No Coverage for Replacement Cost Until Damage Property Actually Replaced

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Appellate Court Refuses to Rewrite Policy Terms to Assist the Plaintiff

When a Plaintiff claimed that it was entitled to replacement cost benefits under an insurance policy issued by defendant, based on damage to plaintiff’s warehouse from a storm. Defendant paid plaintiff a total of $165,952.85 under the policy, based on the actual cash value (ACV) for damage to HVAC systems on the warehouse roof and for damage to a portion of the surface of the western section of the roof. Plaintiff asserts that its roof suffered additional damage from the storm, and it seeks benefits for all damage based on a total replacement cost (RC) of $1,472,727.74. Defendant argues that plaintiff is not entitled to replacement cost benefits under the policy, and that benefits for covered losses are limited to ACV.

In KAW Drive, LLC v. Secura Insurance, A Mutual Company, Case No. 19-2238-JWL, United States District Court For The District Of Kansas (October 15, 2020) the USDC, applying Kansas law, found that unambiguous contracts are enforced according to their plain, general, and common meaning in order to ensure the intentions of the parties are enforced.

FACTS ABOUT ACTUAL REPAIR OR REPLACEMENT

Defendant first argued that plaintiff may not recover RC benefits under the policy for any damaged property that plaintiff has not already repaired or replaced, and on that basis it seeks summary judgment on any such claim. Plaintiff’s policy included optional Replacement Cost coverage. It provided, in part, that: “We will not pay on a replacement cost basis for any loss or damage: (1) Until the lost or damaged property is actually repaired or replaced; and (2) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.”

This provision states unequivocally that defendant is not required to pay benefits based on replacement cost until the property is actually repaired or replaced. Based on this provision, defendant argued that if plaintiff had not already effected a repair or replacement for specific damage, plaintiff may recover only ACV benefits for such damage. As defendant notes, courts have enforced nearly-identical provisions under Kanas law as unambiguously requiring actual repair or replacement before RC benefits may be recovered.

ANALYSIS

Plaintiff’s primary argument is that its obligation to repair or replace is excused by a prior breach of the policy by defendant, namely defendant’s failure to pay initially a proper amount of ACV benefits. Plaintiff argued that a proper ACV payment is the trigger for the RC condition requiring actual repair or replacement by plaintiff.

The policy clearly conditions RC benefits on plaintiff’s actual repair or replacement of the damaged property. Without any additional qualification that the condition applies only if defendant first pays ACV benefits.  Under plaintiff’s interpretation, if the insurer were to dispute that there was a covered loss, and therefore does not pay any benefits (on an ACV or RC basis), then the actual-repair condition for RC benefits would be effectively written out of the policy for such a situation. A court does not have the authority to, and should never, rewrite a contract voluntarily entered into by the parties.

Plaintiff has not shown that its allegation that the failure of the actual-repair condition may be excused by defendant’s “prior material breach” in failing to pay ACV benefits initially. With respect to the claimed damage for which defendant did not pay ACV benefits to plaintiff, defendant effectively denied the claim entirely.

Plaintiff has provided no authority to support the argument that such a breach negates the condition for payment of RC benefits. Plaintiff effectively seeks to rewrite or add a qualification to a condition for an optional coverage benefit. The language of the policy governs. The policy in this case does not qualify the actual-repair condition based on whether defendant has first paid ACV benefits to plaintiff for claimed damages.

A party who fails to satisfy a condition precedent may avoid the consequences of his failure if it is caused by the conduct of the other party to the agreement. However, the burden is on the party seeking to take advantage of the doctrine to prove its application.

Plaintiff has not been prevented from effecting repairs (it could use other funds); rather, defendant merely seeks to enforce the policy, which requires that repairs be completed first.

Accordingly, the Court enforced the clear language of the policy, which does not allow plaintiff to recover RC benefits for damaged property that it has not already repaired or replaced. Defendant is therefore granted summary judgment to that effect.

Defendant has not shown that plaintiff elected to recover ACV benefits in this case; thus, defendant has not shown that the 180-day-notice requirement was triggered in this case. Accordingly, defendant is not entitled to summary judgment on the basis of a failure to give such notice.

The motion was granted with respect to plaintiff’s claims for replacement cost benefits for damaged property that plaintiff has not actually repaired or replaced, and defendant was awarded judgment on any such claim. The motion was otherwise denied.

ZALMA OPINION

Clear and unambiguous conditions must be fulfilled to recover the promised benefits. Failure to do so, in this case fully repair or replace, defeats the claim for RC. Other issues, like delay in payments, remain to allow the plaintiff to continue its suit for breach of contract and bad faith. Conditions are placed in contracts to protect the parties from abusing the rights of the other. By trying to have a court rewrite the policy the insured in this case was acting to deprive the insurer of the benefits of the contract promised at the time of the creation of the contract of an insurance. In so doing it violated the covenant of good faith and fair dealing.

 


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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