Property Insurance Only Insures the Interest of the Person Insured: Only the Risk of Loss of Property Is Insured

The Seventh Circuit Court of Appeals was asked to determine that although no repairs were performed on a damaged structure the insured was entitled to recover the depreciation holdback because it waived the time limit for repair. Before any repairs were performed the owner gave the property to another and no longer had ownership at the time it filed suit against its insurer. In Novogroder Companies, Inc. v. Hartford Fire Insurance Co., 12-3163 (7th Cir. 07/15/2013) [enhanced version available to lexis.com subscribers], the Seventh Circuit recalled that property insurance does not insure property but insures people against the risk of loss of property.

Facts

The Novogroder Companies owned a building that was vandalized and sought payment for the damage from its insurance company. The insurance company paid the actual cash value for the damages, and informed Novogroder that it would also pay for limited repair costs that exceeded the actual cash value. Novogroder claims that it is entitled to this money for repairs—even though it never made any repairs. The district court rejected Novogroder’s argument on summary judgment, and we affirm.

The Novogroder Companies, Inc., (“Novogroder”) is incorporated and headquartered in Indiana and owns hundreds of commercial buildings throughout the United States. One of these buildings is located in Danville, Illinois. This building had been occupied by a Walgreens drug store, but was left vacant when Walgreens moved out around 2005. Novogroder made various attempts to sell or rent the building, but was unable to locate a buyer or lessee.

Novogroder purchased an insurance policy for the Danville building from Hartford Fire Insurance Co. (“Hartford”). Hartford agreed to reimburse Novogroder for damage to the Danville building stating: “Covered property will be valued at either Replacement Cost or Actual Cash Value . . . . We will not pay more than your financial interest in the lost or damaged property.” The Replacement Cost has two components: the Actual Cash Value, which is the value of the property at the time of loss, or an agreed or appraised value; and the Depreciation Holdback, which is the cost of repairs that exceed the Actual Cash Value. The policy further explained that Hartford would “pay on an Actual Cash Value basis until the lost or damaged property is actually repaired, rebuilt or replaced.” If Novogroder repaired the building, and the actual cost of repair exceeded the Actual Cash Value, Hartford would reimburse Novogroder for the Depreciation Holdback. But if Novogroder did not “repair, replace or rebuild on the same site or another site within 2 years of the date of loss, we will pay you on an Actual Cash Value basis.”

In July 2007, Novogroder learned that its Danville building had been damaged by vandalism and theft. Novogroder informed Hartford about the damage, and Hartford investigated the claim. Hartford determined that the building had been damaged on three separate occasions: the building had been vandalized and copper parts had been stolen from the air conditioning on May 15, 2007; the heating and cooling system had been vandalized on May 18, 2007; and the electrical system had been damaged on June 4, 2007.

Because the building remained vacant and could be vandalized again, Novogroder decided not to fully repair the building until a buyer or lessee occupied it. Novogroder informed Hartford of this decision, and Hartford agreed that the repairs should wait until the building was occupied. In the meantime, Hartford calculated the full cost of repairs, and after adjusting for Novogroder’s deductible, Hartford paid Novogroder $1,116,082.16 for the Actual Cash Value of the three claims. Hartford also stated that it would pay Novogroder up to $384,293.00 for the Depreciation Holdback. To claim the Depreciation Holdback, Hartford explained that Novogroder would have to file a supplemental claim “to be filed in accordance with the terms and Conditions of the Replacement Cost Coverage provided you notify us of your intent to do so within 180 days after the date of loss . . . .” In response, Novogroder’s attorney sent a letter to Hartford confirming that Novogroder was aware that it could claim the Depreciation Holdback “at the time of completion of the repairs and restoration.”

Hartford stated that the insurance policy required Novogroder to repair the building within two years of the date of loss, and Hartford pointed out that more than two years had passed since the vandalism occurred. Novogroder reviewed its prior correspondence with Hartford and determined that Hartford had agreed to give the Depreciation Holdback to Novogroder when the repairs were made, regardless of any time limit. In reply, Hartford conceded that it had agreed to waive the 180-day time limit that it had included in its instructions on how to file a supplemental claim, but Hartford denied that it had ever waived the two-year limit in Novogroder’s insurance policy. Hartford therefore refused to give Novogroder money for the Depreciation Holdback. Novogroder donated the building to the church on August 23, 2010, without making any repairs, and took a deduction for tax purposes.

Novogroder sued. Hartford moved for summary judgment, and the district court granted Hartford’s motion. The district court ruled that Novogroder would be unable to establish that Hartford had waived the two-year limit, and even if it could, Novogroder had failed to make any repairs that could be reimbursed by the Depreciation Holdback.

Discussion

Hartford has already paid Novogroder $1,116,082.16 for the Actual Cash Value of the damage to the Danville building. Novogroder now seeks to recover the Depreciation Holdback, but it has not “actually repaired, rebuilt or replaced” the damaged building. Indeed, Novogroder is no longer able to repair the building because it has already donated the building to a local church.

Property insurance is not insurance on the property itself, but rather on the interest of the person insured. Insurance coverage does not run with the property when transferred. Because Novogroder has not, and cannot, repair the building, Novogroder has no repair costs that Hartford could reimburse through the Depreciation Holdback.

Regardless of whether Hartford waived the two-year time limit or is estopped from relying on it, Novogroder still never made any repairs that could be reimbursed by the Depreciation Holdback. Accordingly, Novogroder’s suit fails.

Conclusion

Novogroder’s insurance contract unambiguously required it to make repairs to the damaged building before collecting funds from the Depreciation Holdback. Novogroder never made any repairs, and it lost the ability to do so when it donated the building to a local church.

ZALMA OPINION

This case covers two important issues:

First, the insured must actually repair or replace the property before an insured can collect the difference between replacement cost and actual cash value.

Second, insurance is a contract of personal indemnity and does not insure property or follow the ownership of the property.

The insured in this case attempted to profit from an insurance policy and tried to avoid the conditions of the policy.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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