Replacement Cost Value and the Insured’s Duty to Repair

Commercial property policies provide two methods for recovery.  The first method, actual cash value, permits an insured to immediately recover the value of the damaged property less the amount of depreciation.  This amount is often insufficient to provide the insured with enough money to repair or replace the damaged property.  Therefore, the insured can elect to repair the damage and make a claim for the difference between the actual cash value and the amount it cost to replace the property assuming that the insured advises the insurer in a timely manner.  The second method is known as replacement cost, under which the insured can recover the cost to repair or replace the property with property of comparable quality.  Additionally, the repairs must be made as soon as reasonably possible.  However, in a recent decision from the California Court of Appeal, the court held that the failure to repair or replace the property “as soon as reasonably possible” did not preclude reimbursement for replacement cost where the insurer never accepted coverage for the loss.

In Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co. (November 24, 2014) 2014 Cal. App. LEXIS 1073, the Court of Appeal concluded that the trial court should have entered a conditional judgment for the insured in the amount of the replacement cost even though repairs had not been performed.  In so holding, the court reasoned that after the insurer denied coverage, the insured no longer had an obligation to immediately repair the property in order to recover replacement cost because the insurer’s decision materially hindered the insured from repairing the damage.

Stephens & Stephens XII, LLC (Stephens) the owner of a distribution center, purchased a commercial property policy from Fireman’s Fund Insurance Company (Fireman’s Fund).  Almost immediately following the inception date of the policy, Stephens made a claim seeking coverage in connection with a burglary during which all conductive material was stripped and removed from the building, the walls were damaged, fire protection equipment was rendered inoperable and all electrical components were taken.  Fireman’s Fund was concerned that the burglary was too extensive to have occurred in the three days following the inception of the policy and when the claim was made.  Over the course of the next three years, Fireman’s Fund and Stephens entered into various discussions regarding reimbursement for the damages.  Stephens sought replacement cost even though it had taken no steps to make the repairs.  At no time, did Stephens seek actual cash value.  Fireman’s Fund never accepted coverage for the loss and five years after the incident, Fireman’s Fund denied coverage on the grounds that Stephens had concealed and misrepresented material information during the insurance investigation.  Stephens brought suit against Fireman’s Fund for bad faith and breach of contract.

At trial, Stephens sought only the replacement cost and expressly disclaimed any intent to seek recovery for actual cash value.  The jury found that Fireman’s Fund failed to make payments required by the policy thereby preventing Stephens from repairing the damage to the property.  Despite not having repaired the property, the jury found that Stephens performed its duties under the policy and awarded damages for replacement cost at $2,100,293.  The court, however, entered judgment notwithstanding the verdict on behalf of Fireman’s Fund, holding that Stephens was required to complete the repairs before it was entitled to receive replacement cost.

The Court of Appeal reversed, holding that Stephens was excused from complying with the repair requirement because the insurer’s refusal to accept coverage prevented Stephens from repairing the damage.  In so holding, the court reasoned that when an insurer’s decision to decline coverage materially hinders an insured from repairing damaged property, procedural obstacles to obtaining the replacement-cost value should be excused.  Therefore, the policy’s requirement that damage be repaired as soon as possible was excused.  Thus, Stephens was entitled to a judgment for replacement costs consistent with the repair requirement if it completed the repair as soon as reasonably possible after the judgment became final.

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