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.

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.

The Segals' Boca Raton home was damaged by Hurricane Wilma in October 2005. The Segals duly filed a claim under their homeowner's insurance policy with Harford. Hartford accepted liability for the claim. However, Hartford held back the depreciation in value of the damaged property that was covered. The Segals felt Hartford's depreciation holdback breached the insurance policy, and sued. Hartford moved to dismiss the Segals' Complaint with prejudice for failure to state a claim.

The United States District Court for the Southern District of Florida granted Hartford's motion to dismiss because the Segals' insurance policy with Hartford included a depreciation holdback clause. Thus, the district court concluded that Hartford's depreciation holdback pursuant to that clause was not a breach. The Segals appealed.

The 11th Circuit affirmed the district court's dismissal and held that the Segals' Complaint failed to state a claim. On appeal, the Segals had two arguments. First, the Segals argued that Florida Statute § 627.7011(3), which prohibited insurers from holding back the depreciation in value of damaged property covered by a policy, was incorporated into the Segals' policy. Unfortunately for the Segals, the statute went into effect after the Segals' policy was signed. The parties even agreed the statute did not apply retroactively to the Segals' existing policy. However, the Segals argued that the statute prohibiting depreciation holdback was incorporated into their policy through the policy's liberalization clause. The liberalization clause stated,

"If we make a change which broadens coverage under this edition of our policy without any additional premium charge, that change will automatically apply to your insurance as of the date we implement the change in your state . . . "

The court, however, disagreed with the Segals, and explained that in Florida, contracts for insurance "are construed in accordance with the plain language of the policies as bargained for by the parties." Segal, 2009 U.S. Dist. LEXIS 13215 at *1. So, the court analyzed the liberalization clause pursuant to its plain language. The liberalization clause stated, "[I]f we make a change . . . ." Id. Section 627.7011(3)'s change prohibiting depreciation holdback, however, was made by the Florida Legislature, not by Hartford. Thus, the court took a narrow view of the liberalization clause and held that pursuant to the policy's plain language the liberalization clause did not incorporate the statute's provision prohibiting depreciation holdback.

Second, the Segals argued that the same liberalization clause also incorporated Hartford's changed practices to no longer holdback depreciation to their insureds. The court, however, rejected this claim because the Segals did not allege Hartford's changed practices in their Complaint. Accordingly, the court affirmed the district court's dismissal of the Segals' Complaint with prejudice for failure to state a claim.

Click here to read the full opinion. Please understand that I am not in agreement with this decision as it applies to most policies that also indicate that they will conform to the state law. Read together, a change in state law should be iberalized because the form policies issued would have to provide coverage. In this case, it may be that no liberalizatin took place until after the loss happened.

There are some lessons to remember from this case.  Always ask for the most recent forms and endorsements being issued which reflect the statutory changes. Always ask for a certified copy of the policy with endorsements. Check the Department of Insurance for requests by the carrier for approved endorsements which may prove the liberalization of coverage.