What Is An "Open Policy?" Part 2

Much like the code section that precedes it, California Insurance Code section 2051.5 sets various measures of indemnity under open policies.

The first part, section 2051.5(a), sets the measure of indemnity for open policies that require payment of the replacement cost for a loss. In such a case, the measure is the amount that it would cost the insured to repair, rebuild, or replace the lost or injured item, or the policy limit, whichever is less. If the policy requires the insured to repair, rebuild, or replace the damaged property in order to collect the full replacement cost, then the insurer shall pay the actual cash value of the damaged property until the repair or replacement is complete. Once the property is repaired, rebuilt, or replaced, the insurer will pay the difference between the actual cash value payment and the full replacement costs to replace the damaged property, up to the limits stated in the policy.

The second part, section 2051.5(b), regulates time limits that may be placed on insured parties in order for them to collect full replacement cost of their loss. As a general matter, no time limit less than 12 months can be imposed, with additional six-month extensions granted for good cause. However, in the event of a covered loss related to some state of emergency (such as natural disaster or war), coverage for additional living expenses extends for a period of 24 months.

Additionally, section 2051.5(b) provides that where an insured structure is totally lost, a policy may not limit or deny payment of replacement cost if the insured decides to rebuild the property in another location. Of course, insurers may still restrict payment in cases of suspected fraud. These provisions were added to the Insurance Code in 2004.