If some Alberta homeowners are only getting a small fraction of the cost to repair properties damaged in the recent hail storm, that could be the result of choosing a policy that only covers actual cash value, Insurance Bureau of Canada observed.
The vast majority of home insurance policies cover the full replacement cost of damage. But in a few cases, clients may have selected an option that provides coverage on an actual value basis, IBC spokesperson Steve Kee told Canadian Underwriter Friday.
More than 20,000 property claims have been submitted to various insurers since June 13, when areas in and near Calgary were hit by hail the size of tennis balls. In some cases, there has been major damage to roofs, siding and vehicles, with windows and skylights blown out. There is some speculation the damage could cost the industry around $1 billion but initial estimates are not expected until about mid-July.
Barry Haggis, president-elect of the Insurance Brokers Association of Alberta, told Canadian Underwriter earlier he has read some reports alleging that, in some cases, insurers are only paying 10 or 20% of damages and imposing high deductibles. Haggis is concerned there is misleading information being spread by some members of the public who are not familiar with the exact terms of the policies in question.
If a homeowner chose to buy coverage with actual cash value, this would not cover full replacement cost but would instead take into consideration the life expectancy and age of the item, Kee told Canadian Underwriter Friday.
“While a 20% settlement offer could indicate an actual cash value policy this would also suggest an item would be close to the end of its life expectancy. Although possible in limited circumstances, these types of situations are rare, and would be based on decisions the homeowner made at the time of the insurance purchase,” Kee wrote in an email to Canadian Underwriter.
“Some policies may be offered on an actual cash value settlement basis, or offer options that include portions of loss or damage as actual cash value, to help lower overall premium costs,” said Kee. “Higher deductibles are commonly chosen to help reduce the overall premium as well.”
But the client’s decision has consequences when a loss or damage arises.
“Insurers will cover the costs for emergency repairs, cleaning up yards, replacing roofs, siding and broken windows,” said Kee. “Insurers have and will continue to provide effective service to tens of thousands of impacted residents, fulfilling the terms and conditions of the policy that was chosen by the homeowner.”
A dispute over an “actual cash value” endorsement on a property policy is currently before a Nova Scotia court.
In 2017, a sprinkler line failed in a commercial building in Sydney, which was built in 1885 as a convent and acquired in 2013 by New Dawn Enterprises. The policy issued by Northbridge had an endorsement providing coverage for the actual cash value rather than replacement value. An appraiser for New Dawn calculated the actual cash value at $1.59 million, Northbridge’s appraiser came up with $230,000 and an umpire selected by the two appraisers then decided $258,000 should be the actual cash value. A judge with the Supreme Court of Nova Scotia ruled in May that the matter must now go to a new umpire.
The policy did not actually define actual cash value, Justice Joshua Arnold wrote in New Dawn Enterprises Limited v. Northbridge General.
So appraisers from both sides used different methods to reduce the cost of a new building. One dispute was on whether external obsolescence — negative influences outside the site, such as neighbourhood decline, the property’s location within the community or local market conditions — should be factored in.