A recent class action lawsuit filed in Pennsylvania1 raised an issue that policyholder advocates and public adjusters see all over the country – insurers that try to exclude overhead and profit from property damage claim payments made on an actual cash value basis.

The named plaintiffs had replacement cost insurance policies with the following language:

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.

(Emphasis added).

The case involved a situation where the plaintiffs had not yet completed the construction repairs at the time they received their ACV payments. Therefore, the insurer argued that it was not responsible to include overhead and profit in the payments because they were made on an actual cash value basis and that its policy explicitly excluded overhead and profit payments for general contractors when payments are made on ACV basis.

The policyholders disagreed, and argued that the general contractor overhead and profit exclusion was ambiguous because of its use of the term “replacement cost” as a component of “actual cash value” and that the provision was contrary to Pennsylvania law and unenforceable.

The court agreed with the policyholders and ruled in their favor. The court’s ruling specified that:

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. (see Mills v. Foremost Ins. Co, 5 I I F.3d 1300, 1306 (II th Cir. 2008) (“A majority of courts considering the question under similarly drafted insurance policies has determined that an actual cash value payment includes a general contractor’s overhead and profit charges in circumstances where the policyholder would be reasonably likely to need a general contractor in repairing or replacing the damaged property in issue”); Goffv. State Farm Florida Ins. Co., 999 So. 2d 684, 689 (Fla. Dist. Ct. App. 2008) (“Actual cash value includes overhead and profit where the insured is reasonably likely to need a general contractor for repairs.”); Salesin v. State Farm Fire & Cas. Co., 229 Mich. App. 346, 368-69, 581 N. W .2d 781, 791-92 (1998) (“it is also true Sales in has paid a premium for a full replacement cost policy. There is no logical reason. nor any reason based upon the insurance policy itself or the record below, for deducting estimated contractor’s overhead and profit”); Tritschler v. Allstate Ins. Co., 213 Ariz. 505, 514, 144 P.3d 519, 528 (Ct. App. 2006), as corrected (Dec. 19, 2006) (“Several other jurisdictions have since followed the reasoning in Gilderman and Salesin and ruled that an insurer may not automatically deduct a contractor’s overhead and profit from an actual cash value payment.”); Mazzocki v. State Farm Fire & Cas. Corp., 766 N. Y.S.2d 719, 721 (App. Div. 3d Dep’t 2003) (“we find that the term “replacement cost”-as opposed to “actual replacement cost”-in defendant’s policies can reasonably be interpreted to include profit and overhead whenever it is reasonably likely that a general contractor will be needed to repair or replace the damage”).

The court also took issue with the insurer’s policy language seeking to exclude overhead and profit from actual cash value payments “unless the law of your state requires [otherwise].” The court stated this provision was troublesome because it requires “a lay purchaser of a homeowner insurance policy [to obtain] legal assistance to understand what he or she is paying for.”
1 Konrad Kurach v. Truck Insurance Exchange, No. 150700339, and Mark Wintersteen v. Truck Insurance Exchange, No. 150703543, both before the Court of Common Pleas of Philadelphia County, Pennsylvania.