Standard property insurance policies allow insureds to collect the actual value of their damaged or lost property. Insureds may often secure
Standard property insurance policies allow insureds to collect the actual value of their damaged or lost property. Insureds may often secure additional protection through a replacement cost endorsement which provides increased coverage for the expense of replacing the property. Replacement cost coverage was designed to remedy the shortfall which often occurs when a property insurance policy only provides compensation for actual cash value (“ACV”). That is, while a policy compensating an insured for the ACV of damaged or lost property requires the insured to bear the burden of the additional cost of repairing or replacing their property, replacement cost coverage allows recovery for the actual value of the property at the time of loss without a deduction for depreciation. However, while replacement cost coverage is designed to place the insured in his or her pre-loss condition, it often results in a windfall for the insured, placing him or her in a more favorable position than previously.
In an attempt to somewhat alleviate this dilemma, many policies provide that initially the insurer is only required to pay ACV, and is only obligated to pay the remainder of the full replacement cost after the insured completes actual repair or replacement within a certain reasonable period of time. However, in many cases, insureds have argued that they should be excused from this condition, and thus, should be compensated for the amount withheld for depreciation. Despite the seemingly logical policy behind such provisions, a few courts around the country have relied on the doctrine of prevention of performance, or similar reasoning, to reject this precondition and allow insureds to collect replacement costs without having first repaired or replaced their property. See e.g., D & S Realty, Inc. v. Markel Ins. Co., 284 Neb. 1, 816 N.W.2d 1 (2012) (holding that an insured’s wrongful denial of liability can prevent the performance of a repair or replacement condition and excuse the insured from performing the same prior to recovery); Vantage View, Ins. v. QBE Ins. Corp., 2011 WL 536546 (Mar. 3, 2009 S.D.Fla.)(holding that by withholding all funds under the policy when it had the duty to do so, the insurer “frustrated [the insured’s] efforts to make any repairs and prevented [the insured’s] compliance with the replacement cost provision.”).
In Georgia, however, courts have historically upheld replacement cost provisions. For example, in BSF, Inc. v. Cason, the Georgia Court of Appeals held that a replacement condition in a homeowners policy was not waived by the insurer’s action in denying the insured’s claim prior to litigation. 175 Ga. App. 271, 333 S.E.2d 154 (1985). In BSF, the insured argued that he was not required to actually replace his home before recovering replacement costs, as the insurer waived the requirement of actual replacement when it denied his claim for coverage. The insured relied on a handful of cases which stated that a denial of coverage waives policy conditions requiring an insured to submit a proof of loss before receiving proceeds. The court disagreed with the insured’s broad analogy and held that denial of coverage does not waive conditions requiring the insured to replace or repair property before receiving complete replacement costs.
Again, in Marchman v. Grange Mut. Ins. Co., the Court of Appeals strictly applied the terms of a replacement cost provision. 232 Ga. App. 481, 500 S.E.2d 659 (1998). There, the insured received ACV for the loss of his home, but argued that he was also entitled to replacement costs based on a rider attached to his policy. The rider provided that the insurer “will pay only an amount equal to the actual cash value of [the insured’s] damaged property until the actual repair or replacement is complete.” The insured argued that since most of the ACV he received went to his mortgagee, and he was unable to secure a loan for rebuilding the dwelling, the actual replacement requirement should be waived because it was impossible for him to comply. The court disagreed, reasoning that the language of the rider was plain and unambiguous, and as such, required no judicial construction. Further, the court noted that the insured could not claim financial inability as his reason for noncompliance since he admitted to abandoning his pursuit of financing to rebuild after being denied by only one bank. With this, the court seemed to hint at the possibility for an insured to recover replacement costs without first repairing or replacing property if he or she demonstrates impossibility despite great good-faith diligence.
While BSF and Marchman are the only Georgia cases that have evaluated whether an insured may recover replacement costs without first satisfying a policy’s replace or repair condition, case law from other jurisdictions, including a recent case from the Eleventh Circuit, Buckley Towers Condo., Inc. v. QBE Ins. Corp., 395 Fed. Appx. 659 (11th Cir. 2010), supports the decision to uphold such provisions.
In Hilley v Allstate Ins. Co., 562 So 2d 184 (Ala. 1990), the Alabama Supreme Court held that a mere intention to replace damaged or destroyed property did not trigger the insurer’s replacement cost payment obligation. Like the insureds in Marchman, the Hilleys recovered the actual cost for their home, but most of the proceeds went to their mortgage. The Hilleys attempted to obtain loans from an array of financial institutions without success and even attempted to have the insurer guarantee the additional money to a construction company that agreed to rebuild the structure. In the court’s opinion, however, these seemingly diligent attempts were insufficient to “overcome the clear and unambiguous terms of [the] policy that precluded any replacement cost payment prior to the completion of rebuilding.”
Similarly, in Buckley Towers, applying Florida law, the Eleventh Circuit Court of Appeals reversed a lower court’s award of replacement costs because the insured failed to repair its condominium buildings as required by the insurance policy. The insured, Buckley Towers, submitted a Sworn Proof of Loss after its pair of condominium buildings were damaged by Hurricane Wilma. The claim consisted of a form that contained information applicable to both replacement cost value (“RCV”) and ACV damages. The insurer never paid nor fully rejected the claim, construing it as a demand for replacement costs which under the policy were not due until repairs were complete. Buckley Towers sued its insurer and after trial, was awarded both ACV and RCV damages. The lower court reasoned that the insurer’s denial of the claim made it impossible to repair or replace the property and thus, prevented the insured from complying with the policy’s condition. The Eleventh Circuit reversed the district court’s award of replacement costs without actual replacement, reasoning that such a result would impermissibly rewrite the policy and where a policy provision “is clear and unambiguous, it should be enforced according to its terms.”
A few recent cases have expressly adopted the Eleventh Circuit’s reasoning in Buckley Towers, further supporting the court’s decision. In Fla. Ins. Guar. Ass’n v. Somerset Homeowners Ass’n, Inc., expressly adopting the holding in Buckley Towers, the court declined to excuse an insured from repairing its property before receiving RCV, reasoning that application of the prevention of performance doctrine would impermissibly rewrite the policy. 83 So. 3d 850 (Fla. 4th DCA 2011). Again, in Oriole Gardens Condo. Ass’n I v. Aspen Specialty Ins. Co., the court relied on the holding in Buckley Towers to reject a prevention of performance argument and held that an insured was not entitled to RCV because it had failed to satisfy its policy’s preconditions for obtaining replacement cost coverage. 875 F. Supp. 2d 1379, 23 Fla. L. Weekly Fed. D 229 (2012).
Though not binding on Georgia courts, the reasoning and holdings in the above cited cases demonstrate continued support for the strict application of replacement cost loss settlement conditions in property insurance policies. The Eleventh Circuit’s decision in Buckley Towers as well as the Alabama Supreme Court’s decision in Hilley suggest that Georgia courts will continue to enforce replacement cost provisions, thereby denying insureds the windfall of collecting replacement costs without having first replaced or repaired their property.