Insurer Must Pay to Replace Damaged & Undamaged Part of Building to Make Insured Whole
First party property insurance is intended to provide sufficient funds to make an insured whole – that is enough to put the property back like it was before the loss using material of like kind and quality. Insurers and insureds often argue over the need to replace both damaged and undamaged portions of the property so that the replacements match in color, shape and quality the part not damaged or, if not possible, replace all.
In Windridge of Naperville Condominium Association v. Philadelphia Indemnity Insurance Company, No. 18-2103, United States Court of Appeals For the Seventh Circuit (August 7, 2019) the insurer refused to pay to match damage replacements with undamaged portions of the property.
A 2014 hail and wind storm damaged Windridge buildings that were insured by Philadelphia Indemnity. The storm physically damaged the aluminum siding on the buildings’ south and west sides. Philadelphia argued that it is required to replace the siding only on those sides. Windridge argued that replacement siding that matches the undamaged north and east elevations is no longer available, so Philadelphia must replace the siding on all four sides so that all of the siding matches.
The parties agreed that the storm directly damaged the siding only on the buildings’ south and west sides. Philadelphia Indemnity has already paid $2.1 million to Windridge for that damage. Windridge seeks additional money to replace the siding on the north and east sides because matching siding is no longer available for purchase. Windridge argues it is entitled under the policy to have the buildings repaired so that, as before the storm, the siding matches on all sides. Philadelphia Indemnity has refused to pay for these additional costs and argues that the policy requires payment only to replace siding that was directly hit and damaged by the hail and wind.
The Insurance Policy
Under the coverage provision, Philadelphia Indemnity must “pay for direct physical ‘loss’ to Covered Property caused by or resulting from any of the Covered Causes of Loss.” “Covered Property … means,” among other things, the “‘Buildings’ described in the Declarations.” “‘Buildings’ means buildings or structures.” “‘Loss’ means accidental loss or damage.”
Windridge brought this suit under diversity jurisdiction. The trial court assumed that no matching siding is available and answered the legal question: whether the policy requires Philadelphia Indemnity to replace or pay to replace the siding on all four elevations (to ensure matching) or only on the physically damaged elevations. The court determined that matching is required. The court concluded that “the only sensible result is to treat the damage as having occurred to the building’s siding as a whole.” If Philadelphia Indemnity were to only pay to replace the siding on the damaged south and west elevations with siding that did not match that on the undamaged north and east elevations, it could not possibly be said that Windridge had been made whole, for it would be left with a building suffering from a glaring and profound flaw.
The interpretation of an insurance policy is a matter of state law. Here, Illinois law controls. Although ‘creative possibilities’ may be suggested, only reasonable interpretations will be considered. [Hobbs v. Hartford Insurance Co. of the Midwest, 823 N.E.2d 561, 564 (Ill. 2005)] Further, “to ascertain the meaning of the policy’s language and the parties’ intent, the court must construe the policy as a whole and ‘take into account the type of insurance purchased, the nature of the risks involved, and the overall purpose of the contract.'” [Travelers Insurance Co. v. Eljer Manufacturing, Inc., 757 N.E.2d 481, 491 (Ill. 2001).]
Courts around the country have confronted similar so-called “matching” issues. Put simply, Philadelphia Indemnity is required to replace or pay to replace covered property that suffered a “direct physical loss”—i.e., property that has been damaged.
While Philadelphia Indemnity’s position that only the siding directly hit by the storm is covered is not indefensible and has some support in case law, the language of the policy is not so clear and in fact favors an interpretation that the unit of damaged property is the buildings as a whole—not solely each elevation or each panel of siding. The better construction and one certainly permitted by policy language that is ambiguous as applied to these facts, is that each building as a whole suffered direct physical loss as a result of the storm. The storm altered the appearance of the buildings such that they were damaged.
Condominium buildings with mismatched siding are not a post-storm outcome that the insured was required to accept under this replacement-cost policy. Windridge has not yet been made whole. It has not been returned to its pre-storm status.
Each building here suffered a direct physical loss, which was caused by or resulted from the hail and wind storm, and Philadelphia Indemnity therefore must pay to return the buildings to their pre-storm status—i.e., with matching siding on all sides. Windridge only asked for sufficient funds to be put back in the position it was in before the storm. Having mismatched siding on its buildings would not be the same position.
The Seventh Circuit, affirming the District Court, applied logic and legal analysis to what should have been a simple coverage issue. The policy promised to indemnify the insured and pay for the repair of damaged structures using material of like kind and quality. Different siding on two sides of a building are not a replacement of like kind and quality. Since the original siding is no longer available the insurer was required to pay for the replacement of all of the siding on both damaged and undamaged sides of the building. In California, the Fair Claims Settlement Practices Regulations requires: “When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance.” [California Code of Regulations § 2695.9]
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
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 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 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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