Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Eldon Branch owned several rental properties that were insured by Farmers Insurance Company. When one of his properties suffered roof damage caused by hail, he filed a claim with Farmers. Farmers acknowledged coverage for the claim and issued payment. Mr. Branch's policy contained the following definition:

Actual Cash Value...mean[s] replacement cost of the property at the time of loss less depreciation.

Farmers calculated the ACV payment by depreciating labor costs for tear-off labor and new installation. Mr. Branch filed a lawsuit against Farmers alleging, among other things, that Farmers' depreciation was in bad faith. When the U.S. District Court in the Western District of Oklahoma ruled against Mr. Branch on the bad faith claims, he filed an appeal.

Mr. Branch asked the appellate court to determine whether the cost to tear off damaged shingles is subject to depreciation, whether the labor cost of installing shingles is subject to depreciation, and whether the district court made a mistake when finding that Farmers' conduct did not amount to bad faith.

At the time Mr. Branch's case was before the Tenth Circuit Court of Appeals, there was a conflict in the Western District of Oklahoma regarding the proper application of depreciation to roof replacement claims under an ACV provision. When there are different rulings on the same or similar issue in a particular federal district, a federal court will often look to the particular jurisdiction’s state law. In Mr. Branch's case, however, Oklahoma state case law did not provide any guidance as to how ACV provisions were evaluated by the state courts.

Ultimately, the appellate court decided that the labor cost to remove the damaged shingles is not depreciable but the labor to install new shingles is depreciable. With regard to Mr. Branch's bad faith claim against Farmers, the Tenth Circuit Court of Appeals explained:

Because Farmer's interpretation of the actual cash value provision was a reasonable position taken in litigation of a legitimate coverage dispute, we affirm the district court's grant of summary judgment against Appellant's [Mr. Branch's] fraud and bad faith claims.

At the end of my posts, I remind readers that the case I write about is specific to a particular jurisdiction. This case demonstrates that there are sometimes different rulings on the same issue within a particular jurisdiction. This is why it is important to thoroughly research and consider all possibilities when litigating a property damage claim.

Click on the following links to read other posts on Actual Cash Value and Depreciation.

Often, insurance companies mistakenly pay the initial $500 under a “replacement cost value” policy and stipulate the additional $500 will be proffered upon the policyholder showing an invoice for a new television that cost at least $1,000. Florida Statute § 627.7011 does not permit this practice.

(3)(b) In the event of a loss for which a dwelling or personal property is insured on the bases of replacement costs, the insurer shall pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling or property.

Instead of paying the depreciated value first, and subsequently paying the full replacement value later, this statute requires the insurance company to send the entire value to the policyholder initially for damaged personal property.

Florida policyholders should consider the value in purchasing “replacement cost value” coverage when purchasing their homeowners policy and understand the insurer’s responsibility under Florida Statute § 627.7011(3)(b) to pay the replacement value initially.

The policyholders’ home sustained “catastrophic” damages during Hurricane Katrina on August 29, 2005. At the time of the loss, they had a flood policy issued through the National Flood Insurance Program (“NFIP”) and a homeowners policy with State Farm. The insureds filed a flood claim with the NFIP, and were paid $145,000. They also filed a claim with State Farm, and received about $41,000 for wind damages.

In 2006, the policyholders sold the property to a buyer in an “as-is” condition without making any repairs. Later in 2006, the policyholders filed a lawsuit against State Farm, asserting that State Farm’s payment of about $41,000 was insufficient to pay for all of their damages. They provided State Farm with their own contractor’s estimate of $111,000 for replacement costs associated with the wind damage. After a re-inspection, State Farm paid the policyholders some additional funds. The policyholders then filed suit, seeking replacement cost benefits for their dwelling.

State Farm filed a motion for summary judgment, arguing that the policyholders were not entitled to replacement cost under the terms of the policy since they sold the property in “as-is” condition in 2006 and they had never performed any repairs or replacement of the property before the sale. State Farm argued that the policyholders were only entitled to the actual cash value as of August 28, 2005.

The trial court granted State Farm’s motion and the appellate court affirmed the ruling. The appellate court analyzed the language of the policy and held that the following language supported the decision limiting the policyholders to actual cash value because of the sale:

SECTION I – LOSS SETTLEMENT

We will settle covered property losses according to the following:

COVERAGE A – DWELLING

1. Replacement Cost Loss Settlement – Similar Construction

a. We will pay the cost to repair or replace with similar construction and for the same use on the premises shown in the Declarations, the damaged part of the property covered in Section I – Coverages, subject to the following:

(1) until actual repair or replacement is completed, we will pay only the actual cash value at the time of the loss of the damaged part of the property, up to the applicable limit of liability shown in the Declarations, not to exceed the cost to repair or replace the damaged part of the property;
(2) when the repair or replacement is actually completed, we will pay the covered additional amount you actually and necessarily spend to repair or replace the damaged part of the property, or an amount up to the applicable limit of liability shown in the Declarations, whichever is less;

The court held that the policy clearly states that the policyholders were limited to the actual cash value of the damaged property because they did not repair or replace the damaged property before the sale. This case does however stand for the proposition that a policyholder may still claim damages sustained from a loss despite a later sale of the insured property. The policyholder has an insurable interest if there was no assignment of the claim negotiated as part of the sale transaction. Keep in mind that this court applied Louisiana law in reaching its decision, and the law may differ in other jurisdictions.

The court rejected the insurer’s argument that paying the policyholders the overhead and profit would result in a windfall to the insured.

Relying on Gilderman v. State Farm Ins. Co., 649 A.2d 941 (Pa. Super. 1994), the court reasoned that insureds who purchased replacement cost policies have paid an additional premium for such coverage so that the policyholders can afford to repair or replace their property at current value and effectively keep the value of their property the same. No windfall occurs where the policyholder receives coverage for which it has paid and to which it is entitled, even if the policyholder does not actually incur the costs of a general contractor.

[T]he issue is not whether a given cost is contingent. The issue is what [insurer] agreed to pay to its insureds prior to actual repair or replacement. It agreed to pay ‘actual cash value,’ which means ‘repair or replacement cost less depreciation.’ Thus, the real inquiry is what is included in ‘repair or replacement costs.’ We hold that repair or replacement costs include any cost that an insured is reasonably likely to incur in repairing or replacing a covered loss. In some instances, this will include use of a general contractor and his twenty percent overhead and profit.

Colorado courts have not directly addressed policyholders’ rights to actual cash value payments including contractor overhead and profit. However, the Colorado Division of Insurance issued a bulletin in 2007 regarding residential property policies and overhead and profit:

III. Division Position

Insurers shall be prohibited from deducting contractors’ overhead and profit in addition to depreciation when policyholders do not repair or replace the structure.

The relevant policy language states:

“We will pay the actual cash value of the damage to the buildings, up to the policy limit, until actual repair or replacement is completed.”

The Division of Insurance has learned that one or more insurers have interpreted this language, or substantially similar language, to permit deduction for contractors’ overhead and profit, in addition to depreciation, from replacement cost in calculating actual cash value.

The position of the Division of Insurance is that the actual cash value of a structure under a replacement cost policy, when the policyholder does not repair or replace the structure, is the full replacement cost with proper deduction for depreciation. Deduction of contractors’ overhead and profit, in addition to depreciation, is not consistent with the definition of actual cash value. The Division of Insurance will interpret policy provision containing the foregoing or similar language to prohibit deduction of contractors’ overhead and profit, in the calculation of actual cash value, where the dwelling is not repaired or replaced by the policyholder.

Nothing in this bulletin shall be construed as prohibiting the carrier and insured from explicitly agreeing to a different method for calculating actual cash value.

Although this Colorado Division of Insurance bulletin in not binding, in combination with much of the case law around the country, it provides strong support for policyholders’ entitlement to Actual Cash Value payments which include overhead and profit for a general contractor.

A more moderate replacement cost valuation law was recently offered by Senator Garrett Richter. It passed committee and states the following:

(a) For a dwelling, the insurer must initially pay at least the actual cash value of the insured loss, less any applicable deductible. To receive payment from an insurer for replacement costs, the policyholder must enter into a contract for the performance of building and structural repairs, unless the requirement for a contract is waived by the insurer. The insurer shall pay any remaining amounts necessary to perform such repairs as work is performed and expenses are incurred. The insurer or any contractor or subcontractor may not require the policyholder to advance payment for such repairs or expenses, with the exception of incidental expenses to mitigate further damage. If a total loss of a dwelling occurs, the insurer shall pay the replacement cost coverage without reservation or holdback of any depreciation in value, pursuant to s. 627.702. 18.

(b) For personal property, the insurer may limit the initial payment to the actual cash value of the personal property to be replaced. An insurer may require an insured to provide receipts for the purchase of the property financed by the initial payment and use such receipts to make the next payment requested by the insured for the replacement of insured property, and continue this process until the insured remits all receipts up to the policy limits for replacement costs. The insurer must provide clear notice of this process in the insurance contract. The insurer may not require the policyholder to advance payment for the replaced property the insurer shall pay. . . .

The language could be improved, but it is far more fair than what was previously in SB 408. I have no idea who wrote this amendment, but I am happy to see Senator Richter offer it and that it has replaced the offensive language in the original legislation. It will mean a lot to policyholders and is much better public policy since the other language invited delayed and denied claims by insurance companies.

The next scheduled meeting on this legislation is Tuesday February 22, 2011. The agenda starts with SB 408.

I truly believe that most elected politicians want to do the right thing for their constituency when they are educated about what is "right." Maybe Florida's elected officials are starting to understand but are afraid to show their love for policyholders with the insurance lobby watching and rewarding pro-insurance industry interests.

This thought leads to today's appropriate Valentine's Day song for Senator Richter and others that want to do the right thing:

Senate Bill 408 is lengthy and covers many topics. Here is a summary of some key provisions:

PUBLIC ADJUSTERS:

amending s. 626.854, F.S.;

·        providing limitations on the amount of compensation that may be received by a public adjuster for a reopened or supplemental claim; (20% of the reopened or supplemental claim payment) p. 13

·        providing statements that may be considered deceptive or misleading if made in any public adjuster’s advertisement or solicitation;

·        providing a definition for the term “written advertisement”;

·        requiring that a disclaimer be included in any public adjuster’s written advertisement;

·        providing requirements for such disclaimer;

·        requiring certain persons who act on behalf of an insurer to provide notice to the insurer, claimant, public adjuster, or legal representative for an onsite inspection of the insured property;

·        authorizing the insured or claimant to deny access to the property if notice is not provided;

·        requiring the public adjuster to ensure prompt notice of certain property loss claims; p.19 (& give a copy of PA contract to ins. co. including % of PA compensation)

·        providing that an insurer be allowed to interview the insured directly about the loss claim;

·        prohibiting the insurer from obstructing or preventing the public adjuster from communicating with the insured;

·        requiring that the insurer communicate with the public adjuster in an effort to reach an agreement as to the scope of the covered loss under the insurance policy;

·        prohibiting a public adjuster from restricting or preventing persons acting on behalf of the insured from having reasonable access to the insured or the insured’s property;

·        prohibiting a public adjuster from restricting or preventing the insured’s adjuster from having reasonable access to or inspecting the insured’s property;

·        authorizing the insured’s adjuster to be present for the inspection; prohibiting a licensed contractor or subcontractor from adjusting a claim on behalf of an insured if such contractor or subcontractor is not a licensed public adjuster;

·        providing an exception;

amending s. 626.8651, F.S.; requiring that a public adjuster apprentice complete a minimum number of hours of continuing education to qualify for licensure; 

amending s. 626.8796, F.S.; providing requirements for a public adjuster contract; (Must include percentage of compensation)

SUPPLEMENTAL CLAIM:

creating s. 626.70132, F.S.;

·        requiring that notice of a claim, supplemental claim, or reopened claim be given to the insurer within a specified period after a windstorm or hurricane occurs; (3 year)

·        providing a definition for the terms “supplemental claim” or “reopened claim”; providing applicability;

amending s. 627.351, F.S.; providing that members of the Citizens Property Insurance Corporation Board of Governors are not prohibited from practicing in a certain profession if not prohibited by law or ordinance;

CHANGE IN POLICY: (p. 83)

creating s. 627.43141, F.S.;

·        providing definitions; requiring the delivery of a “Notice of Change in Policy Terms” under certain circumstances;

·        specifying requirements for such notice; (must be sent with renewal) specifying actions constituting proof of notice; (placing it in the U.S. mail is proof of notice) authorizing policy renewals to contain a change in policy terms;

·        providing that receipt of payment by an insurer is deemed acceptance of new policy terms by an insured;

ACTUAL CASH VALUE: (p.87)

amending s. 627.7011, F.S.;

·        requiring that an insurer pay the actual cash value of an insured loss for a dwelling, less any applicable deductible, under certain circumstances;

·        requiring that a policyholder enter into a contract for the performance of building and structural repairs;

·        requiring that an insurer pay certain remaining amounts; (as repairs are made)

·        restricting insurers and contractors from requiring advance payments for certain repairs and expenses;

·        authorizing an insured to make a claim for replacement costs within a certain period after the insurer pays actual cash value to make a claim for replacement costs; (1 year)

·        requiring an insurer to pay the replacement costs if a total loss occurs;

·        allowing an insurer to limit its initial payment for losses to personal property; (ACV or 50% of RCV, whichever is greater, and pay holdback with receipt of purchase)

SINKHOLE: (p. 91)

amending s. 627.70131, F.S.;

·        specifying application of certain time periods to initial or supplemental property insurance claim notices and payments; (90 days)

·        providing legislative findings with respect to 2005 statutory changes relating to sinkhole insurance coverage and statutory changes in this act;

amending s. 627.706, F.S.;

·        authorizing an insurer to limit coverage for catastrophic ground cover collapse to the principal building (so no outlying buildings, sheds, etc.) and to have discretion to provide additional coverage;

·        allowing the deductible to include costs relating to an investigation of whether sinkhole activity is present;

·        revising definitions; (“covered building” – seems to exclude driveways, pools, etc.)

·        defining the term “structural damage”; p.94 (1. foundation movement outside of acceptable variance of applicable building code; 2. damage which “prevents the primary structural members or primary structural systems from supporting the loads and forces they were designed to support”)

·        placing a 2-year statute of repose on claims for sinkhole coverage; (from the time insured “knew or reasonably should have known about sinkhole loss”)

amending s. 627.707, F.S.;

·        revising provisions relating to the investigation of sinkholes by insurers;

·        deleting a requirement that the insurer provide a policyholder with a statement regarding testing for sinkhole activity;

·        providing a time limitation for demanding sinkhole testing by a policyholder (60 days from denial of claim) and entering into a contract for repairs (within 90 days);

·        requiring all repairs to be completed within a certain time; (within 12 months)

·        providing exceptions to the time to complete repairs; (mutual agreement between policyholder and insurance company or the claim is in litigation, appraisal or neutral evaluation)

·        providing a criminal penalty on a policyholder for accepting rebates from persons performing repairs;

amending s. 627.7073, F.S.;

·        revising provisions relating to inspection reports;

·        providing that the presumption that the report is correct shifts the burden of proof;

·        requiring the policyholder to file certain reports as a precondition to accepting payment;

·        requiring a seller of real property to provide a buyer with a copy of any inspection reports and certifications;

amending s. 627.7074, F.S.;

·        revising provisions relating to neutral evaluation;

·        requiring evaluation in order to make certain determinations;

·        requiring that the neutral evaluator be allowed access to structures being evaluated;

·        providing grounds for disqualifying an evaluator;

·        allowing the Department of Financial Services to appoint an evaluator if the parties cannot come to agreement;

·        revising the timeframes for scheduling a neutral evaluation conference; authorizing an evaluator to enlist another evaluator or other professionals;

·        providing a time certain for issuing a report;

·        providing that certain information is confidential; p. 110 (oral, written statements or non-verbal conduct, other than “expressly required to be admitted by this subsection, are confidential” and can be disclosed only to the parties – i.e., can’t be admitted in court)

·        revising provisions relating to compliance with the evaluator’s recommendations;

·        providing that the evaluator is an agent of the department for the purposes of immunity from suit;

·        requiring the department to adopt rules;

Changes regarding insurance law seem much more frequent than they were a decade ago. The financially endowed insurance corporations have professional lobbyists that are peddling their economic desires on a full time basis to our elected officials and insurance regulators. These same insurance corporations often are behind the propaganda to vote against judges who don’t rule for the insurance industry’s agenda or position in cases. Florida Senate Bill 408 is substantially law that only helps insurance companies and does little for policyholders. It does not take a genius to figure out who first drafted the proposed bill.

Many of Florida’s elected leaders were financially supported by this very strong insurance lobby. As a result, many of the changes proposed in the legislation may become law. In a very perverse and counterintuitive way of thinking, this law will probably result in more business for me because insurers have more reasons not to timely pay property insurance claims.

Here’s hoping that future insurance law changes will eventually help policyholders rather than increase insurance company executives’ salaries and woe to those suffering catastrophe. Since we are speaking of changes, one singer personifies how much change can happen over a period of time and the music may help those reading through this bill:
 

A recent Louisiana case, which will surely be a topic of discussion at the upcoming Windstorm Conference in Houston is Bradley v. Allstate Insurance Company, No. 09-30035, 2010 WL 3619863 (5th Cir. La. Sept. 20, 2010). The case vacated a prior opinion and is worthy of study because it involves many issues. One topic is that insurers are allowing their counsel to argue contrary to their own internal claims manuals just to lower the amounts owed to customers.

For example, nowhere in Allstate's property claims manuals is actual cash value defined as market value of a structure because Allstate does not consider market value when selling its product that insures the cost to replace or repair. Yet, to win the case, Allstate, and many other insurers, will allow their attorneys to argue almost anything. Unfortunately, jurists who might not fully understand the insurance product and law sometimes agree with their arguments. In a "whatever it takes to win the case" mentality rather than honest debate, insurance attorneys treat insurance company customers as third parties rather than individuals who deserve good faith treatment. The Court noted the actual cash value issue as follows:

The district court found that the ACV of the Bradleys' home was $97,000 because the market value of the Bradleys' home at the time that it was destroyed did not exceed $97,000. Allstate contends that the district court correctly determined the ACV of the Bradleys' home based on its pre-storm value and appropriately held that they were not entitled to recover further payment under their homeowners policy. The Bradleys argue that ACV is properly calculated as the replacement value of the home less depreciation, but that-regardless-ACV is not the correct measure of their potential recovery.

Fortunately, the Fifth Circuit did not follow the District Court or Allstate's attorneys when construing Louisiana law defining actual cash value of a structure:

ACV is computed as the cost of replacing the building as it existed at the time of the accident, taking into account the replacement costs within a reasonable time after the accident, minus depreciation. The district court erred by calculating ACV based on the pre-storm market value of the house.

In most states and for most property insurance policies, this is the correct definition of actual cash value and basis for payment where the building is not being repaired. First, note that the time of determination is a reasonable time after the loss. Since one can only repair or replace after the loss, this is important. Some cases wrongly suggest that the time of the loss or just before the loss occurs is the correct measure. What would be the cost of replacing a structure during Hurricane Katrina? Pretty expensive. Making the value dependent on market conditions just before the loss will often shortchange the policyholder. No insurance companies get construction pricing before the loss, although their attorneys will often argue this point based on improperly worded cases.

The double recovery issue is correct on one point and very troubling on the second point because it encourages insurance companies to pay too little and too late.

In order to determine whether there has been a double recovery by an insured party, the court must ascertain actual loss relative to amounts already recovered under the homeowners policy and other insurance coverage. In the context of evaluating double recovery-or whether any of the insured's losses remain uncompensated-the insured's scope of recovery is measured by the actual loss, not by the total amount of insurance coverage.

A review of decisions under Louisiana law demonstrates that actual loss has alternately been measured by the cost of repair, replacement, or ACV-depending on the circumstances of each case....Recovery for up to the amount of replacement costs turns on whether those additional costs have been or will be incurred. Using replacement costs as the measure of actual loss only in such limited circumstances squares with the general principles of double recovery; replacement costs constitute recovery of a different element of damages than ACV....(“Louisiana law does not allow for double recovery of the same element of damages”). Where contested, the proper measure of actual loss, like the measure of recovery under the policy, is a question of fact....

Here, however, it is undisputed that the Bradleys have not repaired, rebuilt, or replaced the Tennessee Street property within the two-year period allowed under the policy and Louisiana law. See Versai Mgmt. Corp. v. Clarendon Am. Ins. Co., 597 F.3d 729, 737 (5th Cir. 2010) (“Versai's claim for replacement costs likewise was properly dismissed because Versai has not completed repairs on its property as required by the insurance policy.”); La. Dept. Ins., Directive 195... Thus, as a matter of law, the appropriate measure of the Bradleys' actual loss is the ACV of the property-not the cost to rebuild or replace the property. The fact-finder must determine, or the parties may stipulate, the ACV of the property. Subtracting insurance payments already received results in the losses still recoverable under the homeowners policy, subject to the policy limits.

Because the district court treated ACV as synonymous with the pre-storm market value of the Bradleys' home, it incorrectly held that there was no evidence suggesting the Bradleys had uncompensated losses. (citations omitted and emphasis added)

Insurers often argue that they should not pay the full amount of replacement or repair cost until they are incurred. Under the pseudo replacement cost policies where only actual cash value is paid until the repair or replacement is incurred, this view has merit. These policies are not true replacement cost policies because repair or replacement has to be made before the policy pays those sums. Unlike other true replacement cost policies that insurers sell and pay replacement right away, these insurers deceptively sell a replacement cost insurance product that is not a replacement cost product. These insurers should not be allowed to market their product as "replacement" because that is deceptive, as this ruling demonstrates. Those products are contingent replacement cost products. This is especially true since these insurers with contingent replacement cost policies may escape full liability by delaying payment or paying too little -- effectively preventing most insureds from receiving the replacement benefit.

Allstate, State Farm, Nationwide and other major insurers, as well as their agents, should start being honest about what they sell. They should honestly state that they market an insurance product that is inferior to a true replacement cost policy and that they sell a "contingent replacement cost policy." It is not fair that they market and suggest that their product is like others which provide full replacement costs right away. Most consumers are amazed when I tell them that they do not get replacement cost benefits right away and become furious when they learn they have been duped. Everybody in the claims business knows this, but nobody regulating the honest selling of insurance seems to be taking notice.

The Court's double recovery analysis was long, strained, and, except for the second sentence, fairly logical:

An insured “whose property sustains damage from flood and wind can clearly recover for his or her segregable wind and flood damages except to the extent that he seeks to recover twice for the same loss.” ... Insureds are entitled to recover any previously uncompensated losses that are covered by their homeowners policy and which, when combined with their flood proceeds, do not exceed the value of their property...The homeowners and flood insurance policies provide distinct coverages; each protects against a different form of damage...The interplay between the segregation of flood and wind losses and the double recovery rule ensures that proper adjustment by the insurance companies or segregation of covered and excluded damages will, in theory, prevent the insured from receiving a double recovery.

But payments under flood policies, like any insurance disbursement, may not always be entirely accurate. Fundamentally, Allstate and the Bradleys dispute who receives the potential windfall from an overpayment by the flood policy. As the Bradleys advocate, by first segregating losses into those covered by wind and flood, and allowing the insured to collect all the proceeds for losses caused by wind-regardless of prior payments from flood insurance-the insured would receive the benefit of an overpayment by the flood insurance. If the insured were to collect flood overpayments plus the correct wind payments, recovery under wind and flood insurance coverages combined would exceed actual losses; the insured would be receiving an unlawful double recovery.

Therefore, the district court first evaluates whether the insured has already been fully compensated by payments under wind and flood insurance. If the court concludes that the homeowners' insurer is not liable for further payments to the insured because additional payments would result in a double recovery, then the homeowners' insurer effectively receives the benefit of the overpayment by the flood insurance. Whether “the flood insurance overpayments ... would have to later be returned to the federal government is not at issue here....”
...

Because Louisiana's double recovery bar prevents the insured from recovering in excess of actual loss, a district court does not necessarily err by evaluating double recovery prior to the resolution of disputed issues of causation. Where the value of the property in question has been conclusively established, a district court may find as a matter of law that the insured is limited to a specific recovery....But where the insurer has not conclusively established the value of the property-as here-the court cannot find as a matter of law that the insured is limited to a specific recovery based on the insurer's asserted valuation of the property.

...For the reasons discussed above, depending on the factual determinations of the district court on remand as to the predominant cause of the damage to the Bradleys' property, either: (1) the total loss provision in section 5(e) will dictate that the Bradleys are entitled to recover the full policy limits for covered losses; or (2) the ACV provision in section 5(b) will dictate that the Bradleys are entitled to recover the ACV of their home, replacement cost minus depreciation. Under either section 5(e) or (b), the Bradleys' recovery will be subject to the prohibition against double recovery. In some instances, whether additional recovery leads to a double recovery depends on whether actual loss is calculated based on rebuilding or replacement costs, or ACV. The appropriate measure of actual loss does not present a question of fact here, however, because the allowable period for the Bradleys to recover rebuilding or replacement costs has expired and they have failed to rebuild or replace-therefore ACV is the proper measure of actual loss as a matter of law. Upon remand, the fact-finder must arrive at the proper figure for ACV to establish the amount of actual loss. As long as the Bradleys' combined recovery under their homeowners and flood policies is less than their actual loss, then the double recovery rule does not preclude the Bradleys from receiving additional compensation under their homeowners policy.

Assuming the double recovery rule does not bar further payments to the Bradleys, then they are entitled to recover up to the policy limits of the homeowners policy. But while the Bradleys would preliminarily be entitled to recovery, deductions may be made by Allstate for excluded losses. The losses attributable to excluded events, specifically flood-related damages, raise factual questions inappropriate for summary judgment. Under the Dickerson framework, Allstate bears the burden of establishing how much of the total loss is attributable to flood damage. The Bradleys' policy, of course, contains one additional, crucial limitation: by the explicit terms of the contract, Allstate is liable for no more than the stated policy limits regardless of the extent of the Bradleys' loss. (citation omitted and emphasis added)

I have often said that my clients are entitled to the cost to rebuild their property, less payments from flood, if any, in similar situations. The Court's loose language regarding the "value of the property" versus "value of the loss" at actual cash value or replacement is illogical considering the first part of its opinion which disposes of market value determinations. The Court got the important burden of proof right by noting that Allstate has the initial burden to prove the exclusion--Texas courts should take notice that nobody else in the country, including the insurance companies, place these burdens of proofs on policyholders under open peril coverage.

There are other important issues in this lengthy opinion. Slabbed continues to call for a true all perils policy which includes flood in its recent post, My brother Darryl and my brother Darryl – and we’re all in this together Part Trois: The multiperil drumbeat continues. An occasional series. Until that becomes a reality, the study of these cases is important whenever hurricanes cause loss with combined perils of wind and flood.

In St. Paul Lloyd’s Ins. Co. v. Huang, 808 S.W.2d 524 (Tex. App.—Houston [14th] 1991, writ denied.), the insured sued his insurer for failure to pay damages that were the result of a fire. Although the insured believed it was entitled to sufficient insurance funds to repair or replace everything lost or damaged in the fire, the Court pointed out that his insurance policy only provided coverage for the Actual Cash Value of his property, not the Replacement Cost Value. In its decision, the Court noted that:

[w]here the insurance contract provides the measure of damages is the actual cash value of the damaged or destroyed property, it is equivalent to a market value measure of damages.

One way Texas law quantifies fair market value measure of damages means you have to deduct depreciation from the value of your damages. Depreciation represents the normal wear and tear that a property sustains over the course of time. For example, assume you replaced your roof with a new, thirty-year roof at a cost of $30,000. Let’s also assume that you lose $1,000 in the value of your roof for every year that goes by. This loss represents the estimated normal wear and tear sustained by your roof each year. After ten years, the Actual Cash Value of the roof would only be $20,000. However, it would cost you at least $30,000 – and perhaps more – to replace it. If you only have an Actual Cash Value policy, your insurer will only owe you $20,000 for the roof if a windstorm were to destroy it after ten years. This means you will be left without sufficient funds to replace your roof, and you will have to pay the remaining amount out of pocket.

I urge all of you look over your property insurance policy and determine whether you have an Actual Cash Value policy or a Replacement Cost Value policy. If, after reviewing your policy, you realize that you have an Actual Cash Value policy, I recommend you either upgrade to a Replacement Cost Value policy (if you can reasonably afford it), or prepare yourself for the possibility of a large out of pocket expense in the event your property sustains damage as a result of a covered peril. At least you won’t be surprised when your insurer does not give you enough money to replace or repair your damaged property.

On June 9, 2004, a fire broke out in the kitchen of the rented house at which Holden and her three children lived. The fire damaged or destroyed some of the family's personal property, including furniture and various kitchen items. At the time of the fire, Farmers insured Holden under a “Broad Form Renters Package Policy” (Policy), which included coverage for fire damage…The Policy contains the following provision on loss settlement:

Covered loss to property will be settled at actual cash value. Payments will not exceed the amount necessary to repair or replace the damaged property, or the limit of insurance applying to the property, whichever is less.

…The Policy defines ACV as “the fair market value of the property at the time of loss.” …The Policy does not define FMV or specify what method Farmers will use to calculate ACV or FMV. Nor does the Policy expressly state whether sales tax is accounted for in calculating ACV or FMV.

For an extra premium, Holden also purchased a “Contents Replacement Cost Coverage” endorsement (RCE) with her Policy…. The RCE provides for “the full cost of repair or replacement without deduction for depreciation.” Id. “Replacement cost” is defined as “the cost, at the time of loss, of a new article identical to the one damaged, destroyed or stolen.” …The RCE provision requires the insured to actually replace or repair the damaged property within 180 days of the loss. The insured pays the cost of repair or replacement out-of-pocket and submits receipts to Farmers for reimbursement under the RCE. Farmers often pays sales tax under the RCE, upon proof that it has been incurred.

After the fire, Holden submitted a claim to Farmers under the ACV provision of the Policy. Farmers sent Holden a check for $1,174.41, an amount Farmers determined to be the FMV of Holden's property. This amount was calculated with no regard to Washington state sales tax. When Holden requested that sales tax be included in calculating her reimbursement, Farmers informed Holden that if she submitted receipts for coverage under the RCE, only then would her reimbursement include sales tax. Holden explained in her deposition that she opted not to submit her claims under the RCE because she could not afford to pay the out-of-pocket repair or replacement cost and wait for reimbursement from Farmers.

The legal discussion is worthy of study:

The ACV coverage at issue provides for the settlement of losses according to the FMV of the damaged property. Farmers advances a technical definition of FMV, but it is the ordinary understanding of the contract that controls. A technical approach fails to account for the way Farmers actually implements the ACV coverage provision. One method Farmers uses to calculate FMV looks at current replacement cost less depreciation. Farmers admits that it sometimes calculates replacement cost to include sales tax, representing the amount of money a buyer would actually have to spend to replace the damaged property. The language of the ACV provision plainly allows for looking at replacement cost in calculating the insured's loss:

Covered loss to property will be settled at actual cash value. Payments will not exceed the amount necessary to repair or replace the damaged property, or the limit of insurance applying to the property, whichever is less.

…This policy provision suggests to the average insurance consumer that his or her loss will be determined according to what it would cost to replace the property, less depreciation to reflect the age or wear and tear of the damaged property.

Yet, Farmers argues and the dissent concludes that sales tax must be excluded from any replacement cost calculation on the ground that FMV, as used in other contexts, excludes consideration of taxes. See Farmers' Suppl. Br. at 8-12; Dissent at 2-4. The dissent notes that inheritance tax and property tax are assessed on the FMV of taxable items before tax. If tax were included, the argument goes, an endless cycle would be created because one would need to know the tax in order to determine the FMV, in order to determine the tax, etc. The problem with this “chicken and egg” argument is that the meaning of FMV in other contexts is irrelevant. Its meaning in the context of this insurance contract is what matters, which is why Farmers' own practice of including sales tax is critical. Indemnifying a policyholder for his or her actual loss is quite different from valuing property for the purpose of assessing an inheritance, property, or capital gains tax.

Nor does it advance the argument to say that the traditional notion of FMV necessarily excludes transaction costs, such as sales tax, because these extra costs do not add to the value of an object. Farmers' policy does not define FMV in this manner. Indeed, it does not define the term at all. We have recognized in other contexts that the common understanding of “ ‘ “[f]air market value” is the amount of money which a well informed buyer, willing but not obliged to buy the property, would pay, and which a well informed seller, willing but not obligated to sell it, would accept.’ “…Sales tax represents a portion of the actual out-of-pocket expense to the buyer and bears on the decision to buy. Accordingly, there is nothing intrinsic in the notion of FMV that necessarily includes or excludes sales tax.

Faced with the fact that Farmers only sometimes interprets FMV to include sales tax-namely, when a policyholder replaces damaged property under the ACV provision-the Court of Appeals asserted that such practice reflects “a consistent application of the principles of indemnification.”… But, whether an ACV claimant actually replaces damaged property has no logical bearing on the property's FMV. Consider an example in which two different policyholders own identical sofas that are destroyed in fires. Each seeks coverage under the ACV provision, so Farmers must determine the sofas' ACVs. If one of the policyholders buys a new sofa, does this fact affect the value of the old sofa that was destroyed? Does it mean that this policyholder's sofa was worth more than the identical sofa of the policyholder who did not buy a new one? Of course not; the value of the old sofas was the same without regard to these circumstances. The sole purpose in using a replacement-cost-minus-depreciation method of valuation is to estimate the policyholder's loss. This loss is the same regardless of whether the sofa is actually replaced.

The vast majority of insurers include sales tax in valuation of property. Apparently, Farmers wants its policyholders to get less than what other insurers pay their customers. Nevertheless, the conclusion is what matters and requires Farmers to get in line with everybody else:

The value of coverage under the ACV provision of Farmers' policy does not clearly exclude sales tax on damaged or destroyed property. While the policy defines ACV as FMV, it gives no definition of FMV. Neither does the traditional notion of FMV exclude sales tax from its definition. Farmers sometimes accounts for sales tax when calculating FMV. Moreover, the ACV provision indicates that the measure of recovery is related to “the amount necessary to repair or replace the damaged property.”…This language, combined with Farmers' practices and the absence of a definition for FMV, creates an ambiguity as to whether sales tax is included under the ACV provision of the Policy. Because we construe this ambiguity against Farmers, the Policy must be read to include consideration of Washington State sales tax. (emphasis added)

The problem is that "replacement cost insurance" is never marketed truthfully by most of the insurance industry. Want an example? How about the Insurance Information Institute and its explanation of Replacement Cost Insurance:

Replacement Cost and Actual Cash Value

Replacement cost provides you with the dollar amount needed to replace a damaged item with one of similar kind and quality without deducting for depreciation—the decrease in value due to age, obsolescence, wear and tear and other factors. An actual cash value policy pays you the amount needed to replace the item minus depreciation.

Suppose, for example, a tree fell through the roof onto your eight-year-old washing machine. If you had a replacement cost policy for the contents of your home, the insurance company would pay to replace the old machine with a new one. If you had an actual cash value policy, the company would pay only a percentage of the cost of a new washing machine because a machine that has been used for eight years would be worth less than its original cost.

Suppose, also, that the tree damaged your 15-year-old roof so badly that it had to be completely replaced. If you had a replacement cost policy, the insurance company would pay the full cost of installing a new roof. If you had an actual cash value policy, it would pay a smaller percentage of the cost of replacing it."

Does this explanation say that the policy form subtracts depreciation from replacement cost until the item or structure is repaired or replaced? No. What the insurance company wants people to think is that when they buy replacement cost insurance, they will get paid full replacement right away. In many states, there is no difference between actual cash value insurance and replacement cost insurance unless you actually spend the money within a set period of time and make the replacement. You pay a higher premium for the replacement coverage, but the benefit is the same as actual cash value unless you make the repair or replacement within the time frame allowed by the policy.

If an insurance company wants to sell replacement cost insurance, it should be required to pay replacement cost right away. If it wants to sell a policy that pays replacement cost only after an item or structure is repaired or replaced, it should sell "contingent replacement cost coverage." The Florida legislature should not encourage this bait and switch with legislation specifically approving it.

Let me give you an example of what every claims adjuster would recognize as complete stupidity in the insurance world and that insurance lobbyists provided as an analogy to support their position that 20 year old roofs should be separated out of the replacement cost coverage. A lobbyist explained that their proposed law allowed insurance companies to take depreciation on old roofs even under a replacement cost policy. He said this was just like a situation where a five year old car is wrecked and the insurance company replaces it with a five year old car rather than a new car. Now, most of the people reading this Blog know that is a ridiculous and misleading example when applied to real property loss. The reason why is that you cannot buy a five year old roof. There is no ready market of five year old roofs to purchase. And, there is no ready market to purchase five year old nails, shingles, tiles, and whatever else is needed to repair a five year old roof. Indeed, finding and acquiring five year old parts as a replacement will be a lot more expensive than using new materials.

An insurance industry lawyer-lobbyist told the Senators that before the 2006 Replacement Cost Laws that require insurers to immediately pay replacement costs for policyholders who purchased replacement cost insurance, Florida did not require claims repairs to be paid that way. Instead, according to that lawyer-lobbyist, under actual cash value principles, insurers could hold back depreciation before repairs were made. Wrong again. Florida is one of many states that require "repairs" of structures on an actual cash value basis to be made without depreciation taken. Glens Falls Ins. Co. v. Gulf Breeze Cottages, 38 So. 2d 828 (Fla. 1949) In Glens Falls, the Florida Supreme Court decided this very issue:

When insured structures suffer damage far less than total loss, appropriately compensable only by repair, is the measure of indemnity the cost of repair, necessary to render the structure habitable, rather than cost of repair less depreciation?

The discussion of this longstanding Florida law that all adjusters learn was strangely similar to the discussion taking place in the Senate hearing room. I wonder why the insurance lobbyists did not tell the Senators about it and its very sound logic followed by many states when considering how much must be paid when partial repairs are made? The Court noted and found:

The appellants urge us to make a distinction between the damage to a roof and to other parts of a building, going so far as to say that no contention is made that depreciation should be allowed on repairs to the ‘main portions' of a building damaged by windstorm; that even though the other parts of the building repaired after damage from a storm would be in better condition than before repair, nevertheless the insurer should not be relieved of his duty to make those repairs. Of course to the insurer there may be reason, from a practical standpoint, why the roof of a building might fall into a separate category, that being the part of the building which always feels the full force of the elements, but we must take into consideration the protection which is sought and granted when an insurance company contracts with an owner of property to insure him against loss.

The appellants and the appellee agree, and the chancellor announced, that the contract was one of indemnity. Appellants themselves in their brief concede that in the case of partial loss it is the duty of the insurer to restore the property to its condition prior to the loss (if the cost of doing so does not exceed the amount of the insurance), although the cost of doing this ‘is proportionately more than the amount of damage bears to the value of the insured building.’ Appellants do not dispute the soundness of that rule. In a contract of that character the companies undertook to save the owner from harm caused by ravages of storm, and we think the responsibility obtained without distinction between the roof and the remaining components of the structure. We are not referred to any provision of the contract making any such distinction.

Since the buildings were only partially destroyed, it was all the more necessary, for the reasons we have given, that the roofs should be in good condition in order that the structures might remain habitable, and there seems no occasion for holding that, although the repair of other parts places them in better condition than they were before the damage, a different yardstick should be employed in measuring the amount due for the repair of roofs.

Bearing in mind that the purpose of the contract was to indemnify the owner against loss, we think...that the property should have been placed in as nearly as possible the same condition that it was before the loss, without allowing depreciation for the materials used. Certainly it was not intended that the repairs should be made with materials which were not new. If depreciation were allowed, it would cast upon the owner an added expense which we do not believe was contemplated by the parties when they entered into the insurance contract.

The Florida Supreme Court therefore followed the line of reasoning that actual cash value of partial losses to real property is the amount to repair without depreciation, limited by the total amount of available insurance. It would be a strange quirk if the Florida legislature not only receded from its recent 2006 laws, but, in doing so, took away seventy years of common law protecting insurance consumers---and have the nerve to call the proposed law a consumer protection bill.

Legislators would be well served if they removed insurance industry lobbyists from their "trusted" advisors and only partly for the example I just provided. These insurance lobbyists use conservative principles as "spin." They package anti-consumer laws that will harm Floridians using phrases that appeal to conservative values, although the laws are illogically anti-consumer, but "sound good." For example, who is against the "free market" or "competition?" Nobody. So, every time these insurance industry lobbyists propose a law, they package it in such terms, although the terms do not apply. Conservative legislators should be outraged that the insurance industry lawyers and lobbyists are misappropriating the terms that describe conservative core values and using them to mislead the legislators into supporting laws that truly do nothing to foster the free market or competition, but only hurt their constituents. Conservative legislators and constituents should be further outraged that these lawyers and lobbyists have such inroads into our democratic process because of enormous wealth and resources.

Still, I must apologize if my rhetoric is too harsh regarding our elected officials . I can be as guilty as anybody of getting excited about an issue. I truly meant the following I posted in The Florida Insurance Lobby Currently Controls the Rhetoric Regarding Public Adjusting in Florida:

Everybody reading this should remember a few important aspects about our democratic process, the need to participate, and the need to reform when criticism is warranted:

1. Most elected officials truly want to make the "world, country, state" a better place to live and work. They are not corrupt, but are truly well meaning people.

2. Politicians viewpoints on issues are often ignorant because nobody knows everything. If full-time insurance lobbyists show propaganda to these elected officials that only shows that policyholders are getting something they do not deserve... you do not need to be a genius to appreciate their impressions and viewpoints.

3. Many insurance companies require and train their employees and agents to speak with elected representatives about issues in such a way to slant impressions to elected representatives about the need for laws that protect insurance company interests over consumer interests. They often have these scripted out as talking points so that the propaganda actually makes it sound like the proposed law is in favor of the policyholder---usually through the promise of lower rates which then never materialize or do so at the cost of not having coverage.

4. Unless interested people take an active role to visit with, write, and support representatives that appreciate the truth and the need for policyholder protection, the full time lobyists and employees of the insurance industry will prevail with their message.

5. You have to participate if you want justice to work in a democracy because large corporate interests have already figured this out and spend massive money and time coordinating special interests by industry.

...

7. Show up and support representatives that appreciate the consumer side of insurance. You need to encourage and provide financial support to consumer organizations...

8. If you want justice, you cannot just sit back and expect others to do it all for you. You have to work at it with your time and money. Make a commitment and stick to it. If it is important enough, make a big commitment and encourage others. One person can make a difference.

9. Do not get discouraged. I have visited with and provided information to various representatives for a number of years. Sometimes, I have felt like it is just me, a few lobbyists I have personally hired because I have to work on my cases, and just a handful of others in Tallahassee trying to push for laws that favor consumers...I feel as if I have wasted a significant amount of money and time while some other colleagues simply do nothing and provide no support. And, I still keep at it.

In contrast, the insurance lobbying effort is massive, professional, and full time. They can outspend and provide greater numbers of individuals in their efforts.

And, policyholders cannot give up because the alternative is unjust laws. Those well meaning political representatives understand the enormous wealth and resources of corporations. Contrary to popular rhetoric and demeaning criticism, most elected representatives are not "paid off" or "corrupt." They will listen if you can present a credible and persuasive impression that is based on genuine and authentic truth of an issue.

I enjoyed providing some of my knowledge and explaining my appreciation for insurance to our elected representatives yesterday. Insurance is a wonderful man-made financial product. The issues before the legislature are not easy. Insurers need to make a profit and we need to develop a larger supply of available insurance. Doing that and providing an affordable product that pays fully and promptly demands lawmaking based on truth, logic, and knowledge.

Under most policies, an insurance company’s obligation to pay replacement cost value (RCV) does not arise until the repair or replacement has been completed, and the insurance company will never be responsible for any amount in excess of what it actually costs to repair or replace. However, if an insurance company denies a claim and fails to pay any benefits under the policy, it could be argued that an insurer cannot require compliance with the replacement cost provision or any other condition precedent, as a matter of contract law.

In Florida, it is well-established that a party who prevents or renders impossible the performance or occurrence of a condition precedent, upon which his liability is contingent, cannot avail himself of his own wrong, and be relieved of his responsibility to perform under the contract. See, North American Van Lines v. Collyer, 616 So.2d 177 (Fla. 5th DCA 1993). By the same token, it can be argued that by denying liability and refusing payment under a policy, an insurer prevents the insured from complying with the policy’s replacement cost provision and cannot require specific performance after the claim denial.

In Bailey v. Farmer’s Union Cooperative Ins. Co. of Nebraska, 498 N.W.2d 591 (Neb. Ct. App. 1992), the insured’s home collapsed during an excavation to perform renovations—which was a covered peril under the policy. The policy provided coverage for the least expensive of the three, 1) policy limits, 2) RCV of the home for like construction and use on the same premises, or 3) the necessary amount actually spent to repair or replace the home. As in most policies, Bailey’s replacement cost provision obligated the insured to pay no more than the actual cash value (ACV) until the actual repair or replacement was complete. Without extending coverage for the loss, Bailey’s insurer tendered a settlement offer of $11,900 as ACV to bring the “doubtful and disputed claim to a close” Bailey rejected the offer and demanded her ACV option with an opportunity to claim RCV after incurring in the expenses. Still refusing to extend coverage, Bailey’s insurer rejected her demand and offered to buy her a dwelling of like kind and quality in the same neighborhood, but Bailey insisted on rebuilding on the same site and a lawsuit ensued. The Bailey court held that:

Bailey was prevented from satisfying the condition of rebuilding […] by Farmers Union's refusal to assure Bailey that, in addition to the actual cash value figure, the cost of rebuilding her home would be covered up to the policy limit. A condition is excused if the occurrence of the condition is prevented by the party whose performance is dependent upon the condition. Chadd v. Midwest Franchise Corp., 226 Neb. 502, 412 N.W.2d 453 (1987). Though in Nebraska this general principle of contract law has not yet been applied specifically to a set of facts analogous to those of the case at bar, we are persuaded by the reasoning of the Michigan Court of Appeals in Pollock v. Fire Ins. Exchange, 167 Mich.App. 415, 423 N.W.2d 234 (1988), that an insured should not be barred from recovery for failure to rebuild within the time constraints of the policy when the conduct of the insurer prevented the insured from rebuilding.

Likewise, in Vantage View v. QBE Ins. Corp., 2009 WL 536546 (S.D. Fla. March 3, 2009), the insurer denied the claim. The court, relying on Bailey, held that it is not “reasonably possible” for the insured to make repairs without receipt of the funds from the insurer and that the insured was therefore relieved from its obligation of repairing or replacing the damaged property before demanding replacement cost value.

It is important to note that both Bailey and Vantage View are cases where the insureds were denied any benefits prior to filing suit and the insureds were unable to repair or replace the damaged property out of their own pocket. It therefore follows that, if there are no other provisions or exclusions that prevent coverage, an insured may be entitled to receive RCV benefits without having first repaired or replaced the damaged property, as required under a particular policy.

Traditionally, property insurance policies only offered ACV calculations to settle the amount of the loss. In the early 1990s, however, insurers began to offer Replacement Cost Coverage (RCV) as alternative products or endorsements that would require the insurance carrier to pay the full replacement value of the insured property without reservation or holdback of any depreciation in value and irrespective of whether or not the insured repairs or replaces the damaged property.

Of course, the math behind RCV is not as simple as it sounds. Generally, RCV will be calculated based on whether the policy limits are lesser or greater than 80% of the full replacement cost immediately before the loss. Arriving at these numbers is no easy feat, but with the help of computer systems and insurance valuation professionals, the insured will generally be able retain the right to collect the greater between ACV or RCV, subject to the limits of the policy.

In Florida, if an insured has elected RCV coverage, the carrier has to pay the replacement cost for a dwelling or personal property without withholding any depreciation in value, whether or not the insured replaces or repairs the dwelling property. See, Fla. Stat. 627.7011(3) (2009). According to this definition and following the example above, you should receive $1,000.00 for the widget whether you replace it or not.

In practice, however, the difference between ACV and RCV has become somewhat of a gray area, particularly in cases where the insurance carrier has paid some money to repair the damages. In State Farm Fire and Cas. Co. v. Patrick, 647 So.2d 983 (Fla. 3rd DCA 1994), the insurance company wrote a damage estimate under the policy’s RCV coverage and issued a partial payment. Mr. Patrick fully repaired his damages with the partial payment and sued to recover the amount that was withheld. The court held that under RCV coverage the insured was not entitled to recover the difference between the estimated replacement cost and the amount actually spent to repair or replace the damaged property.

More recently, in Vantage View, Inc. v. QBE Insurance, 2009 WL 536546 (S.D. Fla. 2009), a Federal Judge ruled that even when a policy provides that RCV will not be paid unless the repairs are made, if the carrier does not pay a penny on the RCV damages, the carrier cannot require repair or replacement before issuing the RCV payment. The judge noted that it is the advanced funds that generally enable repairs to occur.

In sum, under both ACV and RCV, an insured will never collect more money than what it actually costs to repair or replace the damaged property to its pre-loss condition. However, RCV will afford additional assurance and value protection that will preclude a depreciation holdback, irrespective or whether replacement or repairs occur, if the carrier does not pay any money to repair the damaged property. I will leave it at that for now. Join me next week to discuss more RCV issues, particularly in cases where the insurance claim is wholly denied. Stay tuned.

In New York Central Mutual Fire Ins. Co. v. Dikis, Fla. 69 So.2d 786 (Fla. 1954), the Supreme Court of Florida adopted the broad evidence rule and established that in determining the ACV of a damaged or destroyed property at the time of the loss, courts should consider any evidence that logically tends to establish a correct estimate of the value of the property. Therefore, under the broad evidence rule, valuation will go beyond mere price points and recovery will not be barred because the damages are difficult to ascertain. Of course, mere speculation or conjectures will not suffice, but evidence that logically tends to establish the correct valuation of a damaged property will be admitted.

A few examples are of rigor. In attempting to determine the ACV of stolen goods from an antique dealer, the insurer argued that the ACV was the equivalent to the price at which the insured could have sold the property at the time of the loss. Under the broad evidence rule, however, consideration may be given to the original cost, the cost of replacement and expert opinions on the value and gainful uses of the property to determine the ACV. Mew v. J&C Galleries, Inc., 554 S.W. 2d 249 (Tex Civ App. 1977). In a claim to recover the value of a herd of pedigreed and registered chinchillas the insured’s contract to sell and deliver 12 pairs of chinchillas was admissible even though the demand for chinchillas at the time was falling and the contract was solicited by an inexperienced buyer. Pinet v. New Hampshire Fire Ins. Co., 100 N.E. 346 (1956).

In Florida, Courts have held that under the broad evidence rule, replacement value and wholesale value are factors, not shackles, by which to determine ACV. J&H Auto Trim Co., Inc. v. Bellefonte Ins. Co., 677 F.d 1365 (11th Cir. 1982). Courts in Florida have also held that a sworn statement in proof of loss and a contractor’s estimate can constitute probative evidence from which a jury can make an ACV determination. Barret v. Prudential Prop. Casualty Ins. Co., 790 F.2d 842 (11th Cir, 1986).

While the broad evidence rule applies to any claim, its use and practice is particularly crucial in business interruption claims since courts will admit any evidence that tends to shed any light to the actual value of the insured property at the time of the loss, including self-serving testimony and opinions as to any gainful uses to which the property may have been put, but not otherwise incurred. However, like any other evidence rule, the opponent will be free to offer rebuttal evidence to challenge the weight and credibility of the conflicting evidence before a jury. Join me next week to discuss Replacement Cost Coverage and more valuation topics.

One even made a joke about how, according to TWIA, they each have exactly 11.2% of building value damage, reflected in The Parable of Hurricane Ike Insurance Claims:

The parable is a story of two men, Larry and Moe, who were on the peninsula when Ike hit. Larry was struck by a flying 2X4 launched by the wind, then, when the surge came, he grasped a floating timber and made it to safety. He was treated for his injuries, estimated at 11% of his being.

Moe was not so lucky. He was killed instantly by a flying TV set. The storm surge subsequently swept his body away.

The medical examiner compared Moe's corpse to Larry. After taking several months to consider the situation, the examiner declared that Moe was only 11% killed by wind, because that's what happened to Larry. He opined that 89% of Moe's death must have been due to flooding.

As a result of Javier Delagado following up on evidence produced in an administrative trial, Slabbers finally have the answer of how TWIA performed the calculations that everybody has exactly the same damage. The person making the calculation for TWIA was University of Texas Professor William Spelman. The TWIA attorneys introduced his testimony via a previous administrative hearing to avoid expense—so much for the ability to confront and cross examine a witness. The TWIA pleading was very telling: 

Dr. William Spelman provided sworn testimony in a previous contested case hearing involving a "slab" claim (see SOAH docket No. 454-09-3158.E). He has not been retained by T.W.I.A. to specifically evaluate any particular claim, but rather he was reetained to perform a statistical analysis from which all slab claims were evaluated by T.W.I.A. His sworn testimony offered in the previous contested case hearing explained the process by which he performed his statistical analysis, and another witness explained how that statistical analysis was applied to the particular slab claim.

Spelman’s transcript revealed that he has no insurance claim experience. Instead, his education is political science, economics, and public policy. He is not a contractor, estimator, meteorologist, or engineer. He teaches applied math and statistics at the University of Texas-Austin School of Public Affairs.

The “Reader’s Digest” version of what he did to calculate how each of the Bolivar Slabbers would be entitled to 11.2% was to perform a statistical regression analysis where three main variables were considered to provide a statistical expectancy that 95% of all residential Slabbers would fully be indemnified for wind only damage if TWIA paid 11.2% of the insured value of the structure. He was provided information and variables from 387 TWIA estimated claims of partial damage. After consultation with TWIA retained engineers, he considered 18 different variables from those claims, but found that only three of them had a significant impact upon the wind damage. Those three variables were:

1. Whether the building use was residential or commercial.
2. Whether the building was constructed before 2004.
3. Whether the roof was placed on the structure before 1989.

He determined a “loss ratio” which he defined as the Actual Cash Value payment by TWIA on the partial damage buildings divided by the Insured Value. The average residential payment loss ratio was 9.8%. But, if TWIA paid 11.2%, he calculated that 95% of all Slabbers would statistically have their full indemnity on an actual cash value basis.

There is much to criticize with this work. Indeed, from what we have reviewed regarding the accuracy and low-balling of the TWIA estimates of partial damage, the entire population will have to be revised. We will provide more on the extent TWIA underpays wind damage claims on partial losses.

Still, I felt that Slabbers are entitled to know the person and how the amount was arrived at. Here is the pleading and testimony for everybody’s review.

The rule and argument suggested in the title has applied at least in the following cases:

1. Zaitchick v. Am. Motorists Ins. Co., 554 F.Supp. 209, 215-16 (DCNY 1982), aff'd., 742 F.2d 1441 (2d Cir. 1983), cert., den., 464 U.S. 851 (1983) (insureds were entitled to recover replacement cost of home destroyed by fire where insurer refused to pay any money to insureds, which made it impossible for them to comply with condition precedent requiring them to first rebuild their home).
2. Ward v. Merricmack Mut. Fire Ins. Co., 753 A.2d 1214, 1218 (N.J.Super. 2000) (evidence created jury question whether property insurer's refusal to tender actual cash value made it impossible for insured to satisfy the precondition of replacing structure in order to recover the replacement cost and whether the condition was excused);
3. McCahill v. Commercial Union Ins. Co., 446 N.W.2d 579, 584 (Mich. Ct. App. 1989) (insurer's failure to advance funds that insured required in order to rebuild home excused insured from having to rebuild in order to recover for replacement costs of home);
4. Northrop v. Allstate Ins. Co., 720 A.2d 879, 883 (Conn. 1998) (insurer's withholding recoverable depreciation determined to be wrongful because it rendered replacement cost coverage illusory);
5. Bailey v. Farmers Union Co-op of Neb., 498 N.W. 2d 598-599 (Neb. Ct. App. 1992) (insured homeowner who lost home to fire entitled to recover replacement cost where insurer failed to ensure that it would reimburse her up to the policy limits);
6. Polack v. Fire Ins. Exch., 423 N.W. 2d 234, 235-38 (Mich. 1988) ("no reason to hold an insurer any less accountable for its actions than other contracting parties" replacement cost was proper measure of damages in case where insurer's refusal to pay prevented insured from rebuilding within 180 day deadline set forth in policy);
7. State Farm Fire & Cas. Ins, Co. v. Miceli, 518 N.E. 2d 357, 362 (III. Ct. App. 1987) (where insurer's denial of vandalism claim precluded insured from making repairs, insured entitled to recover replacement costs at trial);
8. Maine Mut. Fire Ins. Co. v. Watson, 532 A.2d 686, 688-89 (Me. 1987) (insured entitled to recover replacement cost).

Virtually all insurance adjusters are taught to pay the actual cash value of a building or personal property as soon as possible, and then pay replacement values on an ongoing basis for real and personal property as the replacement expense is “incurred.” Some policies now require the replacement to be “paid” or “completed” rather than just “incurred.” But, this is the common practice and most companies have written claims procedures that more specifically follow exactly what I have highlighted. Most insurers, acting in good faith, extend any limitations of the period of replacement, so long as the insurance company is not prejudiced by delay. The typical prejudice caused by delay usually results in price increases, and many insurers will still pay far outside the allowable period of replacement if the price is brought back to present value at the time of the loss rather than an inflated amount. Some just pay, acknowledging that they profited from the float. Some of my colleagues and others upset with the insurance industry may hate that I acknowledge that insurance adjusters and their managers do anything correctly, but most property insurance cases are amicably resolved in this manner.

The problem arises when some carriers make the wrong call on coverage, fail to timely pay, or fail to pay enough to allow the policyholder to replace. When this happens, the aforementioned cases and thorough discovery into the insurer’s typical practices provide the policyholder with a good factual and legal basis for jurists to relieve the policyholder from a harsh result caused by the insurance company’s wrongful decisions or actions.

I received an email from an insurance agent and appraiser, John Nixon, that warns of many condominiums "shopping" for cheap appraisals and low estimates for the full replacement value be insured. He wrote:

"Lately, I’ve seen some "professional appraisers" advertising that independent appraisals can help reduce homeowners or commercial property insurance premiums. These ads are suggesting that the insurance carriers are cheating the consumer by inflating estimated replacement costs.

Indeed, some ignorant legislator is accusing Citizens of wrongdoing because he can get an independent appraisal 30-50% lower. These appraisers are using tools and methods inappropriate for insurance purposes: new construction vs. reconstruction, inappropriate deductions for covered property, shorting measurements, and/or failure to include building features.

Sadly, many good independent appraisers were driven out of the insurance to value business by a generation of appraisers willing to work for low fees. Many of these new appraisers unethically do their job and "hit" the number their client wants. This same type of unethical behavior by real estate appraisers generated over-valuation and fueled mortgage fraud. In part, these activities helped lead to the collapse of the lending market.

Now, these same appraisers are trying to appease client demands and "hit" a low number for insurance premium purposes. The insurance consumer doesn’t know any better. However, they will get a hard lesson when the carrier uses different tools and methods when it comes time to calculate coinsurance requirements after a loss. Neither the clever agent nor unethical appraiser will help their client recover from inadequate limits and resulting coinsurance penalties.

I have tried to get Citizens Property Insurance Corporation to clarify their advice for consumers on getting replacement cost estimates for insurance to value purposes, but they declined. They have left the responsibility with the uneducated policyholder to determine appropriate valuation methods. They also declined to disclose what standards they would use post-loss.

Does an underwriter’s acceptance of an independent appraisal on the front-end for underwriting purposes obligate them to use the method/calculations on the back-end for coinsurance calculations? If the coinsurance penalty holds up, have you ever tried to go after appraisers E&O coverage?

In most cases they will have used M&S cost guides and software which have a license restriction prohibiting their use for insurance purposes. I think the agents are more careful to cover their malpractice exposure with signed waivers.

John Nixon
President
Asperta, Ltd."

There is no definitive answer, as each case depends on the facts. I deal with the ramifications of coinsurance penalties all the time. The worst offenders are usually commercial businesses and condominiums. There are various methods we use to avoid coinsurance penalties when the issue arises.

However, I urge all policyholders to get a professional replacement value estimate if feasible. To be safe, over-insure rather than underinsure. Most of the time, many who believe they over-insured are still underinsured.

Agents have to be careful as well. We currently have an eight-figure errors and omission case against an agent. The case involves a co-insurance penalty, and the agent helped make the determination as to the amount of required insurance.

One example is in California where the law requires payment of insurance loss on real property based on loss of market value. It is a stupid rule of law since modern policies contemplate payment based on repair costs regardless of market value. Most California adjusters simply disregard the law and pay based on construction repair estimates.

Texas has a very fair method to determine the value of personal property within a household. The rule certainly is not being told to policyholders. Indeed, most policyholders are told to list their personal household goods, list the date of purchase and the replacement cost, and then provide that list to the insurance adjuster. The adjuster arbitrarily applies depreciation and pays a figure claiming it is the "actual cash value" of the personal property loss. This practice is wrong under Texas law and probably results in underpayment.

In Crisp v. Security Nat'l Ins. Co., 369 S.W.2d 326, 329 (Tex. 1963), the Texas Supreme Court held:

"The law of damages distinguished between marketable chattels possessed for purposes of sale and chattels possessed for the comfort and well-being of their owner. In the instance of the former it judges their value by the market price. In the instance of the latter it measures their loss, not by their value in a second-hand market, but by the value of their use to the owner who suffers from their deprivation. The latter measure is employed in the case of household furniture, family records, wearing apparel, personal effects, and family portraits.

The courts have not abandoned the consideration of either market or reproduction or replacement values in arriving at actual value to the insured, but evidence of those values may be used as a guide in making that determination rather than a shackle which compels strict adherence thereto. The trier of facts may consider original cost and cost of replacement, the opinions upon value given by qualified witnesses, the gainful uses to which the property has been put as well as any other facts reasonably tending to shed light upon the subject.

Where property, such as household goods and wearing apparel, has no recognized market value, the actual value to the owner must be determined without resort to market value." (Emphasis added)

In 1979, the Texas Supreme Court overruled a lower appellate Court that wrongly excluded the testimony of the policyholder's estimate of value. It upheld the finding in Crisp and stated:

"Thus, the rule is that where household goods have no recognized market value, the trier of fact may consider, in determining the actual value to the owner at time of loss, the original cost, cost of replacement, opinions of qualified witnesses, including the owner, the use to which the property was put, as well as any other reasonably relevant facts.

The Court of Civil Appeals erred in holding that the testimony of Mrs. Chance was not competent evidence on the value of household possessions at time of trial. This holding is contrary to the Texas Supreme Court's holding in Crisp."

Allstate Ins. Co. v. Chance, 590 S.W.2d 703, 704 (Tex. 1979).

Power to the Policyholder!