Reed Smith LLP on Replacement Cost Policies and the Dangers When an Insurance Company Refuses to Pay Actual Cash Value

In this Emerging Issues commentary, Jay M. Levin and Jennifer D. Katz, members of the Insurance Recovery Group of Reed Smith LLP, discuss the differing positions courts have taken with replacement cost property insurance policies and the pre-condition to payment of actually repairing or replacing the damaged property. The courts have taken different approaches concerning whether this pre-condition may be enforced by the insurer if it denies coverage or otherwise refuses to pay actual cash value. They write:

Excerpt:

"The Eleventh Circuit acknowledged that Buckley Towers would be unable to receive the 'full range of benefits' under the policy without an advance payment, but held that this was merely 'cost and inconvenience' which did not relieve Buckley Towers of the obligation to repair the building before being entitled to the full RCV. Id. at *7-8. The policy 'unambiguously' required repair before obtaining RCV damages and Buckley Towers did not make the repairs."

"As a result of Rockford's claims handling, specifically its actions concerning ACV payment, the jury 'excused' the policy requirement of repair or replacement. Id. at 66. Because Rockford's failure to fulfill its obligations under the policy prevented Pirtle from repairing the property, the doctrine of prevention of performance excused Pirtle's obligation to repair or replace before full RCV was due. See also 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), cert. denied, 464 U.S. 851 (1983) (noting that policyholders 'were refused any monies under the insurance contract. Not surprisingly, they were unable to replace their home. This conduct by [the insurance company] made it impossible for [the policyholders] to fulfill the condition precedent, and therefore, excuses [the policyholders] from performance of the replacement condition.')"

"Pennsylvania law is even stricter, finding that the requirement to repair or replace the damaged property before receiving full RCV can be unconscionable. In Ferguson v. Lakeland Mutual Insurance Company, 408 Pa. Super. 332, 596 A.2d. 883 (1991), lightning struck an organ inside the mobile home of Glenn and Mary Ann Ferguson. The Fergusons made a claim under their Lakeland Mutual Insurance Company homeowner's policy. Lakeland Mutual disputed coverage, resulting in the Fergusons suing. The jury awarded full RCV. The court held that the requirement of repair or replacement prior to receiving RCV was unconscionable. The court applied a 'two-fold' test for unconscionability: 'First, one of the parties to the contract must have lacked a meaningful choice about whether to accept the provision in question. Second, the challenged provision must unreasonably favor the other party to the contract.' Id. at 336, 596 A.2d at 885. Relying on that test, the court reasoned that insurance policies are contracts of adhesion and the replacement provision unreasonably favors the insurance company. So, despite 'clear and unambiguous' policy language, the repair or replacement requirement was deemed unconscionable."

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