The insurance company has accordingly the option of using the lower of two bases of settlement, viz.: (1) actual cash value at the time of the fire; or (2) what it would cost the insured party to replace the property lost. The price which governs, cost or selling, will depend upon the nature of the property. As a general rule, it is the cost price. For goods which cannot be readily or advantageously reproduced, like cereals and cotton, the adjustment basis is the local open market price prevailing immediately before the fire. In adjusting values, adequate depreciation allowance is made not only for ordinary wear and tear, but also for losses incidental to changes of fashion, demand, etc.

Adjustment of Differences

Whenever there is a dispute regarding the standards applicable in the adjustment or a disagreement regarding the method by which the standards are applied, one or the other of the parties generally invokes the provisions of the policy for an appraisal. In accordance with the terms of the policy, the insurer and insured may each appoint an appraiser who in turn selects an umpire. This official does not act except when called on for a decision if the appraisers disagree on some point. The appraisers proceed to make a joint appraisement of the damage caused and the value of the loss. If this appraisal is incorporated in a written award and signed by the appraisers, it is binding on both parties, and will be upheld by the courts. This provision is applicable to total and partial losses, but is limited to questions of value and damage. The appraisers are generally experts, but may call in any other person to give testimony. They are not bound by any legal rules of evidence, but may determine their own procedure.

After the value of the loss has been arrived at, by agreement or appraisal, the liability as modified by the conditions or limitations comes up for consideration. There are generally a number of these clauses present in every policy although they are not always in force. One of these is the pro rata or the contributing clause. In the standard policy this clause reads as follows: “This Company shall not be liable under this policy for a greater proportion of any loss ... than the amount hereby insured shall bear to the whole insurance, whether valid or not, or by solvent or insolvent insurers covering such property.” The apportionment of the loss on this basis is often a complicated affair.

Effect of Coinsurance Clause

Another limitation clause is the “coinsurance,” sometimes called the “average clause” or “reduced rate” clause. The object of this clause is to make the relation between value and insurance somewhat more stable and to adjust the rates in accordance with the ascertained probability of big and small losses. The assumption is that partial losses to the property will also be partial losses to the insurance company. Rates can be adjusted in the light of the ascertained probability of the respective occurrence of slight and serious losses, and on the assumption that partial losses to the property will also be only partial losses to the insurance company. This clause does not operate to reduce the insured’s recovery if either the loss or insurance equals or exceeds the named percentage of value. Where applied, it does so only after any apportionment under the contribution clause has been determined.

The effect of the coinsurance clause is usually to make the insured a coinsurer with the company for the difference between an amount limited in the policy and the face of the policy. The limiting amount is usually 80%, though it may be any other agreed per cent. The clause in the policy may read somewhat as follows:

“In consideration of the premium for which this policy is issued, it is expressly stipulated that in event of loss this company shall be liable for no greater proportion thereof than the sum hereby insured bears to eighty per cent of the cash value of the property described herein at the time when such loss shall happen, nor more than the proportion which this policy bears to the total insurance.”

Thus, in order to make the insured a coinsurer, in the event of loss the company’s liability is limited to that proportion which the sum insured bears to 80% of the cash value of the property described in the policy at the time of loss. Where the loss or the insurance equals or exceeds 80% of the value, the clause has no effect; when both are less, the insured and the insurer bear the loss in certain proportions. A few illustrations will show the way in which the liability of the company is determined. In the case of an 80% coinsurance clause, the formula by which the liability can be determined is derived as follows: