However careful you are, unforeseen costs occur during the course of construction. In a recent case, a prominent carrier refused to cover them, citing this common policy provision:

Loss will be payable after 60 days after we receive your proof of loss and;

a. reach an agreement with you; or
b. there is an entry of a final judgment; or
c. there is a filing of an appraisal award with us.

In our case, our homeowner client suffered a fire loss. Damage was limited to one side of the home. The insurer and insured agreed upon a scope of repair. The insurer paid the undisputed actual cash value payment. They paid replacement cost overages as incurred. But during the course of repairs the city required additional repairs including replacement of electrical systems affecting the entire house. These new required repairs increased the total costs by approximately 40%. The new repairs were covered under the terms of the policy. But the insurer did not pay.

Citing the “Agreement” provision, the insurer said they had “reach[ed] an agreement with you” already and therefore nothing further was owed. At this time our client was not represented by counsel. But even after we stepped in and demanded coverage, the insurer stood its ground and upheld the denial, contending that management and legal had reviewed and approved the denial. This was shocking since this policy language is rarely if ever used to support a denial (the author has never previously encountered it, nor anyone he consulted with). Lo and behold, we filed suit and the claim settled favorably to the insured long before proceedings formally began.

The policy language cited above does not state that the insurer and insured can only reach one agreement on scope, and any unforeseen costs arising thereafter cannot be covered. Even if that language existed, the author suspects any reasonable court would disallow its enforcement because unforeseen costs are a fact of life during construction. Such a provision would fundamentally undermine the concept of replacement cost insurance and the reasonable expectations of the insured.

Here is one possible explanation for the insurer’s conduct. This is speculation. If an insurance adjuster reports a claim is worth X dollars, but several months later must report it is actually worth 40% more, there may be a fear of reprimand by management. There will be follow up questions. There will be more work needed to justify the change of course. What may be easier is to send the claim to the legal department, so any further monies paid are categorized as a settlement of disputed issues. This is, again, speculation. Insurers frequently adjust their claim payments due to unforeseen costs. But in this case, it is truly puzzling to understand why the insurer would refuse to do so by citing the policy language quoted above. Is there any reasonable dispute that the carrier’s position was wrong? We would love to hear your opinions in the comments.