An Insured Need Not Rebuild at the Same Premises in Order to Recover Replacement Cost
Parks' recent post about whether an insured has to rebuild at the same location in order to recover replacement cost got me thinking, and then researching. Here's what I found:
Although none in Tennessee, there are a dozen or so cases across the country dealing with the issue of whether an insured has to rebuild at the same location in order to recover replacement cost. For example, in Hess v. N. Pac. Ins. Co., 859 P.2d 586 (Wash. 1993), the Supreme Court of Washington held that insureds are entitled to replace at an alternate location, but that the reimbursement amount is limited to the amount it would have cost to rebuild at the original location. Specifically, the court stated,
"This particular limitation does not require repair or replacement of an identical building on the same premises, but places that rebuilding amount as one of the measures of damage to apply in calculating liability under the replacement cost coverage. The effect of this limitation comes into play when the insured desires to rebuild either a different structure or on different premises. In those instances, the company's liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds."
Several other courts have rendered similar decisions. See, e.g., Kumar v. Travelers Ins. Co., 211 A.D.2d 128 (N.Y. 1995) (holding that insurance provision offering to pay full cost to repair or replace damaged dwelling on the same premises merely established the limits of coverage and that replacement cost is limited to what it would cost to replace the damaged structure on the same premises, however, the insured is not required to replace the damaged dwelling on the same premises in order to recover replacement cost); Conway v. Farmers Home Mut. Ins. Co. , 26 Cal. App.4th 1185 (Cal. App. 1994 (“[W]hen the insured desires to rebuild either a different structure or on different premises . . . the company’s liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises); S and S Tobacco and Candy Co., Inc. v. Greater New York Mutual Ins. Co., 617 A.2d 1388 (Conn. 1992) (holding that construction of replacement structure at different location constituted replacement under the policy).
So as much I hate to say it, Parks seems to have a lot of folks with "Judge" in front of their names who agree with him. And so I guess I agree as well.
Hope everyone had a great Thanksgiving!
In Order to Invoke Replacement Cost Coverage, Does An Insured Have to Rebuild at the Same Location?
In most cases, the answer is no. Most policies use replacement cost at a specific location as a measure of the maximum recovery that can be afforded under a property insurance policy. Most policies contain a “Valuation” condition similar to the following:
B. Replacement Cost – When replacement cost is shown on the “declarations” for covered property, the value of covered property will be based on the replacement cost without any deduction for depreciation.
The replacement cost is limited to the cost of repair or replacement with similar materials on the same site and used for the same purpose. The payment shall not exceed the amount “you” spend to repair or replace the damaged or destroyed property.
Replacement cost valuation does not apply until the damaged or destroyed property is repaired or replaced. “You” may make a claim for actual cash value before repair or replacement takes place, and later for the replacement cost if “you” notify “us” of “your” intent within 180 days after the loss.
Typically, absent any other endorsement or provision, this policy language simply limits the amount of replacement cost coverage that is available to the cost of repairing or rebuilding on the same site, with like kind and quality. Therefore, if an insured wants to move to a different location, and spends more than the actual cash value payment made by the insurance company, that insured could possibly be entitled to replacement cost coverage, even though not rebuilding at the same location.
However, it is important to recognize that the “same site” (some policies use the phrase “same location”) requirement will be a cap upon the amount of replacement costs. Let’s assume that the property insured is in Hickman County, Tennessee (a fairly rural area). It is a 2000 sq. ft. brick home with all amenities. The replacement cost of that home, for the sake of argument, would be $175,000.00. When a loss occurs, the policyholder decides that she wants to move to Williamson County, Tennessee (a more suburban area) and builds a home almost exactly like the one that existed in Hickman County. The price of this home was $380,000.00. The carrier previously paid an actual cash value amount (replacement cost less depreciation) of $125,000.00. What additional monies does the policyholder get upon completing the property in Williamson County?
The answer should be only $50,000.00 – the amount it would have taken to rebuild the house with material of like kind and quality at the same site or same location in Hickman County.
The Little Recognized Side Effect of the Broad Duty to Defend
As our first substantive liability blog, I want to talk about the duty to defend. Most attorneys recognize that the duty to defend is a broad duty – one broader than the duty to indemnify. But, the breadth of that duty has a side effect that some lawyers have not anticipated. If, after looking at the duty to defend, not a single allegation of the Complaint would raise a duty to defend, then by necessity, there cannot be a duty to indemnify. If the duty to defend is broader than the duty to indemnify, and analysis of the Complaint or claims against the insured show that there is no duty to defend, then there can never be a duty to indemnify.
In these cases, it is entirely appropriate for an insurer simply to disclaim coverage and, effectively, walk about from the claim or suit. There is no reason for the insurance carrier to remain involved if the duty to defend does not exist. I am often met with an objection when a defense is withdrawn of – “but you don’t know what will happen.” If the duty to defend does not exist, then what happens in that suit, where no duty to defend exists – is really a moot point. If the broad duty cannot exist, the specific duty of indemnity cannot exist.
Case law holds that this conclusion is based upon “logic and common sense,” and the cases hold that logic and common sense dictate that if there is no duty to defend, then there must be no duty to indemnify. See e.g. American States ins. Co. v. Bailey, 133 F. 3d 363 (5th Cir. 1998).
Tennessee courts have long noted it is not uncommon that an insurer will have a duty to defend based on the allegations in the complaint, yet have no subsequent duty to indemnify the insured. St. Paul Fire & Marine Ins. Co. v. Torpoco, 879 S.W.2d 831(Tenn. 1994). I point this “twist” out because it has come up in a couple of my recent cases, where my client is challenging both the duty to defend and the duty to indemnify.
THIRD-PARTY COVERAGE LITIGATION ISSUES NOW ADDRESSED ON BLOG
Although the focus of this blog was, and will remain, first-party insurance coverage litigation, many of our readers have asked if we are going to include third-party coverage litigation topics in the blog. While we initially wanted to remain “purists,” so to speak, demand is such that we will create a separate “Category” entitled “Third-Party Coverage Issues” and will start blogging on these when first-party coverage litigation issues get a little slow or as the need arises. Our focus will remain first-party coverage litigation, but hopefully these new topics will prove helpful and provoke continued discussion.
