Fire Insurance Claim Calculation: A Guide

Under the policy, you are first entitled to the actual cash value (at the time of loss) of your damaged property, which is its value at the time of loss in its used pre-loss condition. You, the policyholder, are entitled to actual cash value regardless if you intend to repair or replace the damaged property.

Different states have different regulations for how the actual cash value should be calculated in an insurance claim. In some states, you may get paid market value for your items lost, meaning the cost that a willing buyer and willing seller would agree on. In Illinois, the method for calculating actual cash value is the replacement cost of the item minus depreciation, if any. 

This is a significant difference because in some cases, the replacement value less depreciation can be far higher than the market value. The difference in values produced under these methods is greatest with very old property where obsolescence will affect market value but not necessarily depreciation. 

Despite the fact that Illinois law makes market value irrelevant to the value of your insurance claim, some insurers may still try to use market value to pay policyholders a lower settlement at actual cash value.

If you do decide to replace your lost items after a fire, you often have the option of getting more money from your insurance company than actual cash value. That is because most insurance policies pay up to replacement cost (at the time of loss) if you actually repair or replace the damaged items within a certain timeframe. This is subject, however, to the amount of insurance available in your policy, making it important to accurately calculate replacement cost value when setting your policy limits.

I often receive calls from concerned policyholders after they receive payment of their claim at actual cash value. I explain that is the proper method of paying claims, and does not stop them from then obtaining the recoverable depreciation. The basic formula in Illinois can be stated as: 

Insurance companies tend to over-depreciate items. According to Illinois law, items should be depreciated based on the age, condition and useful life of the property. So, to return to the example of the tie used in the previous paragraph, a tie that remained in its plastic wrapping for eight years and is still in perfect condition should maintain its original value of $100, even though it had already reached 80% of its supposed useful life. This is difficult to prove in the case of a fire when an item has burned and there isn’t proof of its condition before the fire.

Arguing with insurance companies over small details like this can be frustrating, but insurance lawyers can help in these situations. Collectibles are often also over-depreciated because in those cases, the property’s age adds to its value rather than reducing it, and asserting its useful life is likewise not helpful in determining value.

When you make an inventory of your items lost in the fire, you will estimate the value of each item at the current replacement cost value at the time of loss, and provide an estimated age for each item. For damage sustained to your home, you must obtain an estimate from a contractor for the cost of repairing the house back to its pre-loss condition.

During this time, the insurance company will come up with its own estimate using a software called Xactimate. When you alert the insurance company your intent to repair and rebuild, there is absolutely no imperative for insurance companies to create their own estimates except to create a dispute against any higher bid you receive.

The insurance company estimates are often lowball amounts because there are several things which they don’t account for.

For example, Xactimate estimates may not account for waste in purchasing building materials. The Xactimate estimate may assess that 3.7 feet of drywall is needed for a certain section, but will neglect the fact that drywall is sold in 4X8 sheets, and that one cannot simply purchase 3.7 feet of drywall. Despite this, the Xactimate estimate will only calculate the cost to purchase 3.7 feet of drywall. Roofing material is sold in certain size lots regardless how much you actually need.

When there are differences between your contractor’s bid and the insurance company’s unrealistic software generated estimate, the insurance company will tell you to have your contractor call them so they can work out the differences. This puts you in a bad position because your contractor is likely not a public adjuster who is trained and authorized to represent you in negotiating with insurance companies nor are they an insurance lawyer aware of specific policy language providing coverage.

Most insurance policies provide coverage for your lost items to be repaired or replaced using like kind and quality of materials and construction. The insurance company will almost always seek to repair instead of replace, because it is cheaper. But as a homeowner you have to wonder; will these repairs actually restore my home to the state that it was in before a fire?

The insurance company will not make any guarantee that the repairs they assert are sufficient will not leak in a few years, not continue to smell like smoke, will be healthful to human habitation or otherwise not fall apart down the road. They will say it is your choice to decide on a contractor. But the contractor can only perform repairs the insurance company pays for. So it is up to you to make sure you are obtaining the full extent of your insurance coverage for the damage sustained to be repaired or replaced to its pre-loss condition, by ensuring that your items are actually being restored to a state of like kind and quality.

Some questions you need to make the insurance company answer are whether a repaired roof is of like kind and quality for water resistance as would be a completely replaced roof, will smoke damaged articles of clothing be of like kind and quality to their soft pre-loss condition after using harsh cleaning methods, will drywall drenched with water during fire suppression be like kind and quality for healthful habitation after being primed and painted or should it be replaced?

Remember that an important factor in your fire claim calculation is that in order to get the replacement cost of your home as opposed to just the initial actual cash value, you must actually perform the repairs. There is likely a provision in your insurance policy that states that you must perform your repairs within a certain time-period: usually 180 days or one year.

These provisions are not the required “reasonable time” stated in the Illinois Standard Fire Insurance Policy, which sets minimum coverage in Illinois. Most all policies also contain a conformity with state law provision stating anything in the policy in conflict with state law is conformed to the requirement of that law. The insurance company, however, will likely continue asserting to you the time limit as written in the policy.

So during this time that you are negotiating with your insurance company, they tell you the clock is ticking on your time to get the repairs done, even though the insurance company is the one that is holding you up because they haven’t agreed on a fair price.

The insurer will often pressure you to begin restoration while continuing to negotiate, and blame you for delay if you don’t agree. You should not, however, sign a construction contract until the entire scope and value of repairs is agreed between you and your insurer because that creates new problems of limiting assumptions made for initial repairs.

Your contract with your contractor should also be tied strictly to the final scope and value of repairs you agree to with the insurance company. I often see construction contracts tied to the value of that final estimate but then attempt to write a different scope.

If you don’t perform the repairs because you cannot get any contractor to agree to the value of repairs for the stated scope in the insurer’s final estimate, you may decide to sue your insurance company without having done any repairs. The insurer will then use the fact that you did not complete the repairs within the allotted time period against you, and therefore assert that the most you are entitled to is actual cash value, instead of replacement cost value. In this case, there a number of relevant legal doctrines in Illinois law such as prevention of performance, or failing to adjust your claim according to required claims practices, that an experienced insurance lawyer can raise on your behalf within the claim or litigation.

If the house is structurally sound, the insurance company will try to enter and make their own inventory of your personal property, which is likely to be seriously incomplete.

Sometimes your inventory attempt is the first, but then the insurer attempts to take your handwritten version and enter it into their computer to apply their own pricing information. When they do this, they often change the order and numbering sequence, making it nearly impossible to reconcile the two versions.

If you have the capability to create your own computer-based inventory such as in excel spreadsheet, it is advisable over giving the insurer your handwritten inventory. The insurer will sometimes give you inventory forms asking for irrelevant information such as original purchase price.

They always ask for the age of the items. Age of the items and where they were obtained is an area fraught with risk to your claim. On the one hand, the less age you claim on your items, the more will be your actual cash value payment because newer items have less depreciation. On the other hand, if you claim $60,000 of your property was 1 year old or less, $50,000 was 2 years old or less, etc. they will compare that with your income and try to claim fraud on your part if your disposable income was less for each of those time periods.

But while the inventory is first estimated at replacement cost value at time of loss, that does not justify the insurance company assuming you needed that amount of income to obtain that property. This practice is often fraudulent on their part because there may be many items you obtained without paying the full stated replacement cost value at the time of loss, such as gifts, inherited items, items purchased used or on sale. It is also unjustified on things with ages stated several years old because the aggregate value of your items aged three years old for example, were purchased three years ago, whereas they are valued at time of loss three years later to make your claim.

It is therefore important to be as accurate as possible in estimating ages of items, and don’t assume your property is newer than it is. Additional age only affects the actual cash value of the property, but its replacement cost value at time of loss remains the same regardless of age.

It is equally important when filling in the column for where the items were obtained to state if obtained as gifts, inheritance, purchased used or on sale, all of which cause deviation between the replacement value at time of loss with any presumption you paid that much.

During the inventory process, a public adjuster can be helpful. Public adjusters have experience doing exactly this job, and unlike the insurance company’s adjuster, public adjusters have the benefit of actually wanting your claim to be accurate (thus higher in most cases) because they their fee is a percentage of your recovery.

Of course, there are good and bad public adjusters. The public adjusters to watch out for are the type that go for “low hanging fruit” which is when they don’t fight hard for amounts additional to the insurance company’s estimate. These types may urge you to settle quickly, so that they can get paid and move on to their next case, even if your insurance company hasn’t yet agreed to pay you the full settlement value that you believe you are owed. 

Public adjuster fees are not regulated and vary from 7% of your recovery on the claim all the way to 30%. This is negotiable and you should not assume what they charge is a standard fee. You might also negotiate that their fee only apply to amounts recovered above what the insurance company had initially estimated prior to you retaining the public adjuster. If they agree, the fee will often be a higher percentage, but aligns better with the benefit they provide.

Many public adjusters are also building contractors, and their public adjusting contract states they will waive their public adjusting fee % if you chose them as your contractor. If the public adjuster is honest and hard-working, this can be a great because you get the benefit of their negotiation on your behalf, and their adjusting fee just becomes part of their profit on the construction job, rather than their fee causing a shortfall in money available to hire another contractor.

With less honest public adjusters this can become a big problem because if you don’t think they fought hard enough to get your claim properly paid, they will still assert a lien on your insurance proceeds and the insurance company will include them as payee on all your checks. Now you have to pay their fee even though they did not negotiate enough on your claim, and you still need to find a contractor to do the work with insufficient funds from the failure to negotiate and because of their fee.

Knowing how your claim is calculated is a step in the right direction, but the best way to ensure you get a fair settlement is to hire an insurance lawyer who will work for you on a contingency basis, meaning you don’t pay unless you get paid. If you are located in Illinois, fill out the form below for a free consultation so I can look into your case and determine if I can help you.