1. Forms
2. IH
3. IH-99-07

What the Form Is

The IH 99 07 Replacement Cost endorsement is designed to change the standard valuation method for covered property under certain inland marine policies. Instead of settling losses based on Actual Cash Value (ACV), which accounts for depreciation, this endorsement allows for claims to be paid based on the cost to repair or replace the damaged property with new property of similar kind and quality, without a deduction for depreciation. It is an optional modification to coverage forms that would otherwise settle losses on an ACV basis.

Classes of Business It Applies To

This endorsement is particularly valuable for businesses with significant investments in mobile equipment or specialized property that is subject to inland marine coverage. Examples include:

• Contractors: This is a common endorsement for Contractors Equipment Coverage (IH 00 68). It ensures that contractors can replace damaged or destroyed machinery and tools (e.g., excavators, cranes, bulldozers, specialized tools) with new or equivalent items, minimizing operational disruption. For instance, if a contractor's five-year-old generator is stolen, this endorsement would cover the cost of a new, comparable generator rather than its depreciated value.
• Businesses with Miscellaneous Mobile Articles: Companies that own and utilize various types of mobile equipment or valuable articles that are frequently moved can benefit. This could include surveyors with specialized electronic equipment, photographers with high-value camera gear, or scientific companies with portable testing machinery.
• Equipment Leasing and Rental Businesses: For companies that lease or rent out their own equipment, this endorsement ensures that if their owned equipment is damaged by a covered peril while in their possession or potentially while leased/rented to others (depending on the base form's terms), the valuation for repair or replacement will be at replacement cost.

Special Considerations

• Scheduled vs. Blanket Coverage: The IH 99 07 endorsement can be applied to all property covered under the policy or only to specific items that are listed (scheduled) in the policy declarations. It's crucial for the insured and agent to clearly define and document which property is subject to replacement cost valuation.
• Limit of Insurance: The policy limit for the covered property must be adequate to cover its full replacement cost. If the limit is insufficient, the insured may face out-of-pocket expenses even with the replacement cost endorsement.
• Repair or Replacement Requirement: Full replacement cost value is often paid only after the damaged property has actually been repaired or replaced. The insurer might initially pay the ACV of the damaged property, with the remaining amount (the difference between RC and ACV) paid once the insured completes the repair or replacement, usually within a specified timeframe.
• Coinsurance: Replacement cost coverage is often contingent upon a coinsurance clause, requiring the insured to carry a limit of insurance that is a certain percentage (e.g., 80%, 90%, or 100%) of the property's full replacement value. Failure to meet this requirement can result in a coinsurance penalty at the time of loss, reducing the claim payment.
• Obsolete Property: If the damaged property is obsolete and cannot be replaced with the exact same model, the policy will typically cover replacement with a currently available model of similar function and quality.

Key Information for Agents and Underwriters

• Pricing/Premium: Adding the IH 99 07 endorsement generally increases the policy premium because the potential claim payout is higher compared to ACV.
• Risk Assessment: Underwriters should carefully evaluate the age, condition, maintenance, and susceptibility to loss of the property being considered for replacement cost coverage. For older equipment, the gap between ACV and RC can be substantial, increasing the insurer's exposure.
• Underwriting Guidelines: Insurers often have specific guidelines regarding the eligibility of property for replacement cost coverage, such as maximum age limits or types of equipment. Very old or poorly maintained equipment might not be eligible.
• Moral Hazard: A significant difference between the ACV and RC of property, especially for older items, could potentially create a moral hazard. Underwriters should assess this risk.
• Accurate Valuation: It is essential for agents to work with insureds to establish accurate replacement cost values for scheduled items to ensure adequate coverage and compliance with any coinsurance provisions. Regular reviews of these values are recommended.
• Documentation: All property to be covered on a replacement cost basis should be clearly documented in the policy, especially if the endorsement does not apply on a blanket basis.