The gut answer to the post question is: “Of course not, Chip, that would not be fair and would encourage insurance companies to underpay and deny claims.” Still, this is the result when courts follow the literal contract language found in most “replacement cost’ policies and require policyholders to prove the amount paid above actual cash value benefits – even if the insurer failed to pay all the actual cash value benefits because of underpayment or wrongful denial.

I discussed this problem of common law encouraging insurance companies to breach policies with four of Merlin Law Group’s California-based attorneys. I was discussing the case which led to my post, Actual Cash Value Proof Is Important Under Most Replacement Cost Policy Disputes. The policyholder is sold a “replacement cost policy” only to find that it really is not a replacement cost policy. Most policies only require payment of actual cash value policy until replacement is made.

Where is the money to come from to pay the replacement cost benefits? Where does it come from when the insurance company is wrongfully underpaying the actual cash value amount or denying the claim in whole or part? Policyholders rely on insurance to finance the repair or replacement following a loss—that is why they purchased insurance in the first place.

The discussion led Merlin Law Group attorney Victor Jacobellis to send me a 2014 California decision,1 which stands for a more equitable proposition:

When an insurer’s decision to decline coverage materially hinders an insured from repairing damaged property, procedural obstacles to obtaining replacement-cost value should be excused. If coverage is ultimately resolved in favor of the insured, the insured should remain eligible to receive replacement cost, but only so long as the insured complies with other applicable policy terms, such as a repair requirement. In other words, a coverage dispute should not give the insured a benefit under the policy it never had in the absence of the dispute—such as the right to receive replacement cost without actually repairing the damage.

The official headnote stated the rule in a slightly different manner:

[T]he insured was entitled to a conditional judgment awarding full costs if repairs were actually made. The insurer’s delayed resolution and denial of the claim materially hindered the ability of the insured to plan for the property. As a result, the insured was excused from the requirement that the damage be repaired as soon as reasonably possible after the loss and remained entitled to a judgment awarding replacement cost consistent with the repair requirement if it actually completed the repairs as soon as reasonably possible after the judgment became final. The insurer became liable to pay actual cost value as soon as the claim was filed; repairing the damaged property was a condition precedent only for the additional obligation to pay the difference between actual cost value and replacement cost.

For those interested in the replacement cost nuances in Florida, which I have been writing about lately, I suggest you also read, Do You Have a Florida Property Insurance Dispute Over Valuation? Understand the Differences Between Replacement Cost Value, Actual Cash Value and How the Broad Evidence Rule Works.

Victor Jacobellis, United Policyholders founder Amy Bach, and I are pictured above. You can meet all three of us at the First Party Claims Conference West, which will be held on March 29 & 30 in beautiful Marina Del Ray. Amy Bach and Robb Greenspan will make a presentation, Understanding the Fair Claims Act and How to Use It With Wildfire Claims. Since Amy Bach wrote and advocated for a lot of California’s fair claim practice standards, it is a can’t miss session and opportunity for those of us practicing in California to learn from a unique source.

Thought For The Day

Education’s purpose is to replace an empty mind with an open one.
—Malcolm Forbes
1 Stephens & Stephens XII, LLC v. Fireman’s Fund Ins. Co., 231 Cal. App. 4th 1131 (Cal. App. 2014).