed that, because two years had passed without repairs being completed, it did not owe the holdback. That matter is presently in suit.
With all this in mind, how do you make sure you are able to recover your holdback and the full benefits you are entitled to receive? Obviously, the simplest solution is to “put your money where your mouth is” and have enough funds available to be able to complete and pay for the repairs while waiting for the insurer to pay you back. Unfortunately, very few people are in that position. For the rest of us, it’s important not to sit on our rights.
Protect yourself by keeping the following in mind:
- Be diligent about getting estimates and trying to get replacement work started.
- Document anything and everything the insurer does to delay the adjustment and payment of the claim (e.g., low-balling, burdensome and unreasonable requests for information).
- Document every factor beyond your control (e.g., building inspector demands, material shortages, health issues, lack of funds, etc.) that made it unreasonable to expect your project to be completed within two years of the date of loss. Provide this information to the insurer as events occur.
- Within six months of the end of the two-year period, if it looks like your repairs will not be completed in time, request an extension of the contractual period in writing and make sure you get a response, one way or the other, in writing.