Coinsurance, Actual Cash Value, and an Ordinance-or-Law Endorsement
A Missouri homeowners policy has a Coverage A limit of $400,000, an 80% replacement-cost coinsurance clause, a $2,500 deductible, and an ordinance-or-law endorsement with a $20,000 limit. At the time of a fire, the home's replacement cost is $550,000. The dwelling damage is $180,000 at replacement cost and $120,000 at actual cash value. The insured must also replace a code-required stairwell at a cost of $18,000; the endorsement pays replacement cost for code upgrades. The insured has not repaired or replaced anything and asks the insurer for an advance. The public adjuster's contract provides a 10% fee on 'all amounts paid by the insurer.' The insurer has accepted coverage and has not raised any exclusion. The insurer has not yet paid anything. The insured wants to know what to expect and whether the PA's fee will be calculated on the $180,000 claim.
1. Calculate the coinsurance penalty and the maximum payment for the dwelling loss before the ordinance-or-law endorsement. Show the formula.
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The coinsurance requirement is 80% of the replacement cost at the time of loss: 0.80 x $550,000 = $440,000. The insured carried $400,000, so the coinsurance ratio is $400,000 / $440,000 = 0.90909, or 90.909%. The insured is therefore a partial coinsurer.
For a replacement-cost loss, the payment before deductible is $180,000 x 0.90909 = $163,636.36. Subtract the $2,500 deductible: $161,136.36. That is the maximum replacement-cost payment for the dwelling damage, before any ordinance-or-law payment, assuming the insured repairs or replaces and satisfies the policy's replacement-cost conditions.
Because the insured has not repaired anything, the insurer may first pay actual cash value. The ACV payment is $120,000 x 0.90909 = $109,090.91, less the $2,500 deductible = $106,590.91. The difference between the ACV payment and the replacement-cost payment, $54,545.45, is the recoverable depreciation that is typically withheld until repairs are completed. The insured should not expect the full $180,000.
2. How should the ordinance-or-law payment be calculated, and does the coinsurance penalty apply to it?
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The code-required stairwell costs $18,000 and falls within the $20,000 ordinance-or-law limit, so the starting point is $18,000. The critical question is the endorsement wording. Some forms treat ordinance-or-law coverage as an additional limit that is not reduced by the Coverage A coinsurance ratio; others apply the same coinsurance condition. The answer should not be assumed from the main policy alone.
If the endorsement is not subject to coinsurance, the payment is $18,000. If it is subject to the same 0.90909 ratio, the payment is $18,000 x 0.90909 = $16,363.64. The deductible may also apply once, depending on the form, but it should not be applied twice to the same loss. The public adjuster should request the full policy form and the ordinance-or-law endorsement, quote the precise language, and ask the insurer to state its calculation in writing. If the insurer applies coinsurance without citing the endorsement language, the insured has a basis to challenge the reduction.
3. What is the maximum permissible PA fee under the contract, and what ethical issues arise from charging 10% on the gross claim?
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The contract says 10% of amounts paid, not 10% of amounts claimed. If the insurer eventually pays $161,136.36 on the dwelling and $18,000 on the code upgrade, the total paid is $179,136.36 and the fee is $17,913.64. If only the ACV payment is made now, and the code payment is also $18,000, the total paid is $124,590.91 and the fee is $12,459.09. The fee should not be computed on the $180,000 claim, the $2,500 deductible, or the withheld depreciation before it is paid.
Ethically, the adjuster must disclose how the fee is calculated, avoid taking a fee on money the insured has not received, and refund any fee that exceeds the contract or law. Charging a percentage of an advance can leave the insured short for repairs, so the adjuster should explain the timing and consider billing only on funds actually disbursed. The adjuster should also confirm that the fee is not charged on the ordinance-or-law payment if the contract excludes it or if state law restricts the fee base.