I recently learned that Tennessee Farmers Mutual Insurance Company (Farm Bureau) has changed the way it will pay roof claims. Specifically, a recent endorsement changes roof coverage to actual cash value for roofing materials instead of replacement cost. This means that roof materials will be depreciated in the event of a roof claim. For example, if hail damages a roof that is 10 years old, the replacement cost would be depreciated to account for the age of the roof. The depreciation rate will vary depending on the age and condition of the roof, but could be as high as 75%, which will impact consumers' ability to replace their roofs after a catastrophe. This is obviously a huge deal for Tennessee consumers, particularly in light of the wind and hail storm events that has become common in our state.
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 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.
This is one of those topics that comes up regularly. Does an insurer have to pay general contractors' overhead and profit charges? The short answer is "Yes" but there are some exceptions. According to a 2005 Sixth Circuit Court of Appeals case (interpreting Tennessee law), the costs of a contractor (overhead and profit) are recoverable if the the insured would reasonably be expected to hire a contractor to repair its property. See Parkway Assoc., LLC v. Harleysville Mut. Ins. Co., 129 Fed. Appx. 955 (6th Cir. 2005).
Several nationwide class actions have been filed over the past few years concerning insurance companies' refusal to pay profit and overhead. Despite such class actions and the clear statement of the law by the Sixth Circuit, I still hear about this occurring from time to time. If an insurance company tries to tell you its not going to pay overhead and profit, stand up for yourself and point out this case to the adjuster. Somehow I doubt it will be the first time he or she has heard of it.