Insurance policies may provide several methods to calculate the amount it will pay an insured for a loss. The term replacement cost will be defined or explained in the policy. In a recent federal district court case in Kentucky, Hampton v. Safeco Insurance Company of America,1 the court addressed the meaning of the term “replacement cost”, which, under the particular policy in that case, shall not exceed:

the smallest of the following amounts:
(a) the limit of liability under the policy applying to Coverage A or B;
(b) the replacement cost of that part of the damaged building for equivalent construction and use on the same premises as determined shortly following the loss;
(c) the full amount actually and necessarily incurred to repair or replace the damaged building as determined shortly following the loss;
(d) the direct financial loss you incur; or
(e) our pro rata share of any loss when divided with any other valid and collectible insurance applying to the covered property at the time of loss.

Ms. Hampton’s home was destroyed by a fire. The estimated cost to replace her home was $108,745. Safeco paid her actual cash value for $62,500. Then Ms. Hampton notified Safeco of her intent to replace the home with a mobile home costing $66,729.12. Safeco said that it would pay Ms. Hampton $3,229.12 which was the difference between the replacement cost of $66,729.12 and the actual cash value (after subtracting the $1,000 deductible). Ms. Hampton disagreed, believing she was entitled to $45,345 – the difference between the estimated cost to replace her home ($108,745) and the actual cash value ($62,500). She commenced a lawsuit against Safeco. Safeco contended that it owed no more monies under the policy and filed a motion for summary judgment.

First, the trial court addressed the meaning of “replacement cost.” Ms. Hampton viewed the term “replacement cost” as covering the full value of rebuilding her home. The court did not agree. In reviewing the requirement of paragraph (c) in the policy, the court stated that Safeco was only limited to pay Mrs. Hampton what was “actually and necessarily incurred to repair or replace” her home. This did not include what an appraiser would estimate it would cost to rebuild the home:

If Plaintiff had chosen to rebuild her home, then the “replacement cost” would have included the money spent to rebuild, subject to the policy’s other limitations. If Plaintiff had purchased a mobile home, then the replacement cost would have covered the purchase price for that mobile home, subject to the policy’s other limitations. But there is nothing in the policy language that would allow Plaintiff to purchase a relatively inexpensive mobile home and then claim more than $40,000 in insurance benefits based on a speculative house that she didn’t actually build. That is not how the insurance contract works, and under Kentucky law, the Court is bound by that contract’s unambiguous terms.

Second, the policy language provided that Safeco “will pay the difference between actual cash value and replacement cost only when the damaged or destroyed property is repaired or replaced.” The court stated:2

The language could not be clearer: Defendant owes replacement costs “only when” the property is repaired or replaced. Replacing the property is thus a condition precedent, and without satisfying that condition, Plaintiff is not entitled to the replacement cost benefit. This clear interpretation has apparently been followed by every jurisdiction to address the issue. See 3 Allan D. Windt, Insurance Claims and Disputes § 11:35 (6th ed. 2014) (“It could be that no ‘replacement cost’ payment is owed until the rebuilding is substantially complete”); see also id. at n. 7 (chronicling different jurisdictions’ approaches to replacement cost provisions, all of which require actual replacement before the insurer owes any replacement cost).

***
The insurance contract Plaintiff signed promised only to make her whole. It did not promise that she could receive both compensation for her loss—the $62,500—plus compensation for a house that she has not built or a mobile home that she has not bought.

Therefore, Safeco did not owe any amount under the policy until Ms. Hampton replaced the property.

Since we are talking about Kentucky and replacement cost value for homes, enjoy listening to the official state song of Kentucky and the Kentucky Derby, My Old Kentucky Home:3

The sun shines bright in the old Kentucky home
‘Tis summer, the people are gay;
The corn top’s ripe and the meadow’s in the bloom,
While the birds make music all the day;
The young folks roll on the little cabin floor,
All merry, all happy, and bright,
By’n by hard times comes a-knocking at the door,
Then my old Kentucky home, good night!

Chorus

Weep no more, my lady,
Oh weep no more today!
We will sing one song for the old Kentucky home,
For the old Kentucky home far away.

They hunt no more for the ‘possum and the coon,
On meadow, the hill and the shore,
They sing no more by the glimmer of the moon,
On the bench by that old cabin door;
The day goes by like a shadow o’er the heart,
With sorrow where all was delight;
The time has come when the people have to part,
Then my old Kentucky home, good night!

Chorus

The head must bow and the back will have to bend,
Wherever the people may go;
A few more days and the trouble all will end
In the field where sugar-canes may grow;
A few more days for to tote the weary load,
No matter, ’twill never be light,
A few more days till we totter on the road,
Then my old Kentucky home, good night!

//www.youtube.com/embed/DI_dBarT6UY?rel=0


1 Hampton v. Safeco Ins. Co. of Am., CIV.A. 13-39-DLB-HAI, 2014 WL 3845055 (E.D. Ky. Aug. 5, 2014).
2 Id. at 3.
3 Words and Music by Stephen C. Foster.

  • I’d like to see a case that explains “(d) the direct financial loss you incur”. If Ms. Hampton had only paid $50,000 for the home, would that be her direct financial loss?

  • Roger Poe

    “Ms. Hampton’s home was destroyed by a fire. The estimated cost to replace her home was $108,745. Safeco paid her actual cash value for $62,500.”

    Maybe take the $62,500 and buy a comparable $108,745 house.

    Pay it off with the recoverable depreciation value, plus her deductible value.

    Then sell it. And buy “a mobile home costing $66,729.12.”

    And..Invest the balance.

  • Don Phillips

    This type of case is the reason that Florida has the Valued Policy Law.