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

The prior version of Florida Statute § 627.7011 read:

(3) In the event of a loss for which a dwelling or personal property is insured on the basis 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.

Effective May 17, 2011, the Legislature amended Florida Statute § 627.7011, detrimentally impacting Florida policyholders’ rights under replacement cost value coverage.

The new statute reads:

(3) In the event of a loss for which a dwelling or personal property is insured on the basis of replacement costs:

(a) For a dwelling, the insurer must initially pay at least the actual cash value of the insured loss, less any applicable deductible. The insurer shall pay any remaining amounts necessary to perform such repairs as work is performed and expenses are incurred. 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.

Under the 2010 statutory scheme, insurance carriers were required to pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaced or repaired the dwelling. This makes sense because it protects policyholders from the financial strain caused by having to front money to repair damage to their dwellings in a time of great stress and need.

Under the new 2011 statutory scheme, the insurance carrier is only required to tender the actual cash value of the damaged property until work is performed to repair the damage and expenses are incurred. Policyholders may be forced to pay out of pocket upfront to fix damages sustained by their dwelling, despite paying extra premiums for replacement cost value coverage.

The recent changes are troubling because allowing insurance carriers to withhold depreciation will only delay and possibly prevent repairs. It is important for policyholders to know that if their dwelling suffers a total loss from a covered peril, insurance carriers are not permitted to withhold depreciation and must tender the full replacement cost value. Further, Florida Statute § 627.7011 only applies to homeowners’ policies and not commercial policies.

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.

If a commercial flat roof EPDM layer is damaged by hail and the insurer’s adjuster admits part or all of the EPDM must be replaced, the insurer will likely issue a check for coverage of the EPDM layer only. The insured must have an expert examine the board insulation and all layers down to the roof deck to determine if the roof system condition is adequate to satisfy the applicable building code and manufacturer’s specifications for placing new EPDM on top. If the insulation or roof deck are degraded or in an otherwise improper condition for placement of new EPDM on top, the insured’s replacement cost insurance policy may require the insurer to replace the insulation and/or decking as well.

The Colorado Court of Appeals confirmed this in Dupre v. Allstate Ins. Co., 62 P.3d 1024, 1031-32 (Colo. Ct. App. 2002). The policy in Dupre required replacement of portions of Plaintiff’s house with “equivalent construction for similar use” and “the plain meaning of the term ‘equivalent construction for similar use’ includes maintaining the property's prefire function.” Id. (Emphasis added).

The Court determined that replacing portions of the insured’s house to pre-fire functionality included replacing parts of the house that were not directly fire damaged but had to be brought up to code to allow for fire damaged items to be properly repaired or replaced.

[W]hile an actual cost policy is designed to avoid placing the insured in a better position than he or she was in before the fire, a replacement cost policy allows for such a possibility because it is intended to allow the insured to replace the damaged building. 

Id. at 1030. (Emphasis added).

Prior to the fire, plaintiff's house was a habitable dwelling yielding rental income. Merely restoring it to its prefire condition [not in compliance with code] would have rendered it uninhabitable and thus unfit for any similar use. Such a result does not comport with the plain language of the limitation or the reasonable expectations of an insured purchasing a replacement cost policy.

Id. at 1031.

The same concept may apply to an insured’s hail damaged roof—especially if the roof is an older roof with substrate conditions that may no longer conform to code or manufacturer’s specifications. To simply restore a roof to its pre-hail damaged condition may render it unfit for similar use if the substrate or deck is deteriorated and insufficient to support a layer of new roof materials. Obsolescence and deterioration are insurable risks, and a property insurance policy may require the insurer to pay for either after hail or another covered cause of loss has damaged a policyholder’s roof.

In next week’s post, I’ll provide Tips For Ensuring Adequate Insurance Payments To Properly Replace A Policyholder’s Hail Damaged Roof.

United Policyholders (UP) has often filed amicus briefs in insurance related cases. Their goal is to provide judges with a balanced perspective when they review cases involving insurance questions. As described by United Policyholders,

Amicus curiae (friend of the court) briefs are the vehicle through which interested parties other than the parties in a case make points for reviewing judges to consider. Judicial decisions define insurance consumers' rights and insurance companies' obligations, so they are critically important and have long-lasting impact.

UP points out that insurance companies and their associations routinely inundate reviewing courts with briefs arguing their views. In the majority of cases, judges get no briefs at all that advance the perspective of insureds/insurance consumers. Predictably, the results often favor the insurance industry. UP is striving to change this imbalance through their Amicus Project.

In the appeal of Woodham, Marc Ladd, from the New York office of Anderson Kill & Olick, wrote the pro bono brief. The issues on appeal are whether Allstate’s 180 day policy language violates New York’s Standard Fire Policy and whether Allstate’s 180-day policy language is ambiguous.

As background, Thomas Woodhams and Charlene Connors suffered a fire loss to their property in 2007. The necessary building permit took 180 days to be issued. They asked Allstate for an extension but, because they could not complete repairs within 180 days, Allstate would pay no more than the actual cash value of the loss. In total, Allstate refused to pay over $58,000 in replacement costs.

In litigation, Allstate argued policy required the repairs to be completed within 180 days. The insureds disagreed with this interpretation and argued that policy provisions violate New York’s statute for fire payment claims.

New York Statute §3404 on standard fire insurance policy provides that insured parties shall be entitled to:

TO THE LESSER AMOUNT OF EITHER:

1. THE ACTUAL CASH VALUE OF THE PROPERTY AT THE TIME OF THE LOSS, OR

2. THE AMOUNT WHICH IT WOULD COST TO REPAIR OR REPLACE THE PROPERTY WITH MATERIAL OF LIKE KIND AND QUALITY WITHIN A REASONABLE TIME AFTER SUCH LOSS, WITHOUT ALLOWANCE FOR ANY INCREASED COST OF REPAIR OR RECONSTRUCTION BY REASON OF ANY ORDINANCE OR LAW REGULATING CONSTRUCTION OR REPAIR, AND WITHOUT COMPENSATION FOR LOSS RESULTING FROM INTERRUPTION OF BUSINESS OR MANUFACTURE, OR

3. TO AN AMOUNT NOT EXCEEDING ................ DOLLARS, BUT IN ANY EVENT FOR NO MORE THAN THE INTEREST OF THE INSURED, AGAINST ALL DIRECT LOSS BY FIRE, LIGHTNING AND BY REMOVAL FROM PREMISES ENDANGERED BY THE PERILS INSURED AGAINST IN THIS POLICY, EXCEPT AS HEREINAFTER PROVIDED, to the property described hereinafter while located or contained as described in this policy, or pro rata for five days at each proper place to which any of the property shall necessarily be removed for preservation from the perils insured against in this policy, but not elsewhere.

In the early 1990s, Allstate changed the language in its property damage policies regarding coverage of replacement or repair costs. Prior to the change, the language read:

If you decide not to repair or replace the damage[d] property, settlement will be on an actual cash value basis, not to exceed the limit of liability applicable to the building. You may make claim within 180 days after the date of the loss for any additional payment on a replacement cost basis if you repair the damaged property.

In the initial action against Allstate, the policyholders point out that this language only required a policyholder to make a claim for this additional replacement cost coverage within 180 days of the date of loss. It did not require that repairs be completed within any period of time.

In the mid-'90s, Allstate revised this policy to state the following:

If you do not ... repair or replace the damage[d] building structure, payment will be on an actual cash value basis…You may make claim for additional payment ... if you repair or replace the damaged, destroyed, or stolen covered property within 180 days of the actual cash value payment.

The policy also stated that:

When the policy provisions conflict with the statutes of the state in which the residence premises is located, the provisions are amended to conform to such statutes.

In 1994, The New York State Insurance Department (NYSID) approved this language, and since then, Allstate has issued policies with this language.

In New York, policies that provide coverage for loss by fire must either conform to the standard fire policy, or be approved by NYSID and must include terms and provisions that are no less favorable to the insured than those contained in the standard fire policy.

In the complaint, the insureds argued that the relevant terms of Allstate's policies provide “less favorable” coverage than the standard fire policy.

The insureds filed suit in New York state court, but the case was later removed to the United States District Court for the Southern District of New York in New York City. The case never proceeded to the discovery phase because Allstate’s motion to dismiss was granted. On September 28, 2010, Judge Koeltl issued his Opinion and Order dismissing all claims without prejudice and judgment was entered on September 30, 2010. The insureds appealed, and the matter is still pending in the United States Court of Appeals for the Second Circuit.

Next Saturday, I will write about the arguments raised by the policyholders against the language of Allstate’s policy and the arguments raised on behalf of policyholders in the amicus brief.

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:
 

Newly-elected State Representative Frank Artiles, a public adjuster, appraiser and umpire by trade, held a teleconference on November 22, 2010, with the goal of introducing himself to Florida insurance industry representatives and other interested parties and discussing their concerns, such as fraud and other issues impacting the property and casualty market.

Joined by Paul Handerhan, president of a new insurance advocacy group (founded by Representative Artiles) called "Florida Association for Insurance Reform," Representative Artiles explained that, through various working groups he has facilitated, he has learned there are ways to compromise on the issues, while advocating for consumers.

"I didn't come to Tallahassee to represent public adjusters," he emphasized several times, "I came to represent my district."

After discussing his background at length, Representative Artiles touched on general Florida insurance issues, such as Citizens Property Insurance Corporation ("Citizens"), which he said puts private insurance companies at a competitive disadvantage, principally because it is immune from bad faith claims.

"I want to protect insurance companies to make sure they do make a profit, because at the end of the day, I am a Republican," he added.

Representative Artiles also said he wants to "stamp out fraud," because of its negative impact on the State, as well as on insurance policyholders.

The meeting participants quickly prompted a discussion on claims-related issues and public adjuster fraud. The subject of insurance-related Special Investigative Unit ("SIU") personnel also was touched upon.

"There are good public adjusters and bad SIU people," Representative Artiles said.

In regard to ongoing Hurricane Wilma fraud, Representative Artiles said that there is no reason insurance carriers should be getting newly reported losses from several years ago, when claimaints have had ample time and opportunity to do so earlier.

Arson, he said, is also an issue in certain parts of Florida because of the economic situation. "When someone buys a house in the foreclosure process for $40,000 and insures it for $250,000, the policy alone motivates them to burn down the house," he explained. "We are also limited by the Valued Policy Law."

Further, because of the way Florida's laws are written, he continued, many claims are not technically classified as fraud.

...

On the subject of public adjusters, he referenced Florida's requirement that each public adjuster must carry errors and omissions insurance and said that, since this mandate, nearly 1,000 public adjusters have vacated the field.

Together with Mr. Handerhan, Representative Artiles discussed the licensing of appraisers and umpires. Apparently, many of those who currently hold appraisal and umpire licenses, or "consider themselves appraisers" have been convicted of Medicare fraud and "been literally unlicensed in every aspect."

Representative Artiles alluded that SIU investigators should be licensed as stringently as public adjusters and appraisers. It was pointed out that many of these independent people are not even trained as thoroughly as their counterparts at private corporations.

He added that, in the context of a claim, the SIU representative doesn't make an ultimate decision, but has a significant impact on the process.

One meeting participant said that public adjusters canvassing neighborhoods present a danger to policyholders, who have no screening process to determine their qualifications.

Another meeting participant said he would like to see licensing standards for SIU personnel that are comparable to those applicable to public adjusters and appraisers. The large disparity in requirements sends mixed signals, he explained.

...

"Citizens is literally eating its cake and hurting the entire industry," Representative Artiles said.

...

Representative Artiles remarked that many cases of fraud don't involve public adjusters, adding that a change in Florida's replacement cost value ("RCV") statute has "turned the claims industry on its ear." He explained that, because Florida is the only state that requires insurers to pay RCV up front, the law is anti-consumer, since the costs of these payments are passed along in higher premiums.

He went on to say that Florida should adopt an "Arizona-style" law that would mandate a comprehensive inspection prior to selling a home. The information would be kept in a database and, according to Representative Artiles, would provide a long-term savings for insurers that have access to this type of information. It also would help takeout companies, he said, which he described as "flying blind" from the outset of assuming a policy.

...

 He also remarked that many general contractors are out of work and would welcome the opportunity to be employed as public adjusters.

Candidate Frank Artiles wrote a guest post on this blog, Everyone Must Participate In The Political Process. There he was quite emphatic about the number one problem regarding insurance:

Over the last few years, many voters have not been provided the truth regarding the insurance industry agenda of higher insurance rates and less regulation. This agenda fosters the biggest problem with insurance-- insurance companies that are denying, delaying and not paying claims.

Time will tell what laws Frank Artiles will support on that agenda. Privately, I will do what I can to explain fully the various issues Frank Artiles raised in the teleconference.

I absolutely disagree that the current Replacement Cost law is anti-consumer. It makes insurance companies pay for what they sell: replacement cost insurance. Most consumers will never believe that  allowing insurance companies to sell Replacement Cost Insurance and not requiring that replacement costs be paid is a pro-consumer law because it is not. Such a change in the law promotes deceptive advertising and avoids the legal problems noted in Prevention of Performance with Replacement Cost Value:

…the 11th Circuit Court of Appeals did not agree that the doctrine of prevention of performance should be applied to replacement cost value provisions in insurance contracts when an insurer fails to pay at least actual cash value. The 11th Circuit recognized that it would have been costly, inconvenient, and most certainly a hardship for the association to pay for millions of dollars in repairs without the assistance of insurance benefits, but held that the hardship would not excuse the contractual requirement to actually repair the property before replacement cost value damages could be awarded. The appeals court reversed the trial court’s award for replacement cost value, but affirmed the trial court’s award for actual cash value damages, finding that they had been sufficiently proven.

This decision leaves many unanswered questions for policyholders. For starters, where is one who suffers a large loss supposed to get money to make repairs in order to get replacement cost value? Other issues are equally unsettling in the case, including the supposed election of remedies between ACV and RCV when making an insurance claim that the 11th Circuit discusses.

The flaw in the type of law Representative Frank Artiles now proposes was explained in QBE Insurance Case Rewrites Replacement Cost Adjustment, where I said:

The practical impact of such legal reasoning is that insurers, absent consumer protection statutes requiring payment of replacement costs, can now underpay losses and get away with it.

The existing law protects Representative Artiles' constituents; the law he proposes would essentially allow insurance companies to delay paying or even fleece the difference between replacement cost and actual cash value from policyholders who are at a financial disadvantage when it is time to rebuild or repair after a loss. 

Given that Representative Artiles stated that the number one insurance problem was delayed and denied claims, I cannot imagine why he would support changes to insurance laws that encourage this wrongful behavior.

One wrongful adjustment method that occurs from time to time is the practice of taking the deductible from the policy limit. For insurers, this is a way to never pay the policy limit. When this occurs, the underwriter essentially charges unearned premium for the amount of the deductible, and the policyholder never has a chance to fully recover under the policy. Sometimes the practice occurs out of ignorance. Some just take advantage of the unknowing policyholder.

The general rule for determining loss payment where a deductible applies is:

Total amount of covered loss less deductible, subject to the policy limit. If the amount of the damage-- minus the deductible-- is greater than the policy limit, the insurance company's liability is only the policy limit. The policy limit is the amount of coverage purchased.

I wrote that post because a Texas policyholder attorney wrongly applied the deductible to the policy limit. Policyholders would never obtain policy limits if this were the correct application of the deductable. It is completely illogical. For example, if a policy deductible was a hundred dollars and the policy limit was a hundred dollars, there would never be a payment on the policy.

Brandon McWherter added to the analysis by noting:

Under Tennessee's valued policy statute (T.C.A. 56-7-803), an insurer is liable to the policyholder for the full policy limits if a total loss occurs. In my view, this statute effectively prohibits an insurance company from subtracting the deductible in total loss cases. My research reveals only one case addressing this precise issue, and that is Thurston Nat'l. Ins. Co. v. Dowling, 535 S.W.2d 63 (Ark. 1976). In Thurston, the Arkansas Supreme Court held that an insurance company may not enforce a deductible provision in the case of a total loss when it results in the insured receiving less than policy limits in violation of Arkansas' valued policy law. There is no logical reason why the same rule of law would not be true in Tennessee as well.

This very simple concept seems to be a recurrent issue. For those interested in the topic, I provided a citation for further reading:

This is often referred to as “absorbing a deductible.” For all adjusters studying this, and those that want to point out that they have been wronged, there is an excellent discussion in Property Loss Adjusting (Insurance Institute of America 3rd Ed 2004), section 2.17.

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)

As Tyler noted,

…the 11th Circuit Court of Appeals did not agree that the doctrine of prevention of performance should be applied to replacement cost value provisions in insurance contracts when an insurer fails to pay at least actual cash value. The 11th Circuit recognized that it would have been costly, inconvenient, and most certainly a hardship for the association to pay for millions of dollars in repairs without the assistance of insurance benefits, but held that the hardship would not excuse the contractual requirement to actually repair the property before replacement cost value damages could be awarded. The appeals court reversed the trial court’s award for replacement cost value, but affirmed the trial court’s award for actual cash value damages, finding that they had been sufficiently proven.

The practical impact of such legal reasoning is that insurers, absent consumer protection statutes requiring payment of replacement costs, can now underpay losses and get away with it. If this unpublished is followed, federal courts will not award the full amount of replacement cost benefits until the insured actually does the work. This seems like a pretty illogical result from the policyholders view, as a replacement cost policy should pay for replacement of the property to a new condition. Where an insurer underpays a loss and refuses to acknowledge a proper amount of value for replacement, how are policyholders supposed to do the replacement? Tyler noted this in his comment:

This decision leaves many unanswered questions for policyholders. For starters, where is one who suffers a large loss supposed to get money to make repairs in order to get replacement cost value? Other issues are equally unsettling in the case, including the supposed election of remedies between ACV and RCV when making an insurance claim that the 11th Circuit discusses.

Adjusters and policyholders should pay attention to the election provisions under the replacement cost portion of the policy. These are rarely discussed or elected. However, in this case, the provisions were specifically discussed in the opinion:

…In the first place, the insurance contract unambiguously requires the insured to repair its property before receiving RCV damages. The insurance contract specifically provides that QBE “will not pay on a replacement cost basis for any loss or damage (1) Until the lost or damaged property is actually repaired or replaced; and (2) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.” Condominium Association Coverage Form, provision G(3)(d). [DX-1, p. 13-14 out of 14] The insurance contract contains no allowances for advance payments to fund repairs. Both parties agree, and the record undeniably establishes, that Buckley Towers never completed repairs and, thus, would be barred from recovering RCV damages under the plain terms of the contract. We must accept the unambiguous terms of this contract because “[i]nsurance contracts are construed in accordance with the plain language of the policies as bargained for by the parties.” Prudential Prop. & Cas. Ins. Co. v. Swindal, 622 So.2d 467, 470 (Fla.1993).

 Applying the doctrine of prevention of performance in this case would impermissibly rewrite the insurance contract on the equitable theory that it would be too costly for Buckley Towers to comply with the terms of the agreement. Under Florida's binding law, however, courts are not free to rewrite the terms of an insurance contract and where a policy provision “is clear and unambiguous, it should be enforced according to its terms.” Acosta, Inc. v. Nat'l Union Fire Ins. Co., 39 So.3d 565, 573 (Fla.Dist.Ct.App.2010)... Allowing Buckley Towers to claim RCV damages without repairing or replacing entirely removes the plaintiff's obligations under the Replacement Cost Value section of the contract. The parties freely negotiated for that contractual provision and it is not the place of a court to red-line that obligation from the contract.

 Nor is it a defense to say that it would be costly for Buckley Towers to comply with the insurance contract as written. “Inconvenience or the cost of compliance [with contractual terms], though they might make compliance a hardship, cannot excuse a party from the performance of an absolute and unqualified undertaking to do a thing that is possible and lawful.” N. Am. Van Lines v. Collyer, 616 So.2d 177, 179 (Fla.Dist.Ct.App.1993). Although Buckley Towers may be unable to receive the full range of benefits of their contract without an advance payment under Florida law, that cost and inconvenience may not relieve them of repairing the building prior to claiming RCV damages.

 Indeed, the Florida courts have upheld similar contracts that expressly require repair before claiming RCV damages. The Florida Supreme Court has explained that, with contracts such as the one in this case, replacement cost damages do not “arise until the repair or replacement has been completed.” Ceballo v. Citizens Prop. Ins. Corp., 967 So.2d 811, 815 (Fla.2007) (citation and quotation marks omitted). See also State Farm Fire and Cas. Co. v. Patrick, 647 So.2d 983, 983 (Fla.Dist.Ct.App.1994) (per curiam). And, by example, the First District Court of Appeal recently held that a trial court had erred by allowing an insured homeowner who had chosen to sell his property rather than repair the structures appurtenant to the house to claim RCV damages instead of ACV damages for the structures. Citizens Prop. Ins. Corp. v. Hamilton, --- So.3d ----, No. 1D09-4128, 2010 WL 2671808, *8 (Fla.Dist.Ct.App. July 7, 2010).

Absent a statute, insurance adjusters are generally taught that replacement dollars are owed as soon a bona fide contract for replacement is entered into with a contractor, not when the replacement or repair is complete. Some state departments of insurance are permitting policies which require replacement before benefits are owed.  This is problematic for the policyholder, who usually needs the benefits to pay for the replacement.  Perhaps agents and insurers should be prevented from selling replacement cost insurance that operates this way. Certainly, this case proves the need for consumer protection legislation and that Replacement Cost Coverage is illusory under many forms of insurance.

The editorial noted:

Two provisions, however, could spell trouble for Florida policyholders.

One opens the door to rolling back mitigation discounts that companies provided to homeowners, if they can make a convincing case that premium reductions were too high.

Another allows increases of no more than 10 percent under ``expedited review'' for certain fixed costs -- provided insurers forgo filings to increase base rates the same year.

At best, this makes the bill a 50-50 proposition for consumers. It offers a variety of provisions that protect policyholders, but it also creates loopholes that unscrupulous insurers could exploit, at the expense of consumers.

The best course for Gov. Crist is to veto this bill and insist that legislators give him a clean bill during the upcoming special session -- one he can sign without reservations.

The Miami Herald editorialists missed the part of the bill which reduces replacement cost benefits. A follow up story in the Miami Herald, Veto Watch in Place for Property Insurance Bill, made that point, quoting from Florida House of Representative Rick Kriseman:

He cites three main concerns in the language that give insurers the ability to:

• Withhold a full claims payment until homeowners repair structural damage, contrary to current replacement-cost-value policies;

• Increase rates each year up to 10 percent to cover reinsurance and inflation costs under a separate filing that gets ``expedited review;``

• And offer fewer mitigation discounts to policyholders who strengthen homes against storms and even charge fees to those with inferior protections.

But more than anything, Kriseman said, he disliked the way the Republican leadership in the Legislature strong-armed the bill, blocking all amendments and limiting debate.

``I think there is good reason to veto it,'' he said. ``Just the mere process alone, the way it was shoved down our throats.''

A leading condomium law firm, Becker & Poliakoff, did not miss problems with the property insurance bill when reporting to its legion of clients and readers in Industry Leaders Request Veto of SB 2044 Citing Ability for Insurer's to Withhold Partial Payment of Claims:

One part of the bill purportedly bars homeowners from filing claims. It says that the insured must provide notice of any claim (including supplemental or reopened claims) based on a windstorm or hurricane loss to the carrier within three (3) years of the date of the storm. While it doesn't change the applicable statute of limitations for civil actions, in some cases homeowners do not have a full understanding of all the damages caused by the windstorm/hurricane until after demolition and reconstruction begins. Thus, the three (3) year time frame may result in loss of insurance proceeds, depending upon whether the homeowner has the ability to attend to reconstruction after the storm.

Another section of the bill allows the insurance carrier to change the terms of the policy upon renewal by use of a notice entitled "Notice of Change in Policy Terms". Payment of the renewal premium constitutes acceptance of the new terms.

Most importantly, the bill removes the prompt payment requirements on the part of carriers. It only requires the carrier to pay "actual cash value" minus the deductible, regardless of whether the homeowner paid for replacement cost coverage. The carrier then only pays additional amounts once a contract for reconstruction is in place and the costs are incurred (as the work progresses). Critics argue that this provision disproportionately impacts lower income families that do not have funds available to pay for reconstruction (along with all the non-insured items) and/or replacement of personal property without insurance proceeds.

A comment by Mike Rump to that post hit the mark regarding the replacement cost benefit loss:

This new law should be veto'd. The legislature quickly forgets the number of complaints filed by consumers regarding the filing of holdback depreciation claims during our very recent and busy storm seasons. Consumers who pay for replacement cost did not understand why the carriers were allowed to hold back depreciation until proof of repairs were presented. Consumers saw this as another delay tactic by the carriers and it forced consumers to jump through more hoops after a disaster to completely recover the money they desperately needed for repairs. For this reason, the legislature passed a statute barring carriers from holding back depreciation on fire and hurricane claims only.

Well, now the issue is back on the table and this should come as no surprise. The current legislation will once again allow carriers to hold back depreciation on all first party claims. Property Insurance carriers stand to gain millions and Florida's consumers stand to gain additional paperwork and hassles in fully collecting what they are owed. Veto this Bill Governor.

This past weekend, I noted two important reasons why the law should be vetoed in Is the Proposed Property Insurance Bill Bad for the Average Florida Insurance Consumer? and Is the Property Insurance Bill Unconstitutional Because It Establishes Support for a Christian Organization and No Other Religious Based Organizations? In Senators Mike Fasano and Rhonda Storms Come to the Rescue of Policyholders and An Interesting Day in Tallahassee and Thoughts on the Pending Replacement Cost Coverage Legislation, I explained my frustrations that the current legislation takes away benefits from my future clients, and I gave credit to legislators who stood up to this poor insurance bill.

All this begs the simple question calling for the veto, Pay Higher Premiums and Get Less Coverage Legislation -- Can Anybody Explain Why This is Good for Floridians?

As an example, the provision to withhold replacement cost payments particular to policyholders who paid for this coverage is very disturbing and has the potential to cause great financial harm. As you may or may not know, this is not new to those of us who have made a career in the adjusting profession in this State. Sadly, we seem to have a lack of institutional knowledge in this State coupled with a lack of an impounded panel or council of sages/experts that could provide input on issues given our history. In my opinion this alone could be a very important step to help all stakeholders going forward with legislation on property insurance.

As an example, when Hurricane Andrew hit 18 years ago this August, those of us who worked that storm remember well the outrage and controversies that resulted when insurance companies went to the insured’s home and told them they would not be getting the replacement cost of their loss but a lesser amount known as actual cash value. This controversy continued on and into the 2004 storm season when the legislature then addressed it by requiring full replacement cost to be paid if this was what was purchased by the homeowner.

My question to you and I am sure you will be asked by the Citizens of Florida when the next storm hits is: Where will already struggling homeowners go to get the money to first replace things before they get the benefit of the replacement cost insurance they purchased?

In closing we need some of the reforms as outlined in SB 2044 such as getting the mitigation discount issue on track which should be a very high priority given where our housing stock has been built (coastal areas) and how it is built (remember Country Walk in Dade County?) and reforms on new property insurance companies. As reported by the Sarasota Herald Tribune reporting one set of numbers to the SEC (a profit) and another set to the Office of Florida Insurance Regulation (a loss) is outrageous in my view.

Governor Crist, please veto SB 2044 for the benefit of all Floridians struggling in the wake of the “Great Recession” and the meltdown of our Citizens greatest assets--their homes. Let’s take some time and work on real property insurance reform. What just passed obviously pleased the insurance lobbyists given their report cheers, but silence from the consumer was deafening! Thank you.

Sincerely,

Charles R. "Dick" Tutwiler, C.P.C.L.A., P.C.L.A.
Licensed Public Adjuster / Loss Appraiser / Certified Windstorm Umpire

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.

The Florida Senate’s proposed law allows homeowner policies that will not pay the cost to fully repair a damaged roof older than 20 years. This will cause significant hardship to retirees and just about everybody else who is not wealthy. If your 21 year old roof gets destroyed in a fire and you have this new policy, you may get paid only a small amount of money to replace it. This is a significant shift in the historic manner of how insurance works. Insurance typically insures the entire structure and provides sufficient money to repair or replace that structure from an insured event.

Homeowners, especially those on fixed budgets, will suffer even if the roof is perfectly fine. The proposed law takes away provisions that passed just recently requiring the immediate payment of replacement cost for real and personal property. A few insurance companies pay replacement cost right away under their contracts. This proposed law takes away the requirement of prompt payment and allows insurers to hold back benefits until the replacement is made and a construction contract or a receipt is produced. Chances are that claims payments will be delayed, and we will have the same problems we did before laws were passed outlawing the delays associated with replacement cost payments.

More later….

The usual coverage question in this type of situation is whether the insurance carrier satisfies its replacement cost obligation by replacing the one tile, or does it have an obligation to replace the entire floor to achieve uniformity. “Matching” coverage disputes are highly contentious and controversial. Most insurance carriers will likely insist that they do not have an obligation to replace the undamaged property in a partial loss or that replacement can be achieved by harvesting a tile from an inconspicuous location at the property. However, policyholders are promised “new for old” benefits when they purchase the pricier replacement cost provision and most would shudder at the thought having to look at their patchy homes or businesses if the replacement is not uniform in appearance or quality.

The bottom line is that “patchy” properties lose value. Most replacement cost provisions should provide for full replacement of the undamaged property in those cases considering the valuation impact of a partial repair.

Luckily in Florida, the Legislature addressed this concern.

§ 626.9744. Claim settlement practices relating to property insurance

Unless otherwise provided by the policy, when a homeowner's insurance policy provides for the adjustment and settlement of first-party losses based on repair or replacement cost, the following requirements apply:

(1) When a loss requires repair or replacement of an item or part, any physical damage incurred in making such repair or replacement which is covered and not otherwise excluded by the policy shall be included in the loss to the extent of any applicable limits. The insured may not be required to pay for betterment required by ordinance or code except for the applicable deductible, unless specifically excluded or limited by the policy.

(2) When a loss requires replacement of items and the replaced items do not match in quality, color, or size, the insurer shall make reasonable repairs or replacement of items in adjoining areas. In determining the extent of the repairs or replacement of items in adjoining areas, the insurer may consider the cost of repairing or replacing the undamaged portions of the property, the degree of uniformity that can be achieved without such cost, the remaining useful life of the undamaged portion, and other relevant factors.

(3) This section shall not be construed to make the insurer a warrantor of the repairs made pursuant to this section.

(4) Nothing in this section shall be construed to authorize or preclude enforcement of policy provisions relating to settlement disputes.

For Florida policyholders, if the policy calls for replacement cost and the loss occurred after October 1, 2005, it is important to know that Florida Statute § 627.7011 prevents an insurer from attempting to depreciate the undamaged portion of the structure that needs to be replaced due to matching:

(3) In the event of a loss for which a dwelling or personal property is insured on the basis 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.

According to the above, there is no reason why a policyholder should accept less than full replacement of his tile floor and not be afraid of moving appliances or furniture around their homes to avoid showing a harvested or patchy tile repair. According to the clear language of the law, there is also no reason why an insurance carrier should depreciate the value of the undamaged portion when considering the cost of repair or replacement. 

Not all properties are alike. Buildings may have unique or obsolete construction materials and there may be large difference between replacement cost and market value at the time of a loss. Since generally, replacement cost coverage will be triggered after repairs or replacements have commenced, this scenario would put the policyholder at a financial disadvantage since the cost to replace damaged property with functionally equivalent property is more than its actual cash value and less than its replacement value. It should thus be considered “good business practice” for an agent to evaluate the uniqueness and value of the insured property before binding replacement coverage as the best valuation alternative.

Functional Replacement Coverage (FRC) is used when a functionally equivalent building can replace the original at a lower cost than would be required by an identical replacement. Functional replacement cost valuation provides a lower valuation than replacement cost, resulting in a reduction of the amount of insurance coverage required and thus lower premiums.

FCR coverage may be more favorable for certain items than actual cash value. Most FCR loss settlement provisions provide that losses will be settled following one of these two methods: replacement with a less costly, but functionally equivalent building; or, in the case of a partial loss, restoration of the damaged portion in the same architectural style, but with less costly material (ie replacing a mahogany banister with a pine banister).

The FC&S Bulletin explains the functional cost endorsement as follows:

“Functional Replacement Cost Loss Settlement (Forms HO 00 02,
HO 00 03, and HO 00 05 only)
HO 05 30 10 00

This endorsement may be used when broader coverages are desired than those provided by the HO 00 08, but the insured or insurer does not wish to insure to full replacement cost. This might be the case with an older, ornate home that incorporates stone-, wood-, or plasterwork not readily available.

Replacement cost may so far outstrip market value that to insure based on replacement would do a disservice to the insured, since it is unlikely that the home could be replaced exactly as it stands. Therefore, use of this endorsement provides the insured with the broad range of coverages available in the ISO program, yet allows a more realistic amount of insurance to be selected.

The coverage A limit of liability is chosen based on "functional replacement cost," that is, the amount it would cost to repair or replace using materials that are functionally equivalent to obsolete, antique, or custom methods and materials. For example, plaster walls would be replaced with dry wall, pocket doors with plain doors. The loss settlement provisions substitute "functional replacement cost" anywhere "full replacement cost" appears.

Modified functional replacement cost loss settlement endorsement, HO 05 31, is virtually identical except that if the necessary amount actually spent to repair or replace is less than the actual cash value of the part of the damaged building then the loss is settled on an actual cash value basis.”

A recent opinion on functional replacement coverage was also published in FC&S Bulletin that should help a better understanding this valuation method and its practical usefulness.

Functional Building Evaluation Endorsement as Applied to Partial Loss

December 10, 2009

We have written an old church on a standard ISO form with a Functional Building Evaluation endorsement, CP 04 38 10 00. The building value is a fraction of what it would cost to be replaced but the limit is sufficient to put up a building of the same square footage that would be functional.
The insured suffered a partial wind damage loss. We adjusted the loss based on replacement cost less depreciation and offered that amount. The insured's agent is demanding that the partial loss be paid without the depreciation, at full replacement cost. Can you please advise if we are entitled to depreciate the loss because it is the smaller amount to settle the claim?

Connecticut Subscriber

It is our opinion that you are not entitled to depreciate the loss. The CP 04 38 states that the insured will receive the cost to repair or replace the damaged portion of the building with less costly material, if available, in the architectural style that existed before the loss or damage occurred. This is not the same thing as receiving a depreciated amount, but is less than the full replacement cost because less costly materials are used.

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.

The example I like to bring this point home with is a well maintained dining room wall covering made of gold leaf. I had such a situation representing a wealthy Palm Beach client. I had no idea an individual would dare place such expensive cloth in an area where a chair, champagne spray or whatever could accidently make a meal into a ten thousand dollar event until I was retained on that case. The wall had suffered water damage. Any nice wall paper would be the functional equivalent of the gold leaf. The insurance adjuster was trying to convince me of this as well. But, the client was entitled to the replacement value of gold leaf, not Home Depot Gold Star Wall Covering.

The FC & S Bulletin recently addressed this issue in a question:

"The insured has an HO 04 90 04 91 Personal Property Replacement Cost endorsement. The insured had a collection of army knives and Japanese swords that have been damaged. How should these items be handled? Are they settled under fair market value or do we owe for basic knives? The antique cost to replace is in the hundreds of dollars whereas buying a knife of similar size could be done for about $25.00."

The answer:

"Unless they’re specifically scheduled, they’re paid at actual cash value. Actual cash value is replacement cost less depreciation. This is different than buying a new knife of the same size; that’s more of a functional replacement rather than actual cash value. Functional replacement cost is when you replace something that serves the same function but is less valuable; for example replacing plaster with drywall. They serve the same function, but the drywall costs much less. You can’t replace a diamond with a cubic zirconia; likewise you can’t replace an antique knife with a Wal-Mart special that happens to be the same length. If it’s the same kind of knife fine. You first need to see documentation that the insured had authentic antiques and not museum replicas; replicas are readily available and much cheaper than the actual antique items. There are no special limits on antique knives; guns and jewelry have limits, but not knives. They’re paid at actual cash value."

Please note that some older buildings should be insured at a functional equivalent basis. Older buildings can often be built for in a different manner with modern methods of construction and design for far less than rebuilding to a replacement cost standard. This can save the policyholder premium dollars. In those instances, I suggest that risk managers and brokers raise the issue of insuring on a "functionally equivalent" basis.

The first case, Patrick v. State Farm, 647 So.2d 983 (Fla. 3d DCA 1994), involved a situation where the unit owner repaired and replaced his property through his own efforts. He did not pay somebody else to do much of the work. The Court denied replacement cost coverage stating the following:

Replacement cost insurance is designed to cover the difference between what property is actually worth and what it would cost to rebuild or repair that property. It is insurance on a property's depreciation. Leo L. Jordan, What Price Rebuilding?, 19 ABA Fall Brief 17 (1990). Courts have almost uniformly held that an insurance company's liability for replacement cost does not arise until the repair or replacement has been completed. Id.; see, e.g., Tamco Corp. v. Federal Ins. Co. of New York, 216 F.Supp. 767 (N.D.Ill.1963). Patrick's contract provides that State Farm “will not pay for any loss on a replacement cost basis until the lost or damaged property is actually repaired or replaced....”
…
Patrick also argues that State Farm should pay the total amount the insurance company estimated it would cost to repair or replace his property, despite the completion of the work for a lesser amount. However, the contract plainly provides that State Farm “will not pay more for loss in any one occurrence on a replacement cost basis than ... the amount you actually spend that is necessary to repair or replace the lost or damaged property.” The issue also was squarely addressed in Kolls v. Aetna Casualty and Surety Co., 378 F.Supp. 392 (S.D.Iowa), aff'd, 503 F.2d 569 (8th Cir.1974). There, the insureds were paid $631,955 for the actual value of a destroyed shopping center. Depreciation was figured at $54,920. The insureds then scaled back the rebuilding and only spent $510,759.88. The court refused to order the payment of the withheld amount because the insureds had not spent more on the rebuilding effort than they received in payment for the actual value of the shopping center. “[T]he Replacement Cost Endorsement is not of value to the plaintiffs until they have expended an amount greater than what they could recover under the basic policy coverage....” Kolls, 378 F.Supp. at 400.

The practical pointer here is that had the policyholder’s counsel been aware of State Farm operational guidelines, the case could have been won. State Farm has an internal guideline for just about every claims situation. There was one in existence that provided that State Farm would pay for its policyholder’s time and effort in repairing or replacing the damaged structure. My practice tip is to hire claims experts who have these claims guidelines or simply ask for them. Many companies have these claims guides for use by adjusters. This case is an example of State Farm allowing its attorneys to argue something it did not even believe-- as proven by its operational guides.

Vantage View vs. QBE Insurance, No. 07-60138, 2009 WL 536546 (S.D. Fla., March 3, 2009) is significant because it is a recurrent situation where a denial is made and then the insurer does not want to pay full replacement cost benefits. In some situations, it could provide an unscrupulous insurer a motive to avoid paying the full benefits owed under a policy, knowing a poor insured could never raise monies to rebuild. The Court stated:

Here, the jury found that Defendant breached the insurance contract by failing to pay Plaintiff for the damages it sustained. The jury also found that Plaintiff sustained $910,500.00 of replacement cost damage. Despite that damage, Defendant failed to provide Plaintiff any funds to allow it to make repairs. By so doing, Defendant frustrated Plaintiff's efforts to make any repairs and prevented Plaintiff's compliance with the replacement cost provision in the policy. See e.g., State Farm Fire & Casualty Ins. Co. v. Miceli, 164 Ill.App.3d 874, 115 Ill.Dec. 832, 518 N.E.2d 357, 362 (Ill.App.Ct.1987) (when insurer made compliance with a condition precedent impossible by failing to provide any funds, the insureds were not prevented from recovery of replacement cost); Bailey v. Farmers Union Cooperative Ins. Co. of Nebraska, 1 Neb.App. 408, 498 N.W.2d 591, 598-99 (Neb.Ct.App.1992) (awarding replacement cost coverage despite the plaintiff's failure to comply with the policy condition to rebuild when the plaintiff did not have funds to rebuild); McCahill v. Commercial Union Insurance Co., 179 Mich.App. 761, 446 N.W.2d 579, 585 (Mich.Ct.App.1989)) (awarding recovery for replacement costs because the failure of the insurer to advance funds meant there was “little likelihood of being able to secure financing to repair or replace” property). Florida law is clear that “a party, who, by his own acts, prevents performance of a contract provision cannot take advantage of his own wrong.” North Am. Van Lines v. Collyer, 616 So.2d 177, 179 (Fla.Dist.Ct.1993); see Paparone v. Lake Placid Holding Co., 438 So.2d 155, 157 (Fla.Dist.Ct.App.1983); Ward v. Branch, 429 So.2d 71, 74 (Fla.Dist.Ct.App.1983); see also Restatement (Second) of Contracts § 245 (“Where a party's breach by non-performance contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused”). Indeed, any other outcome would result in an insurer “profit[ing] from its own breach of the agreement.” Zaitchick v. American Motorists Ins. Co., 554 F.Supp. 209, 216 (S.D.N.Y.1982) (quoting and incorporating the insured's argument that the insurer's conduct made it impossible for the insured to fulfill the condition precedent).

This conclusion is buttressed by the language of the policy. Specifically, the policy provides that replacement cost value will not be paid unless the repairs are made “as soon as reasonably possible.” Clearly, it is not “reasonably possible” for the insured to make repairs without receipt of the funds from the insurer. Indeed, Ceballo and Patrick support this interpretation, given that the insurer in those cases advanced funds making it possible for the repairs to occur. Lastly, the Court finds that any other result would provide insurers with an incentive not to pay legitimate claims in cases where payment on a replacement cost basis is likely to be more than payment based on an actual cash value. Thus, the Court denies Defendant's motion for judgment as a matter of law. (emphasis added)

A footnote written by the Court is also significant:

The Court disagrees with Defendant's contention that this finding creates or extends insurance coverage not in the policy.... To the contrary, the Court finds that coverage exists in the policy. It is Defendant's actions in breaching the contract that give rise to Plaintiff's ability to avail itself of the replacement cost provision of the policy. The fact that the policy also provides for actual cash value has no bearing on the Court's interpretation of the policy as to replacement cost in view of Defendant's breach. (emphasis added)

I wish Judge Senter would have followed these lines of cases and reasoning in the Mississippi Katrina litigation. The replacement cost policy contemplates that the insured will have some partial payments immediately on an actual cash value basis to start the repair and replacement. When there is a wrongful denial, the policy stops working in the manner contemplated. The insurer should not benefit from its own wrong action.

Finally, after my post regarding the disappearing appraisal clause in While State Farm May Stay in Florida, Appraisals May Go, the decision in State Farm Florida Ins. Co. v. Nichols,--- So.3d ----, 2009 WL 3674569 (Fla. 5th DCA, November 6, 2009), was released. I believe this opinion will probably accelerate that exodus. By chance, I ran into the very capable policyholder’s attorney, Craig LaValley, in Fort Myers several weeks ago. He won this case and one similar on appeal. He told me that his reasoning was quite simple—if the policy values are determined by appraisal, the insurer decided to go down “the will” street and no longer was on the “may street.”

This is exactly the reasoning followed by the appellate Court:

The homeowners' policies clearly require State Farm to pay the full amount of an appraisal award within sixty days of the award.

…

This statute provides in pertinent part:

The insurer may limit its payment to the actual cash value of the sinkhole loss, not including underpinning or grouting or any other repair technique performed below the existing foundation of the building, until the policyholder enters into a contract for the performance of building stabilization or foundation repairs.

…

We construe this language as permissive, not mandatory. Because it is permissive, the policy language that requires payment of subsurface repairs within sixty days after the appraisal award is not in conflict with the statute and is binding on the parties to the insurance contract.

I suggest that the practical impact of this case is to force many insurers to pay for replacement cost if the value is determined by appraisal. The long term impact may be that the appraisal clause will be written out of many property insurance policies if insurers want to avoid this result.

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 Texas decision follows the Davis case cited yesterday, but adds an important limitation to how the replacement can be made. The rule everybody should follow in Texas when replacing at a different location is as follows:

Under the policy, [the policyholder] was permitted to replace the apartments with different buildings at a different site as long as the new buildings were devoted to the same use. For example, it could have purchased or built a larger apartment complex at a different location. See Davis v. Allstate Ins. Co., 781 So.2d 1143, 1144-45 (Fla.Dist.Ct.App.2001). The amount of Fitzhugh's recovery under the policy was limited to the cost of rebuilding similar or comparable buildings on the same site or the amount it actually spent to replace the property, whichever was less. See id.; see also Republic Underwriters Ins. Co. v. Mex-Tex, Inc., 150 S.W.3d 423, 425 (Tex.2004). For the replacement cost coverage to apply, however, [the policyholder] must have purchased or built a property that was functionally similar to the property that was destroyed. See S & S Tobacco & Candy Co., Inc. v. Greater New York Mut. Ins. Co., 224 Conn. 313, 617 A.2d 1388, 1390-91 (1992). If the new property is not functionally similar to the destroyed property, it is an unrelated expenditure and the destroyed property has not been "replaced."

How the Court got to this bottom line replacement cost rule only came about because the Texas policyholder did not replace the structure with a similar structure, but invested in property of a different use. The policyholder had damage to apartments, and invested in a partial ownership of industrial property.

The reasoning of the Court is important to understand how these cases are judicially viewed:

Unlike the act of giving an insurer notice of a claim or settling a claim without the insurer's knowledge, the replacement of damaged property is an event that triggers coverage. It is the act of replacing the property that causes the insured to suffer an additional loss for which he purchased additional coverage. To allow an insured to recover replacement costs in the absence of actual replacement would permit the insured to recover for a loss he has not suffered. See Harrington, 645 N.Y.S.2d at 224 (reasonable to deny recovery of replacement costs where insured is not going to replace property as he would profit from his loss). Accordingly, we conclude that Fitzhugh was required to replace the damaged property as a condition precedent to its recovery under the policy and that its failure to do so negates its entitlement to recover replacement costs.

For those readers who remember my post, Do Not Take Depreciation to Determine Actual Cash Value of Partial Loss to Real Real Property in Texas, you may wonder why Texas Courts are so concerned about policyholders obtaining “profits” in total loss situations and not mentioning that concern in partial loss situations where the repairs are not made. I am smiling while writing this because I wonder what those judges would say if they thought about that situation and were forced to academically explain how total loss situations differ from partial loss situations. For me, policyholders are generally required to pay the premium based on values at current replacement cost construction prices and should generally get replacement cost benefits unless the policy clearly prevents the same.

Nevertheless, the Fitzhugh 25 Partners court significantly noted what the term “replacement” of a structure contemplated when it was a requirement to obtain replacement cost benefits:

The word "replacement" is not defined in the policy. We must, therefore, give the term its ordinary and generally accepted meaning…. Webster’s New International Dictionary defines "replacement" as a "substitution" or "a new fixed asset or portion of an asset that takes the place of a discarded one."… For something to be a "substitution" or "take the place of" the original, it must serve the same function as the original. The vast majority of cases that have examined this issue have concluded that the term "replacement" inherently contains the element of functional similarity. See, e.g., SR Int'l Bus. Ins. Co. Ltd. v. World Trade Ctr. Props., LLC, 445 F.Supp.2d 320, 334 (S.D.N.Y.2006) (for rebuilt property to be replacement there must be "functional similarity"); Harrington, 645 N.Y.S.2d at 226 (new structure did not "replace" insured's home where insured did not live there); Conway v. Farmers Home Mut. Ins. Co., 26 Cal.App.4th 1185, 31 Cal.Rptr.2d 883 (1994) (term "replace" includes substituting an item that serves same function); Huggins, 423 So.2d at 150 (house was a "replacement" where it served same function as original). but see Ruter v. N.W. Fire & Marine Ins. Co., 72 N.J.Super. 467, 178 A.2d 640, 643 (1962) (replacement need not be identical to original or intended for same occupancy and use).

…

We note that Webster's also defines the term "replacement cost" as "the current cost of replacing a fixed asset with a new one of equal effectiveness."

…

We agree with Fitzhugh's contention that the policy's limitation on recovery of replacement costs to "the cost of repair or replacement with similar materials on the same site and used for the same purpose" is merely a method of calculating damages and not a requirement that Fitzhugh replace the apartment complex with substantially identical buildings at the same physical location. We disagree, however, with Fitzhugh's contention that it may spend the money it recovers under this measure of damages on anything it chooses. Such an interpretation reads the condition that the property be "replaced" out of the policy.

I am also smiling because while I write this post, I am reminded about what I wrote last week in Corban Part Three: A Win for Policyholders and a Decision Following Rossmiller's Causation Analysis of the Anti-Concurrent Causation Clause:

I live in a world where words, and the subtle understanding of them, mean much financially to everybody involved, including myself. I personally had millions of dollars on the line advancing the costs of lawsuits in Mississippi. I was very much a partner with my clients advocating for coverage.

For all future clients of mine, I would ask that you keep the investment in the replacement property as close as you can to the use of the property that was damaged. I can only predict, not guarantee, what these judges will think is “justice” when I present your best case to them.

A New York subscriber to the FC&S Bulletins asked:

One of our insureds owns a building that was destroyed by fire. Instead of rebuilding it in the exact same location, the owner wants to move it to another part of the shopping center in which it was located.

The insurance is written on a replacement cost basis on commercial property form, CP 00 10 06 95. This form states that the insurer will pay the lesser of the limit of insurance, the cost to replace the structure on the same premises, or the amount actually spent to repair or replace the property.
Does this mean that the insured must rebuild on the same site in order to receive a replacement cost adjustment?

One of the benefits to subscribing to the FC&S Bulletins is the ability to ask such questions to the editors. As many that read my Blog, I am a big fan of the FC&S and endorse its product without any benefit to myself.

The Answer:

Your insured may rebuild the structure at another location, but the amount paid to do so will be no more than the cost to rebuild it at its original premises. In other words, it may cost $500,000 to rebuild the store at its present location, the policy limit may be $550,000, and the cost to rebuild it at the new location may be $525,000.

The insured will receive no more than the $500,000 that it would cost to rebuild it at the original location. In addition, if it would cost only $475,000 to build at the new site, the insured would receive only the $475,000—the amount actually spent to repair or replace the lost or damaged property.

It is interesting to note that the 2000 edition of the commercial property form CP 00 10 06 95 has dropped the wording referencing the "same premises.

A Florida case came to the same conclusion citing decisions from New York, California, and Washington. In Davis vs. Allstate Insurance Company, 781 So.2d 1143 (Fla. 3d DCA 2001) the Court held:

“[ R]eplacement cost under the ‘Guaranteed Replacement Coverage’ provision is measured by what it would cost to replace the damaged structure on the same premises.” Kumar v. Travelers Ins. Co., 211 A.D.2d 128, 627 N.Y.S.2d 185, 187 (1995). “[W]hen the insured desires to rebuild either a different structure or on different premises ... the company's liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises.” Conway v. Farmers Home Mut. Ins. Co., 26 Cal.App.4th 1185, 31 Cal.Rptr.2d 883, 885 (1994). “Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds.” Hess v. North Pacific Ins. Co., 122 Wash.2d 180, 859 P.2d 586, 588 (1993).

We agree with the courts in Kumar, Conway, and Hess, supra. The amount owed by the insurance company toward the purchase of a different home is measured by the amount necessary to repair damage to the insured property or to replace items that cannot be repaired. The insured should pay for any costs in excess of that amount.

The ability to purchase or repair at a different location is extremely important to many policyholders. This is one reason why adjusters must fully inform policyholders of this option. For obvious reasons, many restoration companies would rather the policyholder not know of this option.

As I have mentioned in previous posts, there are a few insurers that consistently provide the coverage and customer service they promise

The survey also confirms what those of us in the property insurance industry already knew, Allstate is not living up to its advertised promises or its customers’ expectations.

Admittedly, the Consumer Reports article did not discuss whether some customers were partially to blame for their dissatisfaction with their insurers. Even the best insurance is truly beneficial only when the right coverage is purchased. Likewise, even if a consumer does not have access to the top three insurers, by carefully reviewing the policy with an understanding of the relevant terms and exclusions, he or she can buy great coverage. Some previous posts (Spring Storms and Tornadoes in Mississippi Serve as a Reminder: Review and Update Your Policy for Overlooked Benefits; Three Factors Homeowners Must Consider When Updating their insurance for hurricane season) have explained the terms and necessary coverage.

Their final advice cannot be overstated:

Read your policy and any other correspondence. Ask your agent to explain anything you don't understand.

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.

A special product of insurance coverage exists called “event” or “private event coverage.”  From weddings, to outdoor events, corporate outings, and concerts, those who host these events should consider calling an agent for quotes. Coverage available depends on the event, and can help with extra expenses, lost income, and liabilities to others in the event something goes wrong and the event does not take place. Call your insurance agent to get this valuable coverage.

In researching the issue, I found a case where the coverage discussion is applicable to general insurance disputes, not just canceled Def Leppard concerts. In Celebrate Windsor, Inc., d/b/a Summerwind Performing Arts Center, vs Harleysville Worcester Ins. Co., No. 3:05cv282, 2006 WL 1169816 (D.Conn. May 2, 2006), damage to a canopy lead to a protracted dispute with an insurer and difficulty dealing with the expenses of holding events during a period when the auditorium was not ready for performance. Much of the decision is irrelevant, but the following remark will strike remarkable relevance to many of our current clients and policyholders with delayed insurance claims:

“Harleysville argues that it is not required to pay SummerWind anything because SummerWind never filed a proof of loss. But Harleysville never asked for a proof of loss and continued to process the claim in the absence of one. Therefore, Harleysville waived that requirement. Harleysville also contends that it is not required to pay for any loss until the structure is actually repaired or replaced, and obviously that has not happened yet. But courts have found a duty on the insurer to reimburse the insured before rebuilding takes place when, as here, the insured does not have the means to rebuild the facility without the insurance proceeds. See, e.g., Zaitchick v. American Motorists Ins. Co., 554 F.Supp. 209, 217 (S.D.N.Y.1982); Pollock v. Fire Ins. Exch., 423 N.W.2d 234, 237 (Mich.Ct.App.1988). The Court believes that Connecticut courts would adopt those decisions as the law of Connecticut and, therefore, the Court rejects Harleysville's claim. Finally, Harleysville argues that its policy obligations are conditioned upon the insured replacing the property within a reasonable time after incurring the loss and that SummerWind has not done so. However, if Harleysville's failure to pay Soper's estimate was the reason why the facility has not been repaired sooner, then surely Harleysville could not defend its conduct on this basis. Therefore, this argument by Harleysville does not add anything to its main argument, which is that it is not required to pay the full cost of Soper's 2004 estimate.”

This issue is very important to policyholders. Replacement cost policies contemplate that policy proceeds of at least actual cash value are paid promptly as possible so that replacement can take place. When that does not happen, the entire purpose of insurance is defeated. Insurers that refuse to pay replacement cost benefits when the policyholder seeks judgment should not be allowed to take advantage of the policy terms requiring actual repair or replacement unless they have fully paid all actual cash value amounts owed. This seems common sense, as the Court found above, but not all courts are so inclined.

In Pollock v. Fire Ins. Exch., 423 N.W.2d 234 (Mich.Ct.App.1988), the Michigan case cited by the Celebrate Windsor court had an excellent discussion of the issue:

“…case law and equitable considerations render replacement cost the appropriate method of valuing plaintiffs' damages. The defendant does not challenge the plaintiffs' contention that a bank would be chary to lend money on the basis of an unlitigated law suit in which the defendant and its vast resources intend to present several defenses to payment. Nonetheless, defendant asserts, case law precludes plaintiffs' recovery of replacement value, citing American Universal [Ins Co v Falzone, 644 F2d 65 (CA 1, 1981); Kolls v Aetna Casualty & Surety Co, 503 F2d 569 (CA 8, 1974); Lerer Realty Corp v MFB Mutual Ins Co, 474 F2d 410 (CA 5, 1973); Bourazak v. North River Ins Co, 379 F2d 530 (CA 7, 1967); Higgins v. Ins Co of North America, 256 Or 151; 469 P2d 766 (1970) ]. These cited cases, however, are distinguishable from the instant case. In all the relevant cases cited by defendant save Lerer Realty, the defendant paid actual cash value, and was only litigating the issue of whether additional monies would be due under the relevant replacement cost contract provisos. Thus plaintiffs in the cited cases had at least some money with which to begin rebuilding their property.

The language of the Zaitchicks' insurance contract also supports my emphasis on whether cash value has been paid or not. The contract states that “[t]he Named Insured may elect to disregard this [replacement cost] condition in making claim hereunder, but such election shall not prejudice the Named Insured's right to make further claim within 180 days after loss for any additional liability [for replacement cost].” Defendant's Exhibit M, “Additional Conditions,” ¶ 1(f). In other words, insureds can obtain the necessary funds to begin rebuilding their home, and subsequently upon completion of the construction, obtain additional amounts up to the replacement value. In the instant case, plaintiffs were refused any monies under the insurance contract. Not surprisingly, they were unable to replace their home. This conduct by defendant made it impossible for plaintiffs to fulfill the condition precedent, and therefore, excuses plaintiffs from performance of the replacement condition…

While Zaitchick is foreign law, the concept of not permitting an insurance company to benefit from its own misdeeds is not foreign to the jurisprudence of this state. In Wendt v. Auto-Owners Ins. Co., 156 Mich.App. 19, 27-28, 401 N.W.2d 375 (1986), which considered a somewhat different question than that presented in the case at bar, this Court held that an insurance company is liable for its conduct and may suffer a pecuniary loss as a result of that conduct even where a loss would not ordinarily be imposed by statute:

We see no reason to hold an insurer less accountable for its actions than another contracting party. Consequently, we hold that the breach of an insurer's obligation to process a claim in good faith renders an insurer liable for pecuniary losses which are not otherwise compensated for by statute.

In the instant case, defendant impeded any progress in this matter by refusing to deal with plaintiff prior to her contacting an attorney, by failing to appoint an appraiser after plaintiff's attorney requested they do so and by forcing plaintiff to bring this lawsuit. Defendant failed to make any substantial payment to plaintiff until twenty-five months after the fire. Defendant does not even argue any good faith defenses to its actions of delay. At most, in its answer to plaintiff's complaint, defendant asserted as an affirmative defense that plaintiff failed to provide proper documentation of her loss. Defendant does not argue this defense on appeal. We conclude that, in the face of such lack of good faith processing of plaintiff's claim, the trial court correctly chose to award the replacement cost value to plaintiff based upon equitable considerations.

In short, defendant's failure to pay on the claim hindered, and quite possibly even prevented, plaintiff from complying with her obligation to repair or replace the building. Had defendant immediately paid in good faith the actual cash value of the loss, holding the additional amount due under the replacement cost provision in reserve until the replacement was made or contracted for, or had otherwise worked with plaintiff to insure her financial ability to immediately proceed with the replacement or repair, a different result might be called for. However, defendant did not work with plaintiff to promptly pay the claim and enable her to repair or replace the building; rather, it did as much as possible to hinder plaintiff and delay or prevent the payment of the claim. We will not now allow defendant to raise as a defense plaintiff's failure to perform an act which defendant itself greatly hindered plaintiff from performing…

For the above-stated reasons, we conclude that the trial court properly determined that plaintiff was excused from performing her obligation under the policy to repair or replace the building due to defendant's dilatory tactics.”

Sometimes, I start researching one area of insurance law just to find other gems more relevant to my current cases. I find it amazing how rock and roll can impact my “edgy” interests and then lead to more meaningful understandings in other areas of life. I guess I have to give credit to Def Leppard, a band that will “Rock for the Ages,” for their moving music. Their music made me a better lawyer and lead me to law that supports my clients’ cases.

Enjoy:

Unfortunately, the legislation passed without further changes to the wording and now will be sent to Governor Crist, who will sign or veto the bill.

The bill is sweeping in its scope, excluding surplus lines carriers from all of Chapter 627 of the Insurance Code. Items in Chapter 627 which will not apply to surplus lines carriers include:
 

• The Valued Policy Law
• Required availability of Replacement Cost and Law and Ordinance Coverage
• Florida’s prompt payment statute -- 627.70131(5)(a)
• Sinkhole coverage

An attorney in our office, Amy Boggs, noticed a sentence in the bill which is of immediate concern to anybody who has a claim pending with a surplus lines carrier:

“The amendments to s. 626.913, Florida Statutes, in this act….operate retroactively…except with respect to lawsuits that are filed on or before May 15, 2009.”

If you have a Florida claim pending that involves any coverage issues contained in Chapter 627, you should consult legal counsel to discuss whether filing suit no later than May 15th is appropriate in your case.

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!

First, INSURE TO REPLACEMENT COST. Please call your agent. Have enough insurance. Many of our cases come about because this has not happened.

Second, INSURE TO THE RIGHT AND FULL AMOUNT OF COVERAGE WHICH HAS TO INCLUDE REPLACEMENT COST AND CODE UPGRADE COVERAGE.

Third, HIRE AN ATTORNEY OR A PUBLIC ADJUSTER. If your insurance company has not paid fully and promptly, an EXPERIENCED attorney in this field can help you more than anybody--including public adjusters, who cannot press your state’s consumer protection statutes or argue case law for you.

Fourth, STATUTORY NOTICES FOR EXTRA-CONTRACTUAL DAMAGES. Most states allow and provide extra remedies for filing such notices and may even prompt insurance investigations on claims similar to yours. File the notice. There is no downside to doing so if the insurer is not acting fairly and there is a legitimate reason for the damages.

These four tips might help keep you out of the insurance dispute muck..