The Pennsylvania Supreme Court recently agreed to hear argument on the matter of Kurach v. Truck Insurance Exchange.1 Merlin Law Group blogged about this class action lawsuit back in May of 2017 and the link can be found here.
Kurach involves a situation where the insureds had not completed construction repairs at the time they received the ACV (Actual Cash Value) payments, and the insurance carrier refused to include overhead and profit in the payment. For those unfamiliar, overhead and profit is otherwise known as “10 and 10.” If the work to repair an insured’s damages are to be performed by a general contractor, the contractor would incur overhead above the costs of labor and materials and would also be entitled to earn a reasonable profit. The 10 and 10 represents the typical percentages allocated in the insurance industry for overhead and profit.
The relevant policy language in Kurach is:
Actual cash value- means the reasonable replacement cost at time of loss less depreciation for both economic and functional obsolescence.
5. How We Settle Covered Loss.
(1) Settlement for covered loss or damage to the dwelling or separate structures will be settled at replacement cost, without deduction for depreciation, for an amount that is reasonably necessary, for the lesser of repair or replacement of the damaged property
. . . . .
When the cost to repair or replace damaged property is more than $2,500, we will pay no more than the actual cash value of the loss until actual repair or replacement is completed.
e. General contractor fees and charges will only be included in the estimated reasonable replacement costs if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the repairs. However, actual cash value settlements will not include estimated general contractor fees or charges for general contractor’s services unless and until you actually incur and pay such fees and charges, unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.
The trial court in Kurach relied on the decision in Gilderman v. State Farm Insurance Company,2 and ruled in favor of the insured, stating:
Insurance companies are required in Pennsylvania to include general contractor overhead and profit in actual cash value payments for losses where repairs would be reasonably likely to require a general contractor…. [This reflects] the majority approach across jurisdictions.
However, the appellate court reversed the trial level on the basis that Gilderman “does not set forth binding Pennsylvania law defining how actual cash value is calculated.” The court reasoned that the term “Actual Cash Value” was not defined in the policy that was the basis in Gilderman and the term was defined in absence of the any definition in the policy itself. The appellate court distinguished Gilderman as the Kurach policy specifically defined actual cash value. The court found that the definition of actual cash value as determined in Gilderman did not constitute the law of the State of Pennsylvania and could not overcome the explicit policy definition in the Kurach policy.
Chip Merlin has recently blogged about this issue in dealing with Colorado’s proposal to eliminate a bulletin requiring insurance companies to pay contractor overhead and profit rather than deduct the amount until incurred.3 A paper that Chip wrote on the topic can be accessed here.
Should the Supreme Court of Pennsylvania affirm the appellate court’s ruling on the calculation of actual cash value, it will be another instance of an insurance carrier moving the goal posts back on consumers and further flips the principles of insurance on its head. A basic tenet of insurance is that (1) a loss happens, (2) the insurance company pays the insured for the covered damages, and (3) the insured then fixes the damages with the payment provided by the insurance company. Insurance companies seem to want to turn the process into (1) a loss happens, (2) payment is withheld and the insured is limited to making only the repairs he can afford, and (3) the insurance company keeps the funds withheld if the insured is not affluent enough to make the repairs.
Let’s hope the Pennsylvania Supreme Court gets it right.
1 Kurach v. Truck Insurance Exchange, Docket No. 12 EAP 2019 (Penn.).
2 Gilderman v. State Farm Ins. Co., 659 A. 2d 941 (Pa. Super. 1994).
3 The Colorado Division of Insurance has recently stated they will not withdraw the bulletin (Colorado Bulletin No. B-5.1, Calculation of Actual Cash Value: Prohibition Against Deducting Contractors’ Overhead And Profit From Replacement Cost Where Repairs Are Not Made).