Can My Recovery be Limited to Actual Cash Value When the Insurer’s Failure to Pay Prevented Compliance with My Policy Condition on Recovering Replacement Cost?

Paul LaSalle | Property Insurance Coverage Law Blog | March 12, 2019

Insurers often try to limit damages once they are found liable for breach of the insurance contract by claiming that the insurance policy limits the insured’s recovery to the actual cash value because the insured did not comply with the policy’s condition on recovering replacement cost.1

Insureds generally counter by arguing it would be inequitable for an insurer to withhold payment of actual cash value because of alleged non-coverage under the policy (making it impossible or at least difficult for the insured to replace the damaged property without funds from the insurer), and later deny replacement cost payment when found liable for coverage because the insured did not comply with the policy condition on recovering replacement cost.

In a recent case,2 a federal court addressed this scenario and predicted3 that under Pennsylvania state law an insured could recover replacement cost despite noncompliance with a policy’s replacement requirement condition where the insurer’s denial of liability and failure to pay actual cash value prevents the insured from replacing the property. The court further ruled that the insured must still demonstrate that, but for the insurer’s denial of actual cash value payment, they would have replaced the property. Consequently, an insured may not be able to recover replacement cost if it is shown they had no intention of replacing the damaged property.

In utilizing the “prevention theory” to approach replacement requirement conditions in insurance policies, the inquiry focuses on the insurer’s actions and their consequences for the insured’s ability to perform—whether the insurer paid actual cash value or denied liability altogether and whether denying funds made it impossible, or at least unduly risky, for the insured to comply with the replacement requirement condition. Thus, the replacement requirement condition will be excused (and the insured may recover replacement cost) where the insurer’s denial of liability and failure to pay actual cash value prevents the insured from replacing the damaged property. A replacement requirement condition may not be excused, however, where the insurer has admitted liability and has made payment for the actual cash value, but the insured could not hire a contractor to rebuild because the parties disagreed on the proper value of the damaged property.
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1 The following is an example of an insurance policy’s condition on recovering replacement cost:
We will not pay on a replacement cost basis or any “loss”:
(1) Until the lost or damaged property is actually repaired or replaced with other property of generally the same construction and used for the same purpose as the lost or damaged property; and
(2) Unless the repairs or replacement have been completed or at least underway within 2 years following the date of “loss.”
2 Utica Mutual Ins. Co. v. Cincinnati Ins. Co., 2019 WL 290162 (E.D. Pa. January 23, 2019).
3 Under the Erie Doctrine, a federal court hearing a state law claim must apply state substantive law to resolve the claim. When a state’s highest court (in this case, the Pennsylvania Supreme Court) has yet to speak on a particular issue, a federal court deciding the matter and applying the state’s substantive law must predict how the state’s highest court would decide if confronted with the issue. This is commonly referred to as an Erie Guess.

Replacement Cost Coverage and the 180-Day Notice Requirement

Edward Eshoo | Property Insurance Coverage Law Blog | March 3, 2019

In my experience, one of the most misinterpreted property insurance policy provisions is the 180-day notice requirement to receive replacement cost benefits. Many in the property insurance industry interpret the provision to require actual repair/replacement within 180 days of the loss. Others interpret the provision to simply require notice within 180 days of the loss of the intent to repair/replace. And, there are those who interpret the requisite 180-day notice to be given only if the insured initially makes claim on an actual cash value basis.

What is the correct interpretation? Clearly, it depends on the policy language. Compare the following two ISO provisions.

The ISO “Building and Personal Property Coverage Form” provides as follows:

c. You may make a claim for loss or damage covered by this insurance on an actual cash value basis instead of on a replacement cost basis. In the event you elect to have loss or damage settled on an actual cash value basis, you may still make a claim for the additional coverage this Optional Coverage provides if you notify us of your intent to do so within 180 days after the loss or damage.1

The ISO “Homeowners 3-Special Form” provides as follows:

e. You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss to buildings on an actual cash value basis. You may then make claim for any additional liability according to the provisions of this Condition C. Loss Settlement, provided you notify us of your intent to do so within 180 days after the date of loss.2

As one can see from reading both forms, there is no language requiring actual repair/replacement within 180 days of the loss as a condition to receiving replacement cost benefits.

Both forms are similarly worded, in that they state the insured can make a claim on an actual cash value basis instead of on a replacement cost basis and, in the event such a claim is made, the insured still can claim replacement cost benefits if it notifies the insurer within 180 days of the loss of its intent to claim such benefits. So, from my reading of both forms, the requisite 180-day notice must be given only if the insured initially makes claim on an actual cash value basis.

Not surprisingly, insurers have taken a different view, as discussed in Construction Systems, Inc. v. General Casualty Company of Wisconsin.3 There, General Casualty took the position that the insured was not entitled to receive a replacement cost payment for damage to certain machinery because it failed to notify General Casualty within 180 days of the loss that it intended to claim replacement cost benefits. The General Casualty policy was worded in the same manner as the ISO “Building and Personal Property Coverage Form” discussed above. Emphasizing the language that the insured may seek replacement cost benefits if it notifies the insurer of its intent to do so within 180 days after the loss, General Casualty argued that every replacement cost claim necessarily presupposes an actual cash value claim. Thus, according to General Casualty, the 180-day notice requirement was a condition precedent to receiving any replacement cost payment.

A Minnesota federal district court disagreed, reasoning that the first sentence of the provision undermined General Casualty’s argument. That sentence states that the insured may make a claim on an actual cash value basis instead of on a replacement cost basis. The district court concluded that the 180-day notice requirement attaches only to the circumstance in which the insured were to first seek actual cash value benefits and then later seek replacement cost value benefits. Because it was unclear from the record whether the initial claim was for actual cash value or replacement cost benefits, the district court denied General Casualty’s motion for summary judgment.

The district court’s analysis is spot-on in terms of interpreting 180-day notice requirement to receive replacement cost benefits. However, what constitutes making an actual cash value claim as opposed to a replacement cost claim? Under most property insurance policies, including the ISO “Building and Personal Property Coverage Form” and the ISO “Homeowners 3-Special Form,” replacement cost benefits will not be paid unless and until repair/replacement is completed, the insurer’s payment obligation being limited to actual cash value. So, is accepting an actual cash value payment before repair/replacement is completed making an actual cash value claim? I would say no, as the insured is simply accepting the contractual benefit owed at that time. In my opinion, an insured makes an actual cash value claim by electing to have the loss settled on an actual cash value basis, which is different than receiving an actual cash value payment before repair/replacement is completed.

Practically speaking, the 180-day notice requirement to receive replacement cost benefits should never be an issue. Most public adjusters I have spoken to have told me that their practice is to notify the insurer in writing well before the 180-day deadline (a) that the insured is making a replacement cost claim and (b) that the insured intends to repair/replace the damage to the insured property. Even if the insured is uncertain as to his or her future plans, I see no downside to giving such notice.
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1 ISO Form CP 10 30 10 12 at page 15 of 16.
2 Form HO 00 03 05 11 at page 14 of 22.
3 Construction Systems, Inc. v. General Cas. Co. of Wis., 2010 WL 11575518 (D. Minn., August 31, 2010).

Federal District Court Weighs in on Whether Labor Can Be Depreciated in Arriving at an Actual Cash Value Loss Settlement

Edward Eshoo | Property Insurance Coverage Law Blog | December 7, 2018

Whether labor can be depreciated in arriving at an actual cash value property loss settlement has been a hot topic of debate over these past five years. A federal district court in Ohio recently weighed in on the issue in ruling on motions to dismiss two putative class action lawsuits, one against State Farm Fire & Casualty Company1 and one against Allstate Indemnity Company.2

The insureds in both cases challenged whether labor could be depreciated in arriving at an actual cash value settlement. In concluding that it was proper to do so, resulting in the dismissal of the lawsuits, the district court reasoned that the term “actual cash value,” which was undefined in the State Farm and Allstate policies, meant replacement cost less depreciation and that the plain and ordinary meaning of the term “depreciation” was inclusive of labor. The district court also found persuasive those decisions from other courts that had likewise found that labor should be included in depreciation.3

The results reached in Perry and Cranfield are contrary to the results reached in Hicks v. State Farm Fire & Casualty Company,4 and Titan Exteriors, Inc. v. Certain Underwriters at Lloyd’s, London,5 two recent decisions in which the Sixth Circuit Court of Appeals and a federal district court sitting in Mississippi concluded that labor costs should not be depreciated in arriving at an actual cash value settlement using a replacement cost less depreciation formula. Unlike the district court in Perry and Cranfield, the courts in Hicks and Titan Exteriors found no reason to decide which of the competing legal decisions were correct. Instead, they concluded that all of the interpretations offered by courts considering the labor depreciation issue were reasonable, rendering the term actual cash value ambiguous when defined as replacement cost less depreciation.

While the labor depreciation issue is an interesting legal debate, insurers can put this debate to rest simply by drafting its policy like State Farm has done in its “Actual Cash Value Endorsement” to clearly and unambiguously state that labor is subject to depreciation.6 Until they draft their policies to reflect their intent for labor to be subject to depreciation, insurers will be left to deal with decisions like Hicks and Titan Exteriors.
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1 Cranfield v. State Farm Fire & Cas. Co., No. 1:16-cv-1273, 2018 WL 6162900 (N.D. Ohio Nov. 26, 2018).
2 Perry v. Allstate Indem. Co., No. 1:16-cv-01522, 2018 WL 6169311 (N.D. Ohio Nov. 26, 2018).
3 The district court referred to these cases as the current majority view among state and federal courts. But, as the Hicks court observed, these cases are not similarly situated. Many of them were not decided using the replacement cost less depreciation formula; instead, they employed the broad evidence rule, or some form of fair market valuation. Seee.g.Wilcox v. State Farm Fire & Cas. Co., 874 N.W.2d 780 (Minn., 2016) . Under both the market value test or the broad evidence rule, all relevant evidence is considered in in calculating actual cash value.
4 Hicks v. State Farm Fire & Cas. Co., No. 18-5104, 2018 WL 4961391 (6th Cir. Oct. 15, 2018).
5 Titan Exteriors, Inc. v. Certain Underwriters at Lloyd’s, London, 297 F. Supp. 3d 628 (N.D. Miss. 2018).
6 Under this endorsement, all components of the estimated actual cash value, defined as the estimated cost to repair or to replace damaged property, are subject to depreciation, including labor, materials, taxes, and overhead and profit.

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).