Entitlement to Overhead and Profit on an Actual Cash Value Estimate

Jason Cleri | Property Insurance Coverage Law Blog | December 10, 2017

In the New York class action suit, Mazzocki v. State Farm, 1 A.D.3d 9 (N.Y. 3rd Dept. 2003), the Appellate Court for the Third Department finally clarified the question regarding overhead and profit in actual cash value and replacement cost value claims.

Plaintiffs in the class action sustained storm damage to buildings on their respective properties and filed claims for the actual cash value of the damage under homeowner’s insurance policies issued by State Farm. State Farm then excluded overhead and profit expenses of a general contractor in calculating the actual cash value. Plaintiffs cited the loss settlement provision in the policy which read:

We will pay the cost to repair or replace buildings…subject to the following: (1) until actual repair or replacement is complete, we will pay the actual cash value of the damage to the buildings, up to the policy limits, not to exceed the replacement cost of the damaged part of the building. . . . Any additional payment is limited to that amount you actually and necessarily spend to repair or replace the damaged buildings. . . .

The issue raised by the Plaintiffs was whether State Farm’s refusal to include overhead and profit in its estimate of replacement cost in the first instance constitutes a breach of the terms of its policies. The court stated:

Actual cash value is payable regardless of whether the property is eventually repaired or replaced. Under New York law, “[t]he determination of actual cash value is made under a broad rule of evidence which allows the trier of fact to consider ‘every fact and circumstance which would logically tend to the formation of a correct estimate of the loss’” (Cass v. Finger Lakes Coop. Ins. Co., 107 A.D.2d 904, 905, 483 N.Y.S.2d (1985), quoting McAnarney v. Newark Fire Ins. Co., 247 N.Y. 176, 184, 159 N.E. 902 (1982).

The court determined that in applying the same logic as in Salesin v. State Farm Fire & Cas. Co., 229 Mich.App. 346, 367, 581 N.W.2d 781, 790 (1998), the term “replacement cost” – as opposed to “actual replacement cost” – in State Farm’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. Therefore, the court confirmed that Plaintiffs may bring a breach of contract action when overhead and profit is excluded from an estimate upon proof of the likely necessity of a general contractor’s services in the repair or replacement of their damaged property.

Court Holds Actual Cash Value Policy Provision Unconscionable

Charles Mathis | Property Insurance Coverage Law Blog | December 2, 2017

Sometimes when researching one issue, a case will pop up that isn’t what we were looking for, but nonetheless is worthy of note. While I was trying to help a public adjuster with some case law research the other day, I came across this gem out of Pennsylvania. Back in 1991 the Superior Court of Pennsylvania held that an insurer’s “policy provision which limited the insurer’s liability to actual cash values of property unless replacement has been made was void as unconscionable.”1

The underlying facts of the case are fairly simple, the Plaintiff’s filed a homeowner’s insurance claim after lightning struck a Lowry C-500 organ inside their mobile home. Following a jury trial, the Plaintiffs were awarded $23,317.40 for the organ. After the trial, the insurance carrier filed this appeal which dealt with a jury instruction in which:

[T]he lower court instructed the jury to disregard a provision in the policy which required appellees to either repair or purchase a replacement for the organ prior to receiving the replacement value of the item. In particular, the court found the provision oppressive and unfair since it required appellees to expend a large sum of money prior to a liability determination. [Defendant], however, objected to this instruction, arguing that the policy provision was binding and that appellees were only eligible to collect the actual cash value of the organ as provided by the policy. This objection was denied by the lower court.

Defendant’s appeal of the jury’s award to the Plaintiff’s focused on three issues:

1. Is a clause in a property insurance policy void as against public policy or void as unconscionable when the clause limits the insurer’s liability to actual cash value of the property unless replacement has been made?

2. Can a court modify a limitation on recovery contained in an insurance contract when the limitation is clear and unambiguous?

3. When an insurance contract contains clear and unambiguous language limiting recovery for property loss to actual cash value unless replacement has been made, can an insured recover full replacement costs when she has neither replaced the property, pleaded that she intends to replace the property, nor testified that she intends to replace the property?

The court rejected each of the Defendant’s three issues in turn. The court stated:

In this case, the parties stipulated to estimate the actual cash value of the organ at five thousand seven hundred dollars ($5,700). [Plaintiffs], however, sought a judgment in excess of twenty thousand dollars ($20,000). Since this amount exceeded twice the actual cash value of the organ, [Defendant] argued that the jury could only award [Plaintiffs] the actual cash value of the organ since the insured failed to repair or replace the item prior to receiving the replacement value as required by paragraph 4 of the policy. As noted [], the court rejected this contention, finding the requirement unconscionable. We agree.

In Standard Venetian Blind, [] our supreme court declared that “where … the language of the contract is clear and unambiguous, a court is required to give effect to that language.” [] Unfortunately for [Defendant], however, the court also stated in that seminal case that “in light of the manifest inequality of bargaining power between an insurance company and a purchaser of insurance, a court may on occasion be justified in deviating from the plain language of a contract of insurance.

Citing 13 Pa.C.S. § 2302, our supreme court explained in Standard Venetian Blind that a “court may refuse to enforce a contract or any clause of contract if [the] court as a matter of law deems the contract or any clause of the contract to have been unconscionable at the time it was made.” [] Inquiries concerning whether a contract or clause is unconscionable are properly a question of law for the court.

The court cited the two-fold test of unconscionability from Koval v. Liberty Mutual Insurance Company,2 which states, “[f]irst, one of the parties to the contract must have lacked a meaningful choice about whether to accept the provision in question. Second, the challenged provision must unreasonably favor the other party to the contract.” The court ultimately found that Plaintiffs met the first prong of the test as, “insurance contracts are generally contracts of adhesion … the parties are usually not of equal bargaining power and the buyer must adhere to the terms of a form contract which are not negotiable.”

Concerning the second prong, the court stated:

[W]e find that the second prong of the Koval test is also met: the challenged provision unreasonably favors [Defendant]. Since [Defendant] denied liability, [Plaintiffs] were faced with the unsavory choice of either accepting the lower actual cash value of the organ or expending a large sum of money in replacement costs without a guarantee of reimbursement. In fact, under the terms of the contract, [Plaintiffs] could have only received replacement value in this instance after expending the replacement or repair funds and obtaining a judicial determination concerning liability. Thus, applying the teachings of Standard Venetian Blind and Koval to the instant case, we find the replacement requirement unconscionable despite the clear and unambiguous language of the policy.

The court upheld the jury’s award and denied the Defendant’s appeal.

Overhead and Profit Should be Included with Payments Made on Actual Cash Value Basis

Jonathan Bukowski | Property Insurance Coverage Law Blog | November 15, 2017

While many carriers continue their attempt to exclude overhead and profit from property damage claim payments made on an actual cash value basis, the majority approach across the United States has been 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, even if no general contractor is used or no repair or replacement is made.

The Colorado Department of Regulatory Agency expressed a similar standard in its 1998 initial issuance, and 2007 re-issuance, of Bulletin No. B-5.1 – Calculation Of Actual Cash Value: Prohibition Against Deducting Contractors’ Overhead And Profit From Replacement Cost Where Repairs Are Not Made.

Colorado DORA Bulletin No. B-5.1 provides:

II. Applicability and Scope

This bulletin is intended for and applies to all property and casualty companies providing replacement cost coverage of dwellings. . .

III. Division Position

Insurers shall be prohibited from deducting contractors’ overhead and profit in addition to depreciation when policyholders do not repair or replace the structure.

. . . .

The position of the Division of Insurance is that the actual cash value of a structure under a replacement cost policy, when the policyholder does not repair or replace the structure, is the full replacement cost with proper deduction for depreciation. Deduction of contractors’ overhead and profit, in addition to depreciation is not consistent with the definition of actual cash value.

When taken into consideration with much of the case law that has developed around the country, the Colorado Division of Insurance Bulletin provides strong support for policyholders’ entitlement to general contractor overhead and profit in actual cash value payments where it is reasonably likely that a general contractor would be required to complete the repairs to the insured property.

More recently, Judge Pratt of Arapahoe County relied on Bulletin No. B-5.1 and case law from other jurisdictions in determining that the law of Colorado with regards to overhead and profit in the context of actual value payments:

[I]s that overhead and profit is to be included as part of the actual cash value determination where it is reasonably likely that the services of a general contractor will be required to repair or replace the covered damage.1

When considering Judge Pratt’s decision, the Colorado Department of Regulatory Agency Bulletin No. B-5.1, and the extensive amount of case law from other jurisdiction, it becomes clear that overhead and profit should be included with payments made on an actual cash value basis in circumstances where the policyholder would be reasonably likely to need a general contractor in repairing or replacing the damaged property in issue under Colorado law.
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1 Woodgate South Homeowners Assoc. v. American Family Mut. Ins. Co., No. 2013cv30784 (Colo. Dist. Ct. Oct. 20, 2014).

California Supreme Court Affirms California Fair Plan Ass’n v. Garnes, and Preserves Homeowners’ Interests

Stephanie Poll | Property Insurance Coverage Law Blog | August 17, 2017

The California Department of Insurance recently issued a press release announcing that the California Supreme Court affirmed the homeowner reimbursement protections recently decided in California Fair Plan Association v. Garnes.1 Back in June, my colleague Kevin Pollack wrote about the recent decision and whether actual cash value means fair market value or replacement cost minus depreciation in, Does Actual Cash Value Mean Fair Market Value or Replacement Cost Minus Depreciation.

Last week, the California Supreme Court refused to consider the insurance industry’s petition to overturn a lower court’s decision that insurers must pay to repair a home even if the repair costs exceed the home’s market value. There, a house fire occurred and the homeowner submitted a claim for $320,549 to her insurer, California Fair Plan Association. This amount represented the cost to repair the damaged home, less depreciation. Garne’s FAIR fire insurance policy had a limit of $425,000, yet Fair Plan denied the claim and only paid $75,000, which was determined to be the fair market of the property in 2011 (in large part due to the mortgage-driven recession).

The supreme court’s refusal to consider the proposal ended an ongoing battle and cemented an important decision that protects homeowners’ interests. Insurance Commissioner Dave Jones stated: “This is an important win for homeowners who should have confidence their insurer will deliver on its promises regardless of housing value fluctuations.”2 Jones filed an amicus brief in support of Garnes, arguing the Insurance Code entitled Garnes to be reimbursed. The lower court agreed and relied on Jone’s interpretation of the Insurance Code when ruling in Ms. Garne’s favor.

The Insurance Commissioner appeared as an amicus curiae, or friend of the court. Jones’ interest was in protecting consumers and ensuring the Insurance Code is properly interpreted and enforced. Our friends over at United Policyholders also filed an amicus brief supporting Garnes and advocating for homeowners’ rights.
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1 California Fair Plan Ass’n v. Garnes, No. A143190, 2017 WL 2303165 (Cal. Ct. App. May 26, 2017).
2 http://www.insurance.ca.gov/0400-news/0100-press-releases/2017/release082-17.cfm

Calculating Actual Cash Value, Part 29: Oregon

Shane Smith | Property Insurance Coverage Law Blog | August 25, 2017

This week, Oregon made national news as one of the best locations to view the Great American Eclipse. I realized I had not yet covered Oregon in my series on calculating actual cash value, leading to today’s blog.

In Growers Refrigerating Co. v. American Motorists Insurance Company,1 the insured commenced an action to recover for damage to pears stored in its cold storage plant as a result of contamination following an ammonia leak in refrigeration equipment.

Although the issue the court considered did not center on the cost of repairs, the court held the term actual cash value is defined as the market value at the time of the occurrence:2

We recognize that this is not a case involving the cost of repairs. We also agree that it would have been preferable for plaintiffs in this case to offer testimony framed more precisely in terms of the difference in the cash or market value of the pears before and after they were contaminated by ammonia. We nevertheless hold, however, that under the particular facts of this case evidence showing a comparison of the amounts received from contaminated and uncontaminated pears, together with evidence of the amounts paid in the adjustment of claims for contamination damage to the owners of the pears, was not only admissible, but that presumptively, and in the absence of evidence to the contrary, such amounts represented the difference between the value of the pears before and after they were contaminated by ammonia.

The jury in this case was properly instructed on the issue of damages in terms of cash or market value, as required by the provisions of the policy. We hold that there was sufficient evidence to support its verdict awarding damages to plaintiffs.

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1 Growers Refrigerating Co. v. American Motorists Ins. Co., 260 Or. 207, 488 P.2d 1358 (1971).
2 Id. at 1363, 1364.