When a loss event badly damages a key piece of equipment or machinery, an insured business often faces the complicated question: repair or replace? This is especially so when the extent of the damage is unclear because some may still be hidden.
A business presented with this dilemma is well advised to go through that decision-making process assuming that it is spending its own money.
In all likelihood, however, the business will have insurance for the loss event, and most commercial property policies are written on a “replacement cost” basis. Yet, those policies often define “replacement cost” as being the lesser of “the cost to repair, rebuild or replace” the damaged property with property of comparable size, material and quality. They commonly include coverage for the loss of business income sustained by the insured due to the suspension of the insured’s business during the “period of restoration,” and tie the length of that period to the date when the damaged property should be “repaired, rebuilt or replaced” with reasonable diligence.
These standard commercial property provisions contain a trap for the unwary. Hidden within them lurks the opportunity for the insurance company to second guess the decisions that its insured is now forced to make under abnormal conditions and while facing financial distress.