I have written for years about replacement cost benefits and the simple but often misunderstood principle behind them. Replacement cost is about indemnity through repair or replacement, not about forcing a policyholder to rebuild on the same dirt at all costs. A recent order applying a State Farm homeowners policy manages to get that principle wrong, even while reciting the correct rule that an insurance policy must be read as a whole. 1
The ruling concludes that replacement cost benefits are unavailable unless the policyholder repairs or replaces the damaged dwelling “on the premises shown in the Declarations.” According to the court, that conclusion is “clear” when the replacement cost provision is read in context. From the standpoint of how property insurance is actually taught and adjusted, that conclusion is anything but clear and wrong in practice.
The starting point is the replacement cost loss settlement provision. Like most homeowners policies, it begins by describing a common scenario: the insurer will pay the cost to repair or replace with similar construction and for the same use on the premises shown in the Declarations. That language tells us how replacement cost is measured. It does not, by itself, impose a forfeiture. The operative payment conditions come next. Until repair or replacement is completed, the insurer pays actual cash value.
When repair or replacement is actually completed, the insurer pays the additional amount the policyholder actually and necessarily spent, subject to limits. To receive those additional payments, many policies, like this State Farm policy, require the work to be completed within two years. The two years is an arbitrary time, and why it is there or why the two years is something special is still beyond me, as discussed in Policyholders Should Fight Arbitrary Time Limitations for Replacement or Repair.
Those conditions are about reality and proof, not geography. Did the insured actually replace the loss? Was the money actually spent? Was it completed within the required time? Nowhere in the policy does it say: “If you replace elsewhere, you lose replacement cost.” Courts should be very careful before reading a penalty into a contract that the drafter did not bother to write.
This is where reading the policy as a whole becomes decisive. Insurers do not accidentally choose their policy wording. When insurers want to restrict coverage based on location, they know exactly how to do it. In many forms, the only place where you see explicit discussion of replacement at “the same or another premises” is in Ordinance or Law coverage. That makes sense. Ordinance or Law is an added exposure. It is not part of the fundamental promise to repair or replace what was lost. When a policy singles out Ordinance or Law coverage for specific location language, but does not do so in the main replacement cost provision, that contrast matters.
If the insurer intended to say that replacement cost is payable only if the insured rebuilds on the described premises, the policy could have said precisely that. Some policies do. The State Farm policy at issue does not. Reading a location-based forfeiture into the replacement cost clause while ignoring that the only explicit location restriction appears in the Ordinance or Law section turns the “policy as a whole” rule on its head.
The court’s reasoning also misunderstands how replacement cost works in the real world. Replacement cost is not about sentimental attachment to a foundation. It is about restoring the insured’s interest by repair or replacement for the same use. Policyholders replace at other locations all the time. Sometimes the lot is unbuildable after the loss. Sometimes zoning changes. Sometimes rebuilding makes no economic sense.
The industry has long recognized functional replacement as a legitimate way to satisfy the replacement requirement, provided the replacement is real, completed, and paid for. I have written numerous examples of this in prior blog posts. I wish the policyholders’ attorney had cited just one, such as “Can a Policyholder Use Replacement Cost Benefits to Remodel or Replace at Another Location? What is the Standard to Collect Replacement Cost Benefits? The Three Prong Limitation.”
The ruling treats the phrase “on the premises” as if it were a condition precedent rather than a valuation benchmark. That is a fundamental mistake. The phrase describes how the insurer measures the cost of similar construction and same use. It does not say that replacement cost evaporates if the policyholder accomplishes the same replacement goal somewhere else.
It is also important to be candid about what went wrong in the presentation of the case. The policyholder did not make the argument that should have been front and center. The focus should have been on the actual payment conditions: actual repair or replacement, actual expenditure, and completion within the required time. The policyholder should have argued functional replacement and cited the many cases and industry standards recognizing that replacement does not mean rebuilding on the same footprint at all costs. They did not. As a result, the court was handed an incomplete framework and filled in the gaps with an insurer-friendly argument made by clever State Farm attorneys.
A court can always say that a particular policyholder failed to meet the factual requirements for replacement cost because nothing was actually replaced, or because the expenditures did not correspond to replacing the damaged property. What a court should not do is announce a broad rule that replacement cost requires rebuilding at the insured location when the policy does not say so and, read as a whole, points in the opposite direction.
This ruling is wrong not because it is harsh, but because it is sloppy contract interpretation. It converts descriptive language into a forfeiture. It ignores how the policy allocates location concepts elsewhere. And it contradicts how replacement cost is understood by property insurance professionals who deal with real losses and real rebuild decisions every day.
Replacement cost is about making policyholders whole by repair or replacement for the same use. If insurers want to condition that promise on rebuilding at the same location, they are free to write that limitation into their policies. Until they do, courts should not do it for them.
Thought For The Day
“The essence of a contract is that it expresses the intent of the parties, not the unexpressed wishes of one of them.”
— Learned Hand
1 Taylor v. State Farm Fire & Cas. Co., No. 24-00438 (S.D. Ala. Nov. 24, 2025).
