My colleague Ed Eshoo recently wrote a blog addressing how Illinois courts follow the Prevention Doctrine (if an insurer prevents or hinders an insured from complying with the condition to repair/replace the property before being entitled to full replacement cost, then the insured’s failure to repair/replace won’t necessarily bar a recovery of full replacement costs at the time of trial) (See Illinois Courts Follow the “Prevention of Performance” Doctrine).

Ed’s article reminded me of a case in California that addresses the same issue, but from a different angle: What happens when an insurer prevents or hinders an insured from complying with the repair/replace condition in an insurance policy and the insured does not make a demand for Actual Cash Value (“ACV”) or present evidence of an ACV estimate at any time? Under these circumstances, will the insured be entitled to recover both ACV (money to be used as “seed” money to fund the repairs) and full replacement cost coverage (“RCV”) after the repairs are completed?

In Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Company,1 the California Court of Appeal held as a matter of first impression, that:

1) An insurer’s delay in resolving and denying a claim excused the insured from the policy requirement that the damage be repaired “as soon as reasonably possible after the loss or damage” in order to recover replacement value; and

2) That the insured’s failure to complete repairs to the damaged building, which was a condition precedent to its right to receive replacement cost, did not preclude it from obtaining a judgment that it was entitled to reimbursement of replacement cost conditioned upon repairing the property.

In this manner, the Stephens court’s conclusion is generally in line with other states that follow the prevention doctrine. However, the court in Stephens went further when it also conclude that :

3) The insurer did not waive its right to insist on compliance with the repair requirement prior to paying cost of repair as measure of damages; and

4) The policyholder waived the right to claim ACV because it failed to timely request it or present evidence of damages based on ACV. Specifically on this issue, the court’s ruling specified the following:

Here, Fireman’s Fund’s delayed resolution and denial of the claim materially hindered Stephens XII’s ability to plan for the property’s repair. As a result, Stephens XII should be excused from the requirement that the damage be repaired “as soon as reasonably possible after the loss or damage.” Had Stephens XII sought damages based on actual cost value and proved them at trial, it would have been entitled to an immediate award of such damages. When Stephens expressly disclaimed recovery of actual cost value damages, it waived an award based on this measure. In any event, such an award would lack an evidentiary basis because no evidence of actual cost value damages was presented at trial.

In this connection, Stephens XII contends the trial court erred in denying its oral request, made during argument on Fireman’s Fund’s motion for a directed verdict, to reopen the evidence to permit proof of actual cost value. We find no abuse of discretion by the trial court in denying the request. (See Estate of Young (2008) 160 Cal.App.4th 62, 91, 72 Cal.Rptr.3d 520 [trial courts have broad discretion in ruling on motion to reopen].) Stephens XII presumably knew that proof of actual cost value would be required if the company expected to recover it. The failure to submit such proof appears to have been a tactical decision, rather than an oversight. In any event, Stephens XII subsequently waived any recovery of actual cost value when its attorney unequivocally informed the court, “No, we are not asking for actual cash value.

Stephens XII nonetheless remains entitled to a judgment awarding replacement cost consistent with the repair requirement if it actually completes the repairs “as soon as reasonably possible” after the judgment becomes final.

The court’s comments regarding the “tactical” decision not to present proof of ACV is something many public adjusters and policyholder advocates are familiar with – focusing on demanding full replacement cost coverage vs. demanding ACV to avoid having to complete repairs within a specified time frame and to get the most amount of money out of the insurer. However, the Stephens court highlighted why not pursuing both ACV and RCV can be disastrous to an insured.

What good is a judgment entitling an insured to a full RCV award if they are required to do the repairs first, especially if they do not have the financial resources to fund the repairs? That is the benefit of ACV – it can be used as “seed money” to get the repairs underway.

Thus, from a practical perspective, it makes sense for public adjusters and insureds to demand both ACV and RCV to cover all the bases. While the insurer may not be required to pay RCV until after the repairs have been made, by demanding ACV, the insured can claim that the ACV funds are necessary to help fund the repairs.

Then, in a situation where the insurer drags its feet or denies coverage, when the insured is forced to pursue litigation, proves the insurer breached the contract, and is provided a judgment (like that in the Stephens case) the insured will be able to:

  • Obtain ACV to help fund the repair/rebuild. By making the demand for, and providing an estimate of, ACV during the claim process, the insured will be able present evidence at trial that they sought ACV damages. Otherwise, there is a chance the insured will have to front the entire cost to repair/rebuild and only later get reimbursed. From my view, unless the insured has substantial funds, absent ACV “seed money” most insureds might find it difficult to begin the repair process on their own dime; and then
  • Ultimately recover the RCV after evidence of the repairs have been presented.

From my perspective, I don’t see the harm in demanding both ACV and RCV (or presenting evidence of both). While I understand that the RCV amount will be larger, and that as a result many public adjusters, insureds, and lawyers will be inclined to focus on RCV, I don’t think that first demanding ACV to help fund the repairs diminishes the insured’s right to ultimately recover the RCV amount (or the difference between the ACV and RCV).

However, the opposite (as shown in the Stephens case) can turn out to be true: where an insured fails to request ACV, and fails to present evidence of it, the insured might be precluded from getting the ACV funds necessary to repair the property.

1 Stephens & Stephens XII, LLC v. Fireman’s Fund Ins. Co., 231 Cal. App. 4th 1131, 1145–1146 (1st Dist. 2014).