Recently, Chip shared some insightful practice pointers on this blog about how to maximize replacement cost benefits. The blog made me wonder whether an insured would be entitled to replacement cost benefits if his claim is denied and the insured cannot afford to repair or replace to comply with the replacement cost provision?
Under most policies, an insurance company’s obligation to pay replacement cost value (RCV) does not arise until the repair or replacement has been completed, and the insurance company will never be responsible for any amount in excess of what it actually costs to repair or replace. However, if an insurance company denies a claim and fails to pay any benefits under the policy, it could be argued that an insurer cannot require compliance with the replacement cost provision or any other condition precedent, as a matter of contract law.
In Florida, it is well-established that a party who prevents or renders impossible the performance or occurrence of a condition precedent, upon which his liability is contingent, cannot avail himself of his own wrong, and be relieved of his responsibility to perform under the contract. See, North American Van Lines v. Collyer, 616 So.2d 177 (Fla. 5th DCA 1993). By the same token, it can be argued that by denying liability and refusing payment under a policy, an insurer prevents the insured from complying with the policy’s replacement cost provision and cannot require specific performance after the claim denial.
In Bailey v. Farmer’s Union Cooperative Ins. Co. of Nebraska, 498 N.W.2d 591 (Neb. Ct. App. 1992), the insured’s home collapsed during an excavation to perform renovations—which was a covered peril under the policy. The policy provided coverage for the least expensive of the three, 1) policy limits, 2) RCV of the home for like construction and use on the same premises, or 3) the necessary amount actually spent to repair or replace the home. As in most policies, Bailey’s replacement cost provision obligated the insured to pay no more than the actual cash value (ACV) until the actual repair or replacement was complete. Without extending coverage for the loss, Bailey’s insurer tendered a settlement offer of $11,900 as ACV to bring the “doubtful and disputed claim to a close” Bailey rejected the offer and demanded her ACV option with an opportunity to claim RCV after incurring in the expenses. Still refusing to extend coverage, Bailey’s insurer rejected her demand and offered to buy her a dwelling of like kind and quality in the same neighborhood, but Bailey insisted on rebuilding on the same site and a lawsuit ensued. The Bailey court held that:
Bailey was prevented from satisfying the condition of rebuilding […] by Farmers Union’s refusal to assure Bailey that, in addition to the actual cash value figure, the cost of rebuilding her home would be covered up to the policy limit. A condition is excused if the occurrence of the condition is prevented by the party whose performance is dependent upon the condition. Chadd v. Midwest Franchise Corp., 226 Neb. 502, 412 N.W.2d 453 (1987). Though in Nebraska this general principle of contract law has not yet been applied specifically to a set of facts analogous to those of the case at bar, we are persuaded by the reasoning of the Michigan Court of Appeals in Pollock v. Fire Ins. Exchange, 167 Mich.App. 415, 423 N.W.2d 234 (1988), that an insured should not be barred from recovery for failure to rebuild within the time constraints of the policy when the conduct of the insurer prevented the insured from rebuilding.
Likewise, in Vantage View v. QBE Ins. Corp., 2009 WL 536546 (S.D. Fla. March 3, 2009), the insurer denied the claim. The court, relying on Bailey, held that it is not “reasonably possible” for the insured to make repairs without receipt of the funds from the insurer and that the insured was therefore relieved from its obligation of repairing or replacing the damaged property before demanding replacement cost value.
It is important to note that both Bailey and Vantage View are cases where the insureds were denied any benefits prior to filing suit and the insureds were unable to repair or replace the damaged property out of their own pocket. It therefore follows that, if there are no other provisions or exclusions that prevent coverage, an insured may be entitled to receive RCV benefits without having first repaired or replaced the damaged property, as required under a particular policy.