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.

Colorado Joins a Growing List of Jurisdictions Allowing Depreciation of Labor Costs When Determining Actual Cash Value

Larry Bache and Jonathan Bukowski | Property Insurance Coverage Law Blog | August 8, 2017

While I often argue that depreciating labor simply does not make sense, insurers continue to push the question of whether the depreciation of labor costs in Actual Cash Value policies is acceptable. Though several jurisdictions have rejected the depreciation of labor, surprisingly, the recent trend of jurisdictions touching upon the subject has been to allow for the depreciation of labor.

Courts allowing for the reduction of depreciation for labor appear to base their reasoning upon one simple key issue – whether the definition for Actual Cash Value within the policy is ambiguous. Generally, where the term is found ambiguous, reductions for depreciation of labor are inappropriate as a reasonable policyholder would not expect labor to be depreciated. Similarly, when a court finds Actual Cash Value unambiguous, they typically hold that reductions for depreciation of labor are appropriate to prevent unjust enrichment.

Unfortunately, on July 28, 2017, the United States District Court for the District of Colorado held the term Actual Cash Value in a USAA homeowners policy unambiguous, allowing USAA to depreciate labor when issuing its actual cash value payment.

In Basham v. United Services Automobile Association,1 USAA’s policy provided a two-step approach for resolving property damage claims above $5,000.00:

(1) USAA would pay only the “actual cash value” for the loss, defined as –

the amount it would cost to repair or replace covered property, at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence.

(2) However, if the homeowner completed the repairs or replacement within one year and timely submitted notice, USAA would pay for the replacement cost without a deduction for depreciation.

The policyholder partially repaired her home and was reimbursed without a deduction for depreciation. However, the policyholder was left with the lesser actual cash value—after a depreciation deduction of both the cost of materials and the cost of labor—for the property damage that she did not fix within one year. While the policyholder accepted USAA’s depreciation deduction for the cost of materials, she argued that USAA violated her policy by taking a depreciation deduction for the cost of labor.

USAA’s policy language provided:

Actual cash value means the amount it would cost to repair or replace covered property, which is evaluated at the time of loss or damage, with material of like kind and quality, and subject to a deduction for deterioration, depreciation and obsolescence.

In determining the policy language to be unambiguous, Judge Jackson relied heavily upon the presence of commas to conclude that their presence signaled the independence of each phrasing from the prior and subsequent grouping. The court took it one step further, concluding that each of these independent phrases referred back to the cost of repairing or replacing covered property. Based upon this interpretation, the court interpreted the policy as unambiguously providing:

Actual cash value means “the amount it would cost to repair or replace covered property, which is evaluated:

  1. At the time of loss or damage,
  2. with material of like kind and quality, and
  3. subject to a deduction for deterioration, depreciation and obsolescence.

In other words, the amount it would cost to repair or replace a covered property is subject to a deduction for depreciation. Therefore, at least in this one federal trial court, both the cost of materials and the cost of labor are subject to a depreciation deduction where Actual Cash Value is unambiguous.

What does this recent decision mean for Colorado policyholders? The good news is that this decision is not binding upon Colorado state courts. However, it can be used as persuasive argument in support of an insurers justification for reductions for depreciation of labor in state court. Therefore, policyholders should always carefully read their policy language to determine its coverages and limitations. For instance, a policy could provide language forbidding the depreciation of labor costs, or as in this case, even providing circumstances where reductions are not made where the property is repaired within a defined timeframe. Finally, this trend emphasizes the importance of purchasing a Replacement Cost Policy.
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1 Basham v. USAA, No. 16-cv-03057 (D. Colo. July 28, 2017).

Calculating Actual Cash Value, Part 26: Montana

Shane Smith | Property Insurance Coverage Law Blog | July 5, 2017

In Montana, a jury may consider all relevant evidence when determining the actual cash value of the property damaged or destroyed.1 Under the broad evidence rule, the trier of fact “may consider any evidence logically tending to the formation of a correct estimate of the value of the insured property at the time of the loss.”2

Where a policy limits the insurer’s liability to the actual cash value at the time of the loss, what constitutes actual cash value depends upon the nature of the property insured, its condition, and other circumstances existing at the time of loss.3

Depreciation because of age should be considered in determining the actual cash value of a building partially destroyed by fire.4

However, although not expressly rejecting the use of depreciation based on the age of a building partially destroyed by fire in arriving at its sound value before the fire, the court in McIntosh v. Hartford Fire Insurance Company,5 did not use a depreciation percentage in further determining the amount of liability of the defendant insurance companies. The record showed that the buildings had been insured under policies which provided “against all direct loss or damage by fire. . .” and also that the company “shall not be liable beyond the actual cash value of the property at the time any loss or damage occurs, and the loss or damage shall be ascertained or estimated according to such actual cash value, with proper deduction for depreciation however caused, and shall in no event exceed what it would then cost the insured to repair or replace the same with material of like kind and quality.” The insurance companies argued that where the buildings had depreciated 48%, the cost of repairing them using new materials should likewise be depreciated by the same percentage in fixing the amount of liability of the companies. The court held that under the state statute, Mont. Code Ann. § 33-24-101, where there was no valuation in the policy, the measure of indemnity in insurance against fire is the expense, at the time that the loss is payable, of replacing the thing lost or injured, in the condition in which it was at the time of injury, and that since no valuation of the property insured was included in any of the policies the statute was incorporated into them. The court reversed and remanded with directions to enter judgment against the insurance companies for an amount equal to the full cost of repairing the building using new materials where necessary to restore it to the condition it was in before the fire.
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1 CQI, Inc. v. Mountain W. Farm Bureau Ins. Co., No. CV 08-134-BLG-CSO, 2010 WL 2943143, at *2 (D. Mont. July 21, 2010).
2 Id.citing Interstate Gourmet Coffee Roasters, Inc. v. Seaco Ins. Co., 59 Mass. App. Ct. 78, 794 N.E.2d 607, 611 (Mass. App. Ct. 2003).
3 Century Corp. v. Phoenix of Hartford, 157 Mont. 16, 482 P.2d 1020 (1971).
4 Lee v. Providence Washington Ins. Co., 82 Mont. 264, 266 P. 640 (1928).
5 McIntosh v Hartford Fire Ins. Co., 106 Mont. 434, 78 P.2d 82 (1938).