This is my last post on Judge Sharp’s recent decision in New Hampshire Ins. Co. v. Blackjack Cove, LLC (the opinion can be viewed here) – – unless Parks decides to pick a fight with me about the case. In this installment, I’m going to focus on a small section of the opinion involving replacement cost insurance. To briefly remind you of the facts, the insured property was a marina that was damaged during a tornado. As part of the claim, the insurance company sought summary judgment as to the marina owner’s claim “for the value [the marina] lost due to [the insurer’s] ‘failure to total docks’ at the marina.” Specifically, the marina owner made a claim for “the difference between the value of the property it should have had under the policy and the value of the property that it ended up with,” arguing that the policy provided that damaged property would be valued at replacement cost but it “was left with patched-up 40 year old docks rather than new docks.” This is where the train left the rails for the insured, with Judge Sharp agreeing that summary judgment was appropriate on the claim for replacement cost. Specifically, the court ruled:
The policy provides that [the insurer] will “determine the value of Covered Property in the event of loss or damage at replacement cost (without deduction for depreciation) as of the time of loss or damage.” The Court is hard-pressed to understand why [the insurer] was required to “total” the docks, and [the insured] points to no provision of the policy that supports its argument. Nor does [the insured] explain why the policy terms entitle it to “new docks” rather than “patched-up 40 year old docks” if those patches restore the docks’ total value to what it was when the docks were insured in 2009, i.e., “without deduction for depreciation.” As [the insured] has failed to point to evidence that demonstrates a triable material fact on this damages claim, the Court grants [the insurer] summary judgment on it.
Before I express my opinions about this conclusion, let me first say that the ruling on this issue was fairly sparse, I’ve not read the parties’ briefs, and I have no knowledge of the policy at issue except for that portion quoted by the court in the opinion. That being said, I believe that the policyholder was absolutely correct in its argument that it should not have been left with “patched-up 40 year old docks” when it had replacement cost insurance. Here’s why – – the whole concept of replacement cost insurance is different that traditional principles of indemnity, which would require that an insured be put back in pre-loss condition. Replacement cost insurance costs more because it gives more – – if you have a 40 year old dock that is destroyed by a covered peril, replacement cost insurance requires that the insurance company replace it with a new dock. Now that doesn’t mean that you always get a new dock for just any damage, but you certainly would in the case of a total loss. In the Blackjack Cove case, the court seemed to confuse the principles of replacement cost coverage with market value when it held that the insured failed “to explain why the policy terms entitle it to ‘new docks’ rather than ‘patched-up 40 year old docks’ if those patches restore the docks’ total value to what it was when the docks were insured in 2009, i.e.,’without deduction for depreciation.'” The problem with this phraseology is that the market value of the docks in 2009 is totally irrelevant to a determination of replacement cost value. Tennessee case law makes clear that replacement cost includes all costs associated with replacement of the damage. If damage can be repaired, then the proper query is what it costs to repair the damage – – market value is irrelevant to replacement cost coverage.
In conclusion, I suspect that the court was simply holding that it was not necessary to replace the damaged dock in its entirety and that the insured failed to demonstrate why the dock should be totaled. If that’s the case, then the issue before the court was really one of scope and not of the proper measure of valuation, causing the language concerning “the docks’ total value” to be mere dicta and not necessary to the ultimate holding.