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Valuation Methods and Settlement Options for Damaged HVAC Project Materials

When HVAC materials are damaged on a construction project, project stakeholders—general contractors, HVAC subcontractors, owners, and brokers—must quickly decide how loss value is calculated and how settlements will be handled. This article focuses on U.S. construction projects (with examples in Los Angeles, Houston and New York City) and explains the valuation methods and settlement options under Builders Risk and Contractors' Equipment exposures for HVAC contractors.

Key valuation methods for damaged HVAC materials

Understanding how insurers value loss determines whether you receive enough to replace critical equipment or just a portion of its worth.

  • Replacement Cost Value (RCV)

    • Pays the cost to repair or replace with new materials of like kind and quality, without deduction for depreciation.
    • Commonly used for newly purchased HVAC components on active job sites (uninstalled equipment).
    • Example: A new Carrier 10‑ton rooftop unit (RTU) with list/installed price $28,000 is paid at $28,000 (subject to policy limit and deductible).

  • Actual Cash Value (ACV)

    • Pays RCV minus depreciation (age, wear and tear). Often used for older installed equipment or when RCV endorsement isn’t in force.
    • Depreciation calculation: (Age / Useful life) × Replacement cost.
    • Example: Same RTU above, 5 years old, expected life 20 years → depreciation 25% → ACV = $28,000 × (1 − 0.25) = $21,000.

  • Agreed Value / Stated Amount

    • Parties declare a value up-front. If a declared unit is totally destroyed, insurer pays that pre-agreed amount (less deductible). Useful for high-value custom chillers or packaged systems.

  • Stated Amount with Salvage Rights

    • Insurer pays agreed amount; insurer may take salvage. Helpful when salvageable components (copper coils, compressors) offset replacement costs.

  • Market Value or Discounted Replacement

    • Rare in construction contracts but can appear for used equipment resales or insulated spec markets.

Sources for typical HVAC replacement costs and context:

Settlement options and how they play out

  • Repair-in-kind (Preferred)

    • Insurer pays actual cost to repair damaged units or replace damaged components. Best when downtime and custom matching are required.

  • Replace with New (RCV settlement)

    • Vendor replacement (e.g., Carrier, Trane, Johnson Controls). Most common when unit is economically totalled.
    • Example: On a $150,000 rooftop replacement on a Los Angeles tenant improvement job, RCV settlement pays full cost less deductible.

  • Cash Settlement (ACV)

    • Insurer pays cash equal to ACV. Common when the claimant chooses not to repair/rebuild immediately.

  • RCV with Depreciation Holdback

    • Insurer initially pays ACV; remaining depreciation held and reimbursed upon proof of repair/replacement (invoices). Typical in the U.S. construction market.

  • Partial Payment + Salvage Credit

    • Insurer pays partial settlement; contractor retains salvage and can sell parts (e.g., copper tubing), reducing net loss.

  • Inventory/Invoice-Based Adjustment

    • For on-site HVAC materials not yet installed (spare coils, sheet metal, ductwork), insurers often ask for bills of lading, purchase invoices, and inventory lists to validate settlement amounts.

Practical examples with numbers (Los Angeles, Houston, New York City)

  • Example 1 — Los Angeles (seismic retrofit project)

    • Scenario: Rooftop unit ordered but destroyed in transit on site. Purchase invoice $22,000. Builders Risk policy limit covers materials in transit and on site.
    • Settlement (RCV): Insurer pays $22,000 minus $2,500 deductible = $19,500 (if RCV applies). If ACV applies and unit is new (no depreciation) ACV ≈ RCV. Seismic surcharge may increase premiums on future policies.

  • Example 2 — Houston (hurricane/wind zone)

    • Scenario: Installed RTU (3 years old) damaged by wind-driven rain. Replacement cost $30,000; insurer uses ACV. Useful life 15 years → depreciation 20% → ACV = $24,000. Deductible $5,000 → payout $19,000. If contractor provides repair invoices, RCV endorsement could allow recovery of withheld $6,000 after replacement.

  • Example 3 — New York City (tight scheduling, soft-cost exposure)

    • Scenario: Damaged custom water‑cooled chiller valued at $120,000 causes 14-day outage. Settlement options include repair/replace and consequential loss (soft costs/delay) coverage under Builders Risk adding soft cost endorsements. Delay costs (overtime, extended GC overhead) can surpass equipment costs quickly; soft cost exposure must be pre-declared.

For soft cost and delay exposure guidance, see: Soft Costs, Delay and Debris Removal: Builders Risk Considerations for HVAC Subcontractors.

Insurance products and typical premium ranges (U.S. market)

  • Builders Risk Insurance

    • Typical annual premium: 0.25%–1.5% of total completed value depending on project type, location, total insurable value and policy features. For a $2,000,000 project, expect $5,000–$30,000 yearly (pro-rata for policy term). (Source: Insureon)
    • See The Hartford for coverage specifics: https://www.thehartford.com/business-insurance/builders-risk

  • Contractors' Equipment / Inland Marine (Tool & Equipment)

    • Typical annual premium: 1%–4% of scheduled equipment value, depending on schedule, theft exposure, and territory. For a $200,000 equipment schedule, expect $2,000–$8,000 annually. (Source: Insureon contractors equipment overview)

Insureon overview pages:

Specific insurers often used by HVAC contractors: The Hartford, Travelers, Chubb, and specialty markets. Premiums in hurricane/tornado zones (e.g., Houston metro) or high-theft urban NYC job sites trend toward the higher end of ranges.

Policy nuances HVAC contractors must watch

  • Named perils vs. all-risk wording — Most builders risk policies are “all-risk” but include wind/hail exclusions in hurricane zones. Verify endorsements for water intrusion and transit.
  • Course of construction vs. installed equipment — Distinguish coverage for materials in storage/on-site (Builders Risk) vs. equipment in use (Contractors' Equipment / Inland Marine). See: Builders Risk vs Contractors' Equipment: Which Insurance Protects HVAC Materials on a Jobsite?.
  • Certificates and project requirements — GC and owner named insured or waivers of subrogation often required. See: Certificate and Project Requirements for HVAC Insurers on Construction Sites.
  • Agreed value endorsements — For custom chillers and packaged plants, negotiate agreed value to avoid ACV depreciation disputes.
  • Deductible structure — Per occurrence vs. per unit deductibles can materially affect recovery on multiple damaged components.

Claims best practices for faster, full settlements

  • Document immediately: photos, serial numbers, BOLs, purchase invoices, storage location.
  • Segregate damaged stock and preserve salvage for insurer inspection.
  • Provide age/usage data for installed equipment (hours, cycles) to counter depreciation disputes.
  • Get vendor replacement quotes (Carrier, Trane, Lennox, Johnson Controls) and pro forma invoices. Example retail/installed prices for benchmarking: residential full HVAC systems commonly range from $3,500–$12,000; light commercial RTUs range $6,000–$35,000 depending on tonnage and features (HomeAdvisor). Source: https://www.homeadvisor.com/cost/heating-and-cooling/install-a-new-air-conditioning-system/
  • Use an independent appraiser for high-value disputes.

Quick comparison: ACV vs RCV (at-a-glance)

Feature Actual Cash Value (ACV) Replacement Cost Value (RCV)
Depreciation deducted Yes No (initially)
Cash paid immediately Lower (after depreciation) Typically ACV first, then remainder on repair
Best when Equipment older or destroyed beyond practical repair New equipment, critical systems, fast replacement needed
Example payout (5-year-old $30k unit, life 20 yrs) $30k × 0.75 = $22,500 $30k (with $7,500 holdback until replacement proof)

Conclusion

For HVAC contractors and project stakeholders in Los Angeles, Houston, New York City and across the U.S., choosing the right valuation basis and settlement structure can mean the difference between a quick repair and a prolonged project delay. Negotiate agreed values for custom equipment, keep meticulous purchase/inventory records, and coordinate Builders Risk vs Contractors' Equipment coverages early in contract negotiations. For more on coordination and adding HVAC equipment to coverage, read: How to Add HVAC Equipment to a Builders Risk Policy During Installation.

External reference links:

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