A Colorado public adjuster asked me a question about replacement cost coverage. The question had to do with a remodeling of the structure rather than spending money only on damaged items.
The first thing I should have told the public adjuster was to research this blog. A search found two prior posts, Obtaining Full Replacement Cost Benefits Through Replacement at a Different Location–Texas Style, and Replacement Cost Implications by Replacing at Another Location: Answering the Question if You Have to Repair or Replace at the Same Premises to Obtain the Holdback of Full Replacement Cost Benefits.
All public adjusters should make it a priority to read these two blog posts. These blogs are veritable goldmines of information that can significantly benefit both public adjusters and policyholders. One links to another post about not taking depreciation on partial actual cash value losses. Most insurance company adjusters are either unwilling or unequipped to explain how policyholders can maximize their benefits. This gap in education is often due to cost-cutting measures by insurance companies, which neglect to adequately train their adjusters on how policyholders can fully utilize their policies. Consequently, some insurance company adjusters might be uninformed about key issues that could help their customers receive the benefits they deserve. This situation further underscores the importance of hiring competent public adjusters who can step in to ensure that policyholders are well-represented and adequately compensated.
I updated my research on the issue and came across a winning brief written by Christopher M. Berloth and a New York case discussing the issues.1 The brief and trial court noted that the relevant policy language acts as a three-prong limitation to the amount that can be recovered:
[T]he cost to repair or replace, after application of the deductible and without deduction for depreciation, but not more than the least of the following amounts:
(i) The Limit of Insurance under this policy that applies to the lost or damaged property;
(ii) The cost to replace, on the same premises, the lost or damaged property with other property:
i. Of comparable material and quality; and ii. Used for the same purpose; or
(iii) The amount that you actually spend that is necessary to repair or replace the lost or damaged property
The winning brief noted:
‘It is settled law in New York that replacement cost coverage inherently requires a replacement (a substitute structure for the insured) and costs (expenses incurred by the insured in obtaining the replacement).’ Matos v. Peerless Ins. Co., 2017 WL 444687, (W.D.N.Y. Feb. 2, 2017). ‘Moreover, ‘the insured may replace the premises with a property with similar functionality.’ ‘ Rutkovsky v. Allstate, 2019 WL 10248105 (S.D.N.Y. Oct. 29, 2019)….
‘[F]unctional similarity between the property destroyed and the replacement property is all that [is] required.’ SR Intern. Bus. Inc. Co. v. World Trade Center Props., LLC, 445 F. Supp. 2d 320, 334 (S.D.N.Y. 2006). Thus, ‘[c]ourts have held that a ‘different kind of home’ or ‘far larger building’ at a different location can be a ‘functionally similar’ replacement.’…
New York law is not an outlier in this regard; states across the Country interpret the applicable replacement cost provision the same way. See Fitzhugh 25 Partners, L.P. v. KILN Syndicate KLN 501, 261 S.W.3d 861, 865 (Tex. Ct. App. 2008) (explaining that the insured ‘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.’…Huggins v. Hanover Ins. Co., 423 So. 2d 147, 150 (Ala. Sup. Ct. 1982) (‘While the new house did not take the place of the fire-damaged house in the same physical location, it did serve the same function as the previous home and might be considered a substitute therefore. The [amount] paid for the new home, then, is the amount actually and necessarily spent to replace the damaged building as provided in subparagraph c.(1)(c)’).…
The court agreed:
‘It is settled law in New York that[ ] replacement cost coverage inherently requires a replacement (a substitute structure for the insured) and costs (expenses incurred by the insured in obtaining the replacement)[.]’ Alloush v. Nationwide Mut. Fire Ins. Co., 2008 WL 544698 (N.D.N.Y. Feb. 26, 2008) (alterations adopted) (internal quotation marks omitted) (quoting Woodworth v. Erie Ins. Co., 2006 WL 140798 (W.D.N.Y. Jan. 17, 2006)); see also Harrington v. Amica Mut. Ins. Co., 645 N.Y.S.2d 221, 225 (4th Dep’t 1996). While New York courts have not squarely addressed how similar a property must be to constitute a ‘replacement (a substitute structure for the insured)[,]’… every federal district court to consider the question under New York law has concluded that only functional similarity is required. See SR Int’l Bus. Ins. Co. Ltd. v. World Trade Ctr. Props., LLC, 445 F. Supp. 2d 320, 334 (S.D.N.Y. 2006) (‘In assessing whether rebuilt property constitutes a replacement, courts have determined that ‘functional similarity’ between the property destroyed and the replacement property is all that [replacement cost coverage] requires.’); Rutkovsky v. Allstate Ins. Co., 2019 WL 10248105 (S.D.N.Y. Oct. 29, 2019) (‘Functional similarity between the property destroyed and the replacement property is all that is required.’) (alterations adopted) (internal quotation marks omitted) (citing SR Int’l Bus. Ins. Co. Ltd., 445 F. Supp. 2d at 334); Matos v. Peerless Ins. Co., 2017 WL 444687 (W.D.N.Y. Feb. 2, 2017) (‘[T]he insured may replace the premises with a property with similar functionality at another location.’) (citing SR Int’l Bus. Ins. Co. Ltd., 445 F. Supp. 2d at 334); see also Harrington, 645 N.Y.S.2d at 224 (‘[T]he new structure does not ‘replace’ plaintiff’s home; plaintiff does not live there.’). The ‘vast majority of cases that have examined this issue’ in other jurisdictions have reached this same conclusion. See Fitzhugh 25 Partners, L.P. v. KILN Syndicate KLN 501, 261 S.W.3d 861, 864 (Tex. App. 2008) (collecting cases); see also 12A Couch on Ins. § 176:65 (3d ed. 2022) (‘[N]ot all versions of the replacement cost provision invoke requirements that the new property be identical or similar…. When similarity is required, and the replacement is purchased at a different location, functional similarity is all that has been required to conclude that the new property replaced the old.’).
The bottom line is to look at the three-prong limitation. If money is spent greater than the actual cash value, there are limitations to the amount of the replacement cost benefits. Some courts seemed inclined to add that the money spent must be for a similarly functional type of building.
Two final friendly reminders need to be followed. Always read the exact policy language because these policies are constantly changing. Second, apply the correct state law.
I will be speaking about Colorado law at the upcoming Rocky Mountain Association of Public Insurance Adjusters (RMAPIA) meeting. It will be held on November 2-3 at the McCormick Scottsdale Resort. The eight Rocky Mountain states are Arizona, Colorado, Idaho, Nevada, Montana, New Mexico, Utah, and Wyoming. This is a wonderful time to come to Scottsdale. Hope to see you there.
Thought For The Day
The only thing more expensive than education is ignorance.