What judges say is contemplated under an insurance policy is not always what adjusters are taught and do in the field. Jeremy Tyler noted in Prevention of Performance with Replacement Cost Value, that a new appellate decision involving QBE rewrites how insurance companies may adjust property losses in Florida. Many will read Buckley Towers Condo., Inc. v. QBE Insurance Corp., No. 09-13247, 2010 WL 3551609 (11th Cir. Sept. 14, 2010), to stand for the proposition that an insurer does not have to pay anything towards replacement costs under a replacement cost policy, when replacement is elected but repairs have not been made.

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 If this unpublished is followed, federal courts will not award the full amount of replacement cost benefits until the insured actually does the work.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.

  • Shaun Polunsky

    Mr. Merlin,

    I fail to see the logic in saying that enforcing the replacement cost provision “… is problematic for the policyholder, who usually needs the benefits to pay for the replacement.” What is the definition of an advance payment? Is it one that is made prior to the loss being paid or could it be the ACV payment if allowable? If the ACV is the advance payment the insured can begin to have the work done. I do not believe that an insured, if adding onto their residence would give an advance payment to a contractor untill all involved knew what was to be done and the cost to do the add-on.

    I have worked many states where the provision has been enforced and have yet to encounter a problem with an insured or a contractor regarding the holdback. If properly explained, the procedings go well. Contractors are keenly aware in those states of the holdback provision and make sure that the carrier is out there asap to inspect. Holdback has been paid timely after verification of the repairs with the companies I have been employed by.

    When dealing with Florida cases and the absence of the holdback provision for personal lines losses it has been seen where the policyholder either does no repairs or minimal repairs and uses the money for other reasons. With Florida not having a central data bank for carriers to research previous structure losses or mandating that carriers submit all building losses to PILR there have been on more than one occasion an insured has been paid for damages that were previously paid for. The argument that an insured should be placed back in the position they were in prior to the loss is valid and true. However, when an insured replaced a $40K tile roof with a $30K metal roof or a lower cost shingle roof they have profited from the loss. Those who give the reason that if the insured only had the ACV paid up front and would have to wait for the holdback would be a hardship is not a valid argument. Unless of course they were on a policy that was ACV only. Contractors in Florida are keenly aware of what policies say and would be aware of the holdback and future payments are forthcoming after the re-inspection.

    Insurance rates will continue to rise in Florida at a faster rate than in those states who can enforce the provision. That along without knowledge of previous loss payments, especially since so many carriers have pulled out or have been taken into receivership, it can be very easy to be paid twice in Florida.

  • Chip Merlin

    Shaun,

    The money is the policyholder’s money. Often, that money can best be used to replace, remodel, invest in a diffferent location, etc…AND the policy actually considers that these are all options of the policyholder.

    These are not repair policies nor warranty policies as you seem to suggest.

    Adjusters should explain the options available to policyholders as well as the underwriting result if repairs do not make the insured structure a risk within the underwriting guidelines.

    Often in commercial scenarios, CFO’s go over various options as the best use of the insurance monies and apply those monies into areas with the greatest economic value rather than simply rebuilding a building back to how it was. You seem to imply that residential customers do not have that choice. They should, and they do.

    Since a number of carriers already sell replacement cost coverage that actually pays replacement right away and do so in other states, the additional concerns raised in your comment do not reflect the experience of those carriers with their customers.

    Still, I appreciate your views regarding the affordability of insurance. This is always a concern, but it should not be at the point of the insurance company’s performance.

  • Howard Shore

    Dear Mr. Merlin,

    Please allow me to jump in on this issue.

    To Shaun Polunsky:

    Two points I would like to discuss with you:

    The insured either purchased this home with that type of roof in place or paid to have someone put it on. Either way he paid the price for it. He insured it for what is was. What he replaces it with is immaterial. The insurance is coverage for the value of the materials or items involved in the loss.

    If I but a gold bracelet for $2,000.00, lose it, claim for it and receive back my $2,000.00, I am made whole. If I choose not to replace it or to replace it with a different bracelet for $1,000.00 have I profited from the loss? No. I have been made whole by getting my initial investment back. Same holds true with the roof example.

    Let’s bring it more into every day life. A holdback of $10K-50K still becomes a burden to the insured, contractor and carrier. If the contractor doesn’t have that kind of money to fund the job, it stops. The insured becomes frustrated with the process and the carrier ends up in a loop of endless reinspections to get the job moving.

    And for those customers who can’t afford an up front RC policy, detail a holdback claim with a promissory note to the insured that he can transfer to a contractor or use as collateral to get a loan.

    For those looking for money making opportunities, I suggest opening up a company that funds holdback claims at a hefty percentage premium. Adding 10%-20% to a claim’s replacement cost to fund the holdback claim will definitely get the industry’s attention to change settlement practices. If the carriers and courts don’t want to change the way RC/ACV claims are settled, let good old fashion capitalism do it for us.

    Regards,

    Howard Shore

  • Alexander Rover

    Dear Mr. Merlin,

    I would like to be offered the opportunity, as was offered to Howard Shore, to offer my two cents.

    The insured either purchased this home with that type of roof in place or paid to have someone put it on. Either way he paid the price for it. He insured it for what i[t] was. What he replaces it with is immaterial. The insurance is coverage for the value of the materials or items involved in the loss.

    If I bu[y] a gold bracelet for $2,000.00, lose it, claim for it and receive back my $2,000.00, I am made whole. If I choose not to replace it or to replace it with a different bracelet for $1,000.00 have I profited from the loss? No. I have been made whole by getting my initial investment back. Same holds true with the roof example.”

    What you fail to realize is that the insured is made whole by receiving ACV. Everything in life either depreciates or appreciates. If we take your example of the gold bracelet and, because of the raising value of Gold your RCV is now 3000 should the insured not get 3k instead of 2k, even though the item was valued at 2k at policy inception. The purpose of replacement cost is to facilitate the insured replace the damaged/lost property. If you wish to not replace then ACV portion is yours to do as you wish, because had you had to sell that property it likely get depreciated, or appreciated as the case might be, depending on the property.

    Entities that face holdbacks in the 6, 7, or 8 digit range ussually are corporate entities, or extremely high net worth individuals. Rather hard to feel bad for a multi-millionaire facing a 1,000,000+ dollar holdback (because by definition if your holdback is that large your claim check is in the multiples of a million). Corporate entities large enough to face this problem usually have a mechanism for securing funds in case of uncovered losses or in case of unexpected increase in production. If a manager does not have a contingency plan for this eventualities, he is not a good business manager.

    “Let’s bring it more into every day life. A holdback of $10K-50K still becomes a burden to the insured, contractor and carrier. If the contractor doesn’t have that kind of money to fund the job, it stops. The insured becomes frustrated with the process and the carrier ends up in a loop of endless reinspections to get the job moving.”

    This is a stretch. The contractor has to by default fund a portion of the job before getting reimbursed. From personal experience, and also from friends testimony (a friend of mine is a GC in North Miami) The contractor will require a deposit or initial payment of 20, 30 whatever percentage upon comencement, another portion upon an agreed point, usually inspection, and the final payment upon completion. It is not the insured’s problem if the contractor does not have funds to do the job. That is the contractor’s problem as an independent business entity. Paying a contractor the whole sum upfront is inviting disaster and fraud in the form of incomplete work and vanished companies. No one worries if Walmart has enough funds to cover it’s “cost of goods sold” Balance sheet line, no one worries if Lenanr Homes has enough funds to build a houses until it can sell them. That is their problem, not the customers, why should the relationship with a contractor be different?

    No, this is win, win, win only for PA’s. Replacement cost coverage is conditioned on the actual amount spent. The actual amount spent cannot be properly estimated by a PA because in their seal to “maximise the insurance company payout” they include, thru error or design, unnecessary line items, or duplicated line items. (I have seen 20 hours for cleaning supervisors at 26/hr in some estimates) There is no way to know exactly what the actual amount spent will be until it is spent, or a contract signed. An estimate is just that, an estimate, an educated guess that may be short or it may be over.

    “And for those customers who can’t afford an up front RC policy, detail a holdback claim with a promissory note to the insured that he can transfer to a contractor or use as collateral to get a loan.”

    The insurer already can do that. It is called an assignment of benefits. It is the right the owner of the policy has to assign benefits as he sees fit. The insured can instruct the insurance company to add a certain company, the contractor firm, as an additional payee or as the only payee.

    Here is the real solution to this mess. If you are really serious about eliminating lawsuits, and disputes, and all the claims nastiness that is out there. If I was president of an insurance company this is what I would do (provided of course I could reinstate standard loss proceedures altered via legislation in Florida). All losses get settled at ACV. I would then offer the insured the option to waive the deductible upon receipt of a signed contract and assignment of benefits to a licensed GC of their choice. We would then direct payments to the insured’s chosen CG on a schedule and provide the insured with a statement. No fuzz, no fighting.

  • Dennis Johnson

    I very seldom post to this blog, however I often monitor the comments. This subject is important to all insureds and specifically yours truely. I want to sddress the practical aspects of this RCV vs ACV issue wether than the legal. In our present economic environment it is becoming a problem for an insured to obtain financing to pay the RCV holdback and perform the necessary repairs to obtain this holdback. If the insured has less than an 800 beacon score it is virtually impossible to obtain a mortgage to complete repairs. A cash loan is even more difficult and very few insureds have an adequate cash reserve. Therefore, the most likely scenario is that the insured obtains any money possible from personal property settelment then moving out of the home using the insurance proceeds for temporary housing and then just refusing to pay the mortgage institution. The mortgage institution then is forced to foreclose on the mortgage and fight with the insurance company over the proceeds of the claim to obtain enough money to repair the home. This happened extensively after both hurricane Andrew and Katrina. This strategy simply removes the insured from any involvment in the nasty process of trying to obtain an equitable claims resolution, and maximizes their benefit. In today’s real estate market in most situations, the insured’s property is worth less than its’ insured value. Therefore, when the insuror begins its’ typical “pay as little as possible” scam the insured does nat have any concern as to the subsequent negotiations to attempt to obtain what should be paid by the insuror. I realize that in the past as with Andrew and Katrina the home values were more closely correlated to the insured values and this situation was not an extremely common occurance. However, in the current economic it becomes frightingly relevant while considering a possible and likely event in the near future resulting from a hurricane of sufficient magnitude. Can you imagine this when a Katrina magnitude storm possibly hits Florida where homes have been reduced in value at such an enormus rate? can you imagine 50% of all the Florida homes in a devestated area being left in the hands of mortgage institutions, maybe more? I see this as a realistic probability and the ramifications are scary for all concerned. It is important for this critical problem to be resolved. I don’t think people in the insurance and legal industry are really considering this potential effect while the legislature and courts are trying to provide strictly legal interpretations of the insurance contract. They needs to be looking at the practical aspects of what is most likely in the case of a devastating hurricane in this current economy.