Electing to Settle on an Actual Cash Value Basis

Replacement Cost Coverage (coverage for the full cost of repairing and/or replacing damaged property without deduction for depreciation) is an important part of any association’s insurance policy. Whether it is the building or the personal property contained therein, most associations are required, by law or pursuant to the condominium documents, to obtain Replacement Cost Coverage for damages that may occur.

The one caveat to Replacement Cost Coverage is, however, that the cost to repair and/or replace the damaged property is not typically owed until the costs are incurred or the work is completed. This means that, under some circumstances, associations would be left with no choice but to fund the repairs themselves and seek reimbursement from the carrier later.

Realizing that this would be inequitable, not to mention next to impossible for many policyholders, most policies allow the policyholder to settle their claim on an Actual Cash Value basis (the full cost of repairing and/or replacing damaged property with deduction for depreciation). Unlike Replacement Cost amounts, the Actual Cash Value of damaged property is generally due immediately regardless of whether the work has been, or ever is, completed.

Electing to settle the loss on an Actual Cash Value basis does not preclude a policyholder from ever recovering the Replacement Cost Value. Most policies provide that even if the policyholder elects to have the claim settled on an Actual Cash Value basis, it can still recover the withheld depreciation at a later time, after the work has been completed. To do so, however, the policyholder must notify the carrier of its intent to do so.

While these provisions have been contained in policies for many years, there was little litigation about them until recently when a handful of insurers began attempting to avoid payment by claiming that policyholders had not elected to make an Actual Cash Value claim or had not notified the carrier of an intent to make a Replacement Cost Value claim within the time frame prescribed by the policy (typically 180 days from the date of loss). To avoid any of these arguments one should confirm in writing that the claim is being made on an Actual Cash Value basis for items not repaired or replaced, and that after the work is completed the insured intends to make a claim for any depreciation withheld.

Florida Court Limits Condo Association's Claim to Actual Cash Value Since It Had Not Completed Repairs

When condominium associations suffer millions of dollars worth of catastrophic damage from a natural disaster, most associations will need to rely on insurance proceeds to start and complete repairs. Indeed, that is why they purchased insurance in the first place. Unfortunately for condominium associations in Florida without millions of dollars in reserves, recent legal opinions may not help when it comes time to make those repairs.

Last fall, Chip Merlin and I wrote about an unpublished decision from the Eleventh Circuit Court of Appeals that limited a condominium association’s recovery to actual cash value (ACV) instead of replacement cost value (RCV) when it had not completed repairs to its property after Hurricane Wilma. In Prevention of Performance with Replacement Cost Value, I discussed the case of Buckley Towers Condo., Inc. v. QBE Ins. Corp., 395 F. Appx. 659 (11th Cir. 2010), and how the Court held that an insurance company’s delay or refusal to pay benefits did not alleviate the association’s duty to spend almost $19 million to repair its property before it was entitled to replacement cost benefits under the policy. In QBE Insurance Case Rewrites Replacement Cost Adjustment, Chip continued that discussion, noting

The practical impact of such legal reasoning is that insurers, absent consumer protection statutes requiring payment of replacement costs, can now underpay losses and get away with it. If this unpublished [opinion] is followed, federal courts will not award the full amount of replacement cost benefits until the insured actually does the work. This seems like a pretty illogical result from the policyholders view, as a replacement cost policy should pay for replacement of the property to a new condition. Where an insurer underpays a loss and refuses to acknowledge a proper amount of value for replacement, how are policyholders supposed to do the replacement?

Unfortunately for consumers -- especially condominium associations, last week, Florida’s Fourth District Court of Appeal expressly followed the logic and reasoning of Buckley Towers in Florida Ins. Guar. Ass’n. v. Somerset Homeowners Ass’n, Inc., 4D10-4157, 2011 WL 6373028 (Fla. 4th DCA Dec. 21, 2011). In Somerset, an appraisal panel entered an appraisal award in the amount of $12,581,471.43 for RCV and $11,630,208.55 for ACV. When the insurer failed to pay either ACV or RCV, the association sought confirmation of the award and a judgment was entered for the RCV award. The insurer appealed on several grounds, but the appellate court reversed only on the basis that the judgment was limited to ACV. The decision was based on policy language that required the association to actually perform repairs as soon as reasonably possible after the loss before it would be entitled to replacement cost benefits.

While this decision is ultimately anti-consumer, there is some good news because the appellate court rejected several of the insurer’s arguments, including those that the insurer was entitled to discovery regarding the appraisal, that the award should have been vacated, that “matching” was legally inapplicable, that an award of impact windows was improper, that the appraiser for the association made improper submissions to the umpire, that the appraisal award included items not previously adjusted, and that the insurer was entitled to challenge coverage. Also, this decision does not prevent recovery of the difference between ACV and RCV from being recovered once the repairs are completed, and does not address homeowner’s policies or Florida Statute § 627.7011 that legislates replacement cost coverage for homeowners.

Are Insurers Miscalculating Actual Cash Value Amounts?

Most basic commercial insurance policies, including association master policies, provide coverage for the actual cash value of damages sustained as a result of a covered loss. Actual Cash Value is generally the amount it would actually cost to repair or replace the damaged property, minus depreciation.

Actual cash value policies, however, are usually insufficient to put an association back in its pre-loss condition because of the deductions for depreciation. Best practices mandates that associations purchase replacement cost coverage to ensure that they are entitled to enough money to actually make the repairs necessary. Replacement cost is calculated as the amount it would take to repair or replace the damaged property with new property of like value and quality.

In the course of a normal replacement cost claim, insurers will sometimes pay the actual cash value of the damages and then tender the recoverable depreciation once the costs are incurred or the work is completed. Accordingly, it is often becomes necessary to determine the actual cash value even if the policy provides for replacement cost coverage.

Recently, it has become apparent that many commercial insurers may have been miscalculating the actual cash value of damages, and this may have resulted in payments for amounts less than what was actually owed.

Insurance policies usually provide the method of calculating actual cash value, and parties must look to the valuation section to determine the appropriate value of damages. The standard valuation provision in commercial policies reads, in part:


We will determine the value of Covered Property in the event of loss or damage as follows:

a. At actual cash value as of the time of loss or damage, except as provided in b., c., and d. below.

The policy expressly provides that actual cash value is determined as of the date of loss, not as of the date the estimate is written or the claim is submitted or re-opened. In many situations, this may seem trivial because price lists used in estimating do not generally change drastically from year to year. However, in some instances such as Hurricane Wilma claims, this could mean that the policyholder receives a lesser amount than is actually owed.

Consider the following example:

During a hurricane, an association’s roof is damaged. At that time, the price for replacement of the roof was $100,000.00.

After the storm, the association’s insurer determines that the roof is not significantly damaged and can be repaired for less than the deductible.

A year later, the association is continuing to suffer leaks despite the fact that the repairs suggested by the insurer have been performed. So the association asks for the claim to be re-opened.

After re-evaluating the roof, the insurer’s engineer agrees that the roof should have been replaced due to the storm and the insurer, using current price lists, estimates replacing the roof at $80,000.00.

Taking 20% depreciation, the insurer tenders a check to the association for the actual cash value of the roof in the amount of $64,000.00.

In the above situation, the amounts paid by the insurer for the actual cash value are incorrect because the express terms of the policy state that the actual cash value is calculated as of the time of the loss. Had the insurer calculated the actual cash value in accordance with the valuation provision, the amount owed would be the full $80,000.00 (representing 80% of the $100,000.00 it would have cost to replace the roof at the time of the storm).

Calculating the amount owed in accordance with the policy provisions is an important part of indemnifying an insured. Policyholders and professionals on both sides should read the policy carefully to determine whether amounts paid are sufficient and in accordance with the provisions of the policy.

Prevention of Performance with Replacement Cost Value

Last week, the 11th Circuit Court of Appeals issued its opinion in Buckley Towers Condo., Inc. v. QBE Insurance Corp., No. 09-13247, 2010 WL 3551609 (11th Cir. Sept. 14, 2010). The appeal and opinion dealt mostly with actual cash value (ACV) versus replacement cost value (RCV) damages, as well as law and ordinance damages and prejudgment interest. In a nutshell, actual cash value damages cover the cost of replacing the damaged property, minus depreciation, and replacement cost value damages cover the actual cost expended to replace the property, up to the policy limits. Michelle Claverol explained ACV and RCV calculations in much greater detail in her posts on the Property Insurance Coverage Law Blog titled, Understanding Replacement Cost Coverage: Valuation Issues in Florida, Part 5, and Replacement Cost Value Coverage After a Claim Denial: Florida Valuation Issues, Part 6.

Buckley Towers Condominiums filed suit against its insurer, QBE Insurance, after it appeared that QBE was not going to pay on the association’s insurance claim for the millions of dollars worth of damage Buckley Towers sustained from Hurricane Wilma in 2005. Despite a claim entered for millions of dollars in damages from Hurricane Wilma, the insurance company did not pay any benefits to the insured condominium association. Without any insurance benefits, the association found itself in a situation without money to make necessary repairs.

Under the insurance policy, the condominium association was required to actually make repairs before it would be entitled to replacement cost value damages. At the trial court level, the association’s attorneys successfully argued the doctrine of prevention of performance, essentially arguing that by not paying at least actual cash value on the claim, the insurance company prevented the condominium association from making repairs that would entitle the association to replacement cost value damages. The jury awarded Buckley Towers $11,395,665 in actual cash value (ACV) damages, $18,708,608 for replacement cost value (RCV) damages, as well as ordinance and law damages and prejudgment interest. The final award was $24,986,750.87.

Unfortunately for the insured condominium association, the 11th Circuit Court of Appeals did not agree that the doctrine of prevention of performance should be applied to replacement cost value provisions in insurance contracts when an insurer fails to pay at least actual cash value. The 11th Circuit recognized that it would have been costly, inconvenient, and most certainly a hardship for the association to pay for millions of dollars in repairs without the assistance of insurance benefits, but held that the hardship would not excuse the contractual requirement to actually repair the property before replacement cost value damages could be awarded. The appeals court reversed the trial court’s award for replacement cost value, but affirmed the trial court’s award for actual cash value damages, finding that they had been sufficiently proven.

This decision leaves many unanswered questions for policyholders. For starters, where is one who suffers a large loss supposed to get money to make repairs in order to get replacement cost value? Other issues are equally unsettling in the case, including the supposed election of remedies between ACV and RCV when making an insurance claim that the 11th Circuit discusses. A couple of important notes for policyholders are that this is a federal opinion, which is not binding on Florida state courts, and also that it is an opinion that was “Not Selected for publication in the Federal Reporter.” According to 11th Cir. R. 36-2, “Unpublished opinions are not considered binding precedent, but they may be cited as persuasive authority.”

Chip Merlin will be following up with more analysis of this opinion on the Property Insurance Coverage Law Blog on Wednesday.

Failing To Obtain Regular Appraisals Can Hurt Associations After A Large Loss

The second named storm of the year has crossed Florida, and it will only be a matter of time before another tropical system strikes the state. While there are many problems that an association can face after a loss, few are harsher than the effect of a coinsurance penalty that reduces the amount paid on an otherwise valid claim. Many policies, especially large commercial polices, contain coinsurance provisions. Unfortunately, many directors and managers do not understand what they mean or the effect that they can have.

Coinsurance provisions come in all shapes and sizes, but the most common are 80, 90, and 100% coinsurance provisions. These provisions are fairly easy to understand. Because an insured is supposed to carry enough insurance to replace the entire property after a loss, insurers will reduce the amount of coverage they provide if this is indeed not done. An 80% coinsurance provision means that an insured must have coverage for 80% or more of the replacement cost value at the time of the loss. Likewise, with a 100% coinsurance provision the insured must have coverage for 100% of the replacement cost value at the time of a loss.

If a property does not have enough insurance coverage to equal or exceed the coinsurance provision, the insurer may reduce the amount of recovery even if the cause and amount of the loss are undisputed. This is a harsh effect and may leave an association without the funds to properly repair the buildings.

There are two basic ways that an insurer will reduce payments under coinsurance provisions. First, an insurer may only pay the actual cash value of the damage instead of the replacement cost normally covered under the policy. While this may not seem too harsh for newer properties, failing to recover the depreciation can be a huge problem for older associations.

The second, and more common, coinsurance provision states that if the property is not insured to the required percentage, any loss can be prorated to the percentage of the insurance purchased. For example, if a policy had a 100% coinsurance provision, the building would need to be insured to 100% of its replacement cost value at the time of the loss. If only $100,000 worth of insurance was purchased but the Replacement Cost Value of the property was $200,000, the insurer would only be liable for 50% of the loss.

Thus, if there was a policy limits loss of $100,000 dollars in the above scenario, the insurance company would only be required to pay $50,000 because the property was only insured to 50% of its replacement cost value.

Many associations carry high coinsurance provisions for a number of reasons. Higher coinsurance provisions reduce premiums, which is enticing to many associations looking to save money in tough financial times. Also, many associations cannot imagine a total loss and believe that there is no need to fully insure the property. Others may not even know that the provision is in their policy. No matter what the reason, associations should always check the amount of the coinsurance provision and ensure that they are adequately covered.

If the association policy includes a coinsurance provision, it should be between 80 and 90%. Having a 100% coinsurance penalty is almost never recommended. Also, no matter what your coinsurance provision says, an association should make a habit of having professional appraisals performed on a regular basis. Having a qualified and unbiased third party determine the replacement cost of the property every few years will ensure there is adequate insurance on the property.