What Does Replacement Cost Insurance Pay If There Has Not Been Repair or Replacement?

Insurance companies that wrongly deny or underpay property insurance claims are finding a golden financial opportunity that provides an incentive for them to wrongfully underpay and deny claims—they escape the payment of the replacement cost valuation they promised to their policyholders. While this result can be stopped by common law allowing for bad faith actions and more statutory laws protecting premium-paying policyholders, an example of how this legal issue plays out in many states is from the Georgia case of TPN Properties v. Home-Owners Insurance Company. 1

The court found that the lower Actual Cash Value (ACV) rather than higher Replacement Cost Value (RCV) was the appropriate measure for the cost of repairs in this case despite the policyholder purchasing RCV coverage. A few key facts and reasons led the court to this conclusion.

The policy’s “Loss Payment” provision stated that Home-Owners would determine the value of lost/damaged property per the “Valuation Condition,” which specified using ACV. However, the policy also had an optional coverage provision stating RCV replaces ACV. The policyholder purchased higher priced RCV coverage. The RCV provision, which is common in the vast majority of all property insurance policies, said Home-Owners would not pay on an RCV basis until the property was actually repaired/replaced, and unless repairs were made as soon as reasonably possible after the loss.

The facts of the case indicated that the property still had not been repaired by TPN. Therefore, Home-Owners obligation to reimburse based on RCV had not been triggered since the timely repair requirement was a condition precedent to recovery of the higher RCV amount. Based on Georgia case law, the court found that the insured (TPN) rather than the insurer has the burden of satisfying the condition precedent of making timely repairs before receiving RCV.

In summary, the court ruled ACV was the proper valuation because TPN had not yet repaired the property, which was a condition precedent to receive RCV under the policy terms and Georgia law placing that requirement on the insured. However, the court still denied summary judgment on this count because factual disputes remained regarding the scope of repairs needed, which would impact the ACV amount owed.

The court specifically noted how this boilerplate language provides a gamesmanship unfair advantage to the underpaying or wrongfully denying insurer:

The Court notes that TPN would have been entitled to a reimbursement from Home-Owners based on RCV if TPN had performed the repairs on its own within a reasonable time. Of course, as a practical matter, that would have required TPN to assume the risk that the cost of performing those repairs would be fully reimbursable, and that any dispute about the cost of the repairs would be resolved in its own favor. Although this reading certainly does not inure to the benefit of the insured, the Court finds that it is still the most logical reading for purposes of reconciling the various competing provisions in the Policy, though this construction is one where the insurer effectively designed the least favorable option for the insured….

Our legislators and insurance commissioners need to stop this incentive to underpay and wrongfully deny claims if the courts will not do so under common law. United Policyholders (UP) has been a staunch supporter of pro-policyholder laws and regulations to prevent these unconscionable results. Merlin Law Group is a supporter of UP and is a sponsor of its upcoming UP to Good 2024 event, which will be held on Friday, September 20, in Santa Rosa, California.

Readers of this blog should appreciate that the definition of actual cash value may differ significantly from state to state. I would suggest reading Actual Cash Value Damages and The Broad Evidence Rule in Florida, and Actual Cash Value and Indemnity.

Finally, I will discuss this case and many more important topics for public insurance adjusters at the upcoming Georgia Association of Public Insurance Adjusters conference on Tuesday, September 17, in Atlanta. Matt Brown and I will present What Does Your Client Think of You? How Only an Ethically and Value Oriented Public Adjusting Firm Succeeds. Here is the link for registration.

Thought For The Day

Throughout history, it has been the inaction of those who could have acted; the indifference of those who should have known better; the silence of the voice of justice when it mattered most; that has made it possible for evil to triumph.
—Haile Selassie

1 TPN Properties v. Home-Owners Ins. Co., 631 F.Supp.3d 1301 (N.D. Ga. 2022).