Policyholders Should Fight Arbitrary Time Limitations for Replacement or Repair

Arbitrary time deadlines to complete replacement seem to make little sense, especially in the context of personal property replacement, except to help insurance companies gain a windfall, as noted in “Insurance Breakage—Why Do Insurance Regulators Approve Arbitrary Time Limits for Replacement?” I am certain that many insurance agents whose clients have suffered a severe loss often wonder why insurance companies place such frustrating time deadlines into policies that simply upset their mutual customers.

An article by public adjusting firm Swerling Milton Winnick, Insureds: Don’t Be “S.O.L.” on Your Statute of Limitations, noted the following:

There is another two-year period that can affect an insured’s right to payment. To this point, we have been focusing on the first of the 2-year Statute of Limitations– the one requiring insureds to bring suit within two years of the loss. The second 2-year period is contractual – it requires claimants to repair their property damage within 2 years from the date of loss in order to recover full replacement cost. Sometimes insureds have to deal with slow-moving building officials who impose difficulties on the reconstruction timeline. In such cases, the court might view the 2-year contractual provision as a ‘forfeiture’ provision, which are viewed unfavorably and are likely to result in insureds getting a reasonable time beyond the two-year period to finish. But where insureds don’t complete repairs because of their own foot-dragging, courts will enforce the 2-year contractual period.

While this is a good warning about the issue, the truth is courts in some states with applicable facts and sound arguments, will not enforce these time deadlines as forfeiture clauses. Some cases not applying the time limits focus on the fact that insurers’ refusals to pay recovery to their insureds prevented the insureds from repairing or replacing as the insureds lacked sufficient money for such efforts.1 Some courts did not apply the time deadlines because they determined that the insured parties would have rebuilt but for repudiation of their policies by their insurers.2

Ed Eshoo wrote an excellent article about the “prevention of performance” doctrine in Illinois Courts Follow the “Prevention of Performance” Doctrine. He explained how this doctrine also allows policyholders to avoid these arbitrary time deadlines:

Homeowner and commercial property insurance policies typically limit an insured’s recovery to actual cash value benefits unless and until the damaged or destroyed property is repaired or replaced. This limitation becomes an issue if coverage is declined and the insurer fails to pay actual cash value benefits as ‘seed money’ to start the repair/replacement process. Under that scenario, can an insured still recover replacement cost benefits if it proves at trial the insurer’s action in denying coverage and in failing to pay the actual cash value of the loss prevented or hindered it from fulfilling the repair/replacement condition?

In Illinois, the answer is yes. Illinois state and federal courts follow the ‘prevention of performance’ doctrine and will ‘excuse’ an insured from complying with the repair/replacement condition if the insurer’s conduct prevents, hinders, or makes it impossible for the insured to repair/replace the damaged property. So, in Illinois, like in other states, an insured’s failure to repair and/or to replace damaged or destroyed property following a loss is not an absolute bar to recovering replacement cost benefits. If the insurer’s denial of coverage and its failure to pay the actual cash value of the loss prevents, hinders, or renders it impossible for the insured to satisfy the precondition of repair/replacement, then the insured is still entitled to replacement cost benefits, regardless whether the denial of coverage was in good faith or in bad faith.

One practical method to avoid all the litigation is simply asking the insurance company to extend the time frames for replacement. I have no idea what the criteria would be for an insurance company to refuse to do so. However, many insurance companies will do so with a request. Get any agreements in writing, and do not wait until the last minute to get the extensions.

The bottom line is that policyholders, their insurance agents, and public adjusters need to stand up against these arbitrary and capricious time deadlines.

Thought For The Day    

A man dies when he refuses to stand up for that which is right. A man dies when he refuses to stand up for justice. A man dies when he refuses to take a stand for that which is true.

—Martin Luther King Jr.  

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1 See Zaitchick v. American Motorists Ins. Co., 554 F.Supp. 209, 217 (S.D.N.Y.1982), aff’d, 742 F.2d 1441 (2d Cir.1983); Columbia Mut. Ins. Co. v. Sanford, 53 Ark. App. 167, 920 S.W.2d 28, 30 (1996); Pollock v. Fire Ins. Exch., 167 Mich.App. 415, 423 N.W.2d 234, 236–37 (1988).

2 Conrad Bros. v. John Deere Ins. Co., 640 N.W.2d 231, 242 (Iowa 2001) and Bailey v. Farmers Union Coop. Ins. Co., 1 Neb.App. 408, 498 N.W.2d 591, 598–99 (1992).