Coverage For Rebuilding Costs Front And Center In The Wake Of The Costliest Year Ever For Natural Catastrophe Losses

A report released this month by global insurer Munich Re concludes that 2011 was the costliest year ever in terms of natural catastrophe losses. In the U.S., no part of the country was spared; there was a drought and wildfires in the West, historic flooding in the Midwest and Northeast, and tornados in the South. More troubling, the report shows a strong upward trend in both the number of catastrophes and the value of losses from 1980 to 2011. Munich Re reports that less than one-third of the estimated $380 billion in global losses caused by these catastrophe events were covered by insurance. Businesses generally purchase so-called "replacement cost" coverage for natural catastrophe and other insured property losses. This coverage, as its name indicates, is supposed to pay the policyholder to replace its lost or damage property (as opposed to merely paying the "actual cash value" of the lost or damaged property). "Replacement cost" is generally defined as the cost to repair or replace the lost or damaged property with other property of "like kind and quality." Unfortunately, a business faced with an insured loss often discovers that its insurance company's view of "replacement cost" doesn't necessarily include all costs associated with replacing the lost or damaged property. For example, insurers often argue that...