Replacement is Not Always a Prerequisite for an Insured to Claim Replacement Cost Benefits

Kesha Hodge | Property Insurance Coverage Law Blog | April 15, 2018

Replacement cost insurance generally allows recovery for the actual value of property at the time of loss, without deduction for deterioration, obsolescence, and similar depreciation of the property’s value. Depending on the circumstances, the difference between the actual cash value and the replacement cost value of a loss can be significant.

Policyholders and insurance companies often find themselves at odds on whether the policyholder has complied with the policy requirements for obtaining replacement cost benefits. In every case, one must be careful to note what the policy truly requires. A helpful illustration is found in Nicastro v. New York Central Mutual Fire Insurance Company.1 There, three days after his property was destroyed by a fire, the insured advised his property insurance carrier that he “elect[ed] to exercise any replacement cost options, which are or may become available.”

The replacement cost provision of the policy provided:

You may make a claim for the actual cash value amount of the loss before repairs are made. A claim for any additional amount payable under this provision must be made within 180 days after the loss.

A lawsuit followed. The insured contended that he had, in fact, made a claim in compliance with the replacement cost provision by advising the insurance company three days after the loss he would seek replacement costs for the premises. The insurance company countered and asserted that the insured did not comply with the replacement cost provision because it required that the insured make a “bona-fide” claim by “actually replacing and actually spending money in excess of the actual cash value within 180 days of the loss.” The court sided with the insured and concluded that the replacement cost provision was ambiguous because the term “claim” was not defined in the policy and, as an ambiguous provision, must be construed against the insurance company. Therefore, the insured was deemed entitled to full replacement cost coverage under the policy.

Many often assume that a replacement cost policy requires actual replacement before an insured can make a claim for the replacement cost, but like many things in the property insurance coverage arena, the ability to recover replacement costs depends largely on the language in the policy — that is, what the policy states and, sometimes, what the policy fails to state.
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1 Nicastro v. New York Central Mut. Fire Ins. Co., 148 A.D.3d 1737, 50 N.Y.S.3d 736 (4th Dep’t 2017).

The Proper Standard for Evaluating “Actual Cash Value” Under New Jersey Law

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | April 12, 2018

One of the most common questions we hear from our clients has to do with the differences between “actual cash value” and “replacement cost value.” Replacement cost value on its face seems relatively straight forward, but what is “Actual Cash Value” determined under New Jersey law?

This topic was visited by Shane Smith following Super Storm Sandy in Calculating Actual Cash Value, Part 5: New Jersey and New York, and I was curious if the criteria had changed following such an influx of first party property damage claims.

There are typically three general ways to determine Actual Cash Value:

  1. market value;
  2. replacement cost less depreciation; and
  3. the broad evidence rule.1

The Broad Evidence Rule, in layman’s terms, is a combination of Market Value (what it’s selling for now) and Replacement Cost less Depreciation (how much it costs to replace minus age/wear & tear/condition, etc.).2 In Messing v. Reliance Insurance Company, the court found “that the broad evidence rule was most consistent with the principle of indemnity.”3

The Supreme Court of New Jersey agreed. In Elberon Bathing Company v Ambassador Insurance Company,4 a fire case that went to appraisal, the Court held:

“[T]hat (1) appraisal based on replacement cost without consideration of depreciation does not measure actual cash value; (2) the proper standard for evaluating ‘actual cash value’ under New Jersey standard form policy is broad evidence rule. . . .”

The Elberon the New Jersey Supreme Court found broad evidence to be the standard because it requires the fact-finder to consider the same evidence an expert would consider relevant to an evaluation; fair market value and replacement cost minus depreciation. The Court does allow the fact-finder to use the criteria as guidelines if the facts of the case are appropriate.
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1 See Note, “Valuation and Measure of Recovery Under Fire Insurance Policies,” 49 Colum. L. Rev. 818, 820-823 (1949); Cozen, Op. cit., supra, 12 Forum at 648-658; Hinkle, “The Meaning of ‘Actual Cash Value,’” 1967 Ins.L.J. 711. See generally Annot., 61 A.L.R.2d 711 (1958).
2 Messing v. Reliance Ins. Co., 77 N.J.Super. 531, 187 A.2d 49 (1962).
3 Id. at 534.
4 Elberon Bathing Co. Inc. v Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978).

The Proper Standard for Evaluating “Actual Cash Value” Under New Jersey Law

Jennifer Van Voorhies | Property Casualty Insurance Law Blog | April 12, 2018

One of the most common questions we hear from our clients has to do with the differences between “actual cash value” and “replacement cost value.” Replacement cost value on its face seems relatively straight forward, but what is “Actual Cash Value” determined under New Jersey law?

This topic was visited by Shane Smith following Super Storm Sandy in Calculating Actual Cash Value, Part 5: New Jersey and New York, and I was curious if the criteria had changed following such an influx of first party property damage claims.

There are typically three general ways to determine Actual Cash Value:

  1. market value;
  2. replacement cost less depreciation; and
  3. the broad evidence rule.1

The Broad Evidence Rule, in layman’s terms, is a combination of Market Value (what it’s selling for now) and Replacement Cost less Depreciation (how much it costs to replace minus age/wear & tear/condition, etc.).2 In Messing v. Reliance Insurance Company, the court found “that the broad evidence rule was most consistent with the principle of indemnity.”3

The Supreme Court of New Jersey agreed. In Elberon Bathing Company v Ambassador Insurance Company,4 a fire case that went to appraisal, the Court held:

“[T]hat (1) appraisal based on replacement cost without consideration of depreciation does not measure actual cash value; (2) the proper standard for evaluating ‘actual cash value’ under New Jersey standard form policy is broad evidence rule. . . .”

The Elberon the New Jersey Supreme Court found broad evidence to be the standard because it requires the fact-finder to consider the same evidence an expert would consider relevant to an evaluation; fair market value and replacement cost minus depreciation. The Court does allow the fact-finder to use the criteria as guidelines if the facts of the case are appropriate.
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1 See Note, “Valuation and Measure of Recovery Under Fire Insurance Policies,” 49 Colum. L. Rev. 818, 820-823 (1949); Cozen, Op. cit., supra, 12 Forum at 648-658; Hinkle, “The Meaning of ‘Actual Cash Value,’” 1967 Ins.L.J. 711. See generally Annot., 61 A.L.R.2d 711 (1958).
2 Messing v. Reliance Ins. Co., 77 N.J.Super. 531, 187 A.2d 49 (1962).
3 Id. at 534.
4 Elberon Bathing Co. Inc. v Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978).

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.