Most replacement cost policies require the insurer to pay actual cash value (ACV) once that value has been determined. They also require the policyholder to actually repair or replace before the difference between ACV and the full cost to repair or replace (the replacement cost value or RCV) is due and owing. Most insureds do not have the wherewithal to complete repairs without the proceeds of their property insurance policy. Most policyholders are unable and unwilling to begin a substantial repair project without the ACV payment and an agreement by the insurer as to the amount of RCV and that the insurer will pay it when due.
It would seem to be common sense that if the insurer refuses to pay ACV, thereby preventing the policyholder from repairing, and forcing the policyholder to sue for breach of contract, that the policyholder would be able to cover the full RCV in the litigation even without completing repairs. Unfortunately, at least under Florida law, that common sense proposition may no longer be the case.
Buckley Towers Condo., Inc. v. QBE Ins. Corp.
In Buckley Towers Condo., Inc. v. QBE Ins. Corp., 2010 WL 3551609 (11th Cir.), Buckley Towers owned a pair of condominium buildings in Miami. QBE provided Buckley Towers with hurricane insurance. When Hurricane Wilma struck south Florida in October 2005, QBE did not pay the claim. Buckley Towers' original ACV claim was a little over $4.2 million, but QBE neither paid the claim, nor fully rejected it. Instead, QBE construed it to be a demand for RCV and, therefore, claimed nothing was due until repairs were complete.
Buckley Towers sued QBE in federal court seeking the entire RCV, claiming that QBE's failure to pay the ACV prevented it from completing repairs, thereby entitling it to payment of the full RCV. The jury awarded over $11 million in ACV and, based on the argument that QBE's failure to pay ACV prevented Buckley Towers from rebuilding, awarded almost $19 million for RCV. The jury also awarded $800,000 in law and ordinance damages, and the district court entered final judgment for just under $19.4 million.
QBE appealed to the Eleventh Circuit Court of Appeals, arguing that the trial court improperly applied the doctrine of prevention of performance. The Eleventh Circuit noted that, under Florida law, when one party to a contract prevents another from performing its obligations under the contract, the doctrine of prevention of performance bars the preventing party from availing itself of the other party's nonperformance. Nevertheless, the court agreed with QBE, effectively gutting the doctrine of prevention of performance.
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 would not relieve Buckley Towers of the obligation of repairing the building before being entitled to the full RCV. The court held that applying the doctrine of prevention of performance "would impermissibly rewrite the insurance contract on an equitable theory." The court ignored the fact that the doctrine of prevention of performance is, by its very nature, an equitable remedy, and completely ignored the fact that its holding allowed QBE to profit from its own breach of contract by avoiding some $8 million in damages simply by refusing to pay the ACV claim which even the Eleventh Circuit agreed was due and owing.
Other Court Rulings on the Issue
Other courts have refused to adopt the Eleventh Circuit's stringent and inequitable analysis. For example, in Rockford Mut. Ins. Co. v. Pirtle, 911 N.E.2d 60 (Ind. App. 2009), Pirtle bought an historic building and was renting it while restoring it. There was a fire, and Rockford at first offered $80,000 to settle the whole claim. This is was less than the amount of the mortgage and the cost to repair the building, which Pirtle's contractor estimated at over $230,000. Rockford then offered less than $70,000 as ACV. Pirtle rejected the offer and filed suit. Rockford then paid $86,000 in ACV and denied liability for RCV.
The court of appeals of Indiana cited Couch on Insurance for the proposition that even under replacement cost policies where actual repair or replacement must be completed before the RCV is owed, "compliance may be excused by the insurer's actions. The insurer's failure to advance the necessary funds to rebuild may have this effect." The court noted that the first time Rockford made an ACV offer to Pirtle was 6 months after the fire, at which point the property was about to be foreclosed and Pirtle could not even begin repairs. The court held that the trial court's jury instruction on prevention of performance was correct and applicable to this situation. The court rejected holdings from other courts that a policy must be strictly construed to require completion of repair or replacement before RCV is owed. The court stated:
We are convinced that equitable principles win the day in this situation; otherwise the repair or replacement endorsement paid for by Pirtle would be rendered illusory. Rockford had the ability to advance sums of money under that endorsement to assist in commencement of the rebuilding, and could have joined Pirtle in agreements entered into for repairs.
Because Rockford's failure to fulfill its obligations under the policy prevented Pirtle from repairing, the doctrine of prevention of performance excused Pirtle's obligation to repair or replace before full RCV was due.
Pennsylvania law is even stronger, finding that the requirement to repair before receiving full replacement cost can be an unconscionable provision. In Ferguson v. Lakeland Mut. Ins. Co., 408 Pa. Super. 332, 596 A.2d 883 (1991), lightening struck an organ inside Ferguson's mobile home. Lakeland Mutual disputed coverage and Ferguson sued. The jury awarded the full replacement cost. The court held that the requirement of repair and replacement was unconscionable because insurance policies are contracts of adhesion and the replacement provision unreasonably favors the insurer. Since Lakeland Mutual denied liability, the policyholder was faced "with the unsavory choice of either accepting the lower actual cash value of the organ or expending a large sum of money in replacement costs without a guarantee of reimbursement." The court noted that the policyholder could only have received the full RCV after paying everything and then suing on coverage.
The very purpose of property insurance is to provide cash for a policyholder to repair or replace damaged property. Most of the time, policyholders are not able to complete repairs without the benefits of the policy. If an insurer can take advantage of a policyholder's financial situation and, by virtue of breach of its obligation to pay ACV, prevent the policyholder from repairing damaged property, the insurer is able to unfairly benefit from its own breach of contract to avoid paying what it owes. The doctrine of prevention of performance is designed to overcome this inequitable result. For an appellate court to ignore this, as the Eleventh Circuit did, is to show a lack of appreciation for real-world issues and to encourage inequitable behavior by insurers.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.