Loss Settlement for Collectors Items – Claims Magazine

Issue

The insured was the original owner of a 1951 Black Phantom Schwinn bicycle which he kept in excellent condition. The bicycle was stolen from his home. There are other 1951 Black Phantom Schwinns in excellent condition available, and the cost to purchase one of these models is $3,500. There are other less valuable models which look similar to the stolen bicycle available, and replicas of the same exact model are also available for about $2,500.

The insured has an ISO HO 00 03 04 91 policy with an ISO HO 04 90 04 91 Personal Property Replacement Cost endorsement. This endorsement provides that "[m]emorabilia, souvenirs, collectors items and similar articles whose age or history contribute to their value" are not eligible for replacement cost settlement and are "settled at actual cash value at the time of loss but not more than the amount required to repair or replace." How should this loss be settled?

Analysis

This bicycle would probably be categorized as either a collectors item or a similar article whose age or history contributes to its value. As indicated by the policy language, such items are not eligible for replacement cost coverage. Thus, it is the assumption of some claimspeople that because such items are settled on an actual cash value basis the recovery for these items must be some amount less than the full replacement cost of the item.

It is our opinion that certain types of items are removed from eligibility for a replacement cost settlement because there is a recognition that for those types of items whose age or history contributes to the value of the item, a replacement cost recovery will not be an accurate measurement of the value of the item.

Typically, in a replacement cost recovery, a new item, or the value of a new item, is provided to the insured when an older item has been damaged. But when the age of an item is one of the reasons why a particular item is valuable, giving the insured a new item for his old item does not adequately indemnify the insured. For example, if an insured suffers a loss to an antique which is in very good condition, giving the insured a new item of similar quality and design will not satisfy the insured who has paid premiums to insure the antique. Therefore, this type of item for which the insured will not be adequately compensated with a new or similar item is not insured on a replacement cost basis, even where the insured has purchased a Personal Property Replacement Cost endorsement.

However, just because an item is not insured on a replacement cost basis, the insured will not automatically be limited to less than the cost to replace the old item with a new one. When this type of item is destroyed, the insured has actual cash value coverage. For this type of property, actual cash value is considered to be the market value of the item. Many collectors items such as baseball cards, comic books, coins, stamps, and other items such as antiques appreciate in value over time rather than depreciating as do other types of property. This is why the typical replacement cost recovery which takes depreciation out of the recovery formula is inadequate to compensate an insured for property which has appreciated in value. The fact that depreciation is not factored in does nothing to change the fact that a replacement cost recovery does not include appreciation.

In determining the amount of the insured's recovery for an antique or collectors item, the insurer must determine the amount of money an item of similar age and condition would bring in the appropriate market. This market value recovery includes any appreciation which an item gains due to its age or history.

Unlike a replacement cost recovery where the condition of the item is not taken into account, the condition of an item can and should affect market value, and thus will also affect recovery under an actual cash value settlement. Therefore, if the collectors item which was destroyed was not in good condition, the insured's recovery will not be the same as it would be for a similar item in excellent condition. For example, if the stolen bicycle had been left out in the elements over the years or otherwise poorly cared for, under an actual cash value recovery these factors will be taken into consideration.

For an item such as this 1951 bicycle, the insured might argue that it is much more valuable than the $3,500 which would buy a similar item in similar condition because it was his first bicycle and he planned to pass it down to his grandchildren who would know their grandfather had learned to ride on this very bicycle. However, this insured would be attempting to recover more than the market value of the bicycle due to the sentimental value which he attached to the item. Sentimental value is not considered in an actual cash value settlement because it is purely personal, speculative, and impossible to determine.

The insured who suffered loss to his Black Phantom bicycle is entitled to the $3,500 which it would take to purchase the same model bicycle of the same age and condition. If the insured was given a replica of the bicycle, he would not be adequately compensated since part of the value attached to this bicycle is that it was an original model which was 45 years old. The insured is not entitled to more than the $3,500 market value of the bicycle because it was very special to him personally since this would be compensating him for the sentimental value he placed on the bicycle. Sentimental value is not a component of an actual cash value settlement.