Fourth DCA Clarifies Rule For Replacement Cost Insurance

The Fourth DCA issued its decision in Prepared Insurance Company v. David Gal, No. 4D15-1909.

Judge Spencer Levine, writing for a unanimous appellate panel, rejected the policyholder’s claim for general contractor fees under a replacement cost insurance policy.

David Gal, the policyholder, submitted a claim for water damage to his custom-built kitchen cabinets. The adjuster estimated his loss at $8,653.47, without general contractor fees. A cabinet expert hired by the insurer estimated the cost of restoration at $2,585 and the cost of replacement at $19,065; either way, he also did not include general contractor fees, explaining that a general contractor might not be necessary and that he personally had worked on similar projects involving plumbers and electricians without one.

The insurer issued a check to the policyholder for $6,153.47 ($8,653.47 less the $2,500 deductible). The policyholder sued for the full $19,065 replacement plus general contractor’s overhead and profit.

The Fourth District Court of Appeal ruled against the policyholder.

First, the Court clarified that replacement cost insurance allows the insurer either to replace or repair damaged items.

We write first to address the trial court’s interpretation of “replacement cost policy.” The trial court concluded that “replacement cost” meant that the insurer had to replace, rather than repair, the cabinets. We reverse as the trial court incorrectly interpreted what a “replacement cost policy” is.

Replacement cost insurance is designed to cover the difference between what property is actually worth and what it would cost to rebuild or repair that property.” A “replacement cost policy” is a policy where the insurer agrees to compensate for a loss without taking into account depreciation. Such a policy does not prohibit repairing the damaged property. In fact, both the governing statute as well as the parties’ insurance policy expressly provide that an insurer may limit its liability to the “reasonable and necessary cost to repair the damaged, destroyed, or stolen covered property.” Thus, we conclude that a replacement cost policy does not mandate that the insurer replace the damaged property.

(Emphasis in original; citations omitted).

The court also clarified that a general contractor’s overhead and profit are not covered under a replacement cost insurance policy unless hiring a general contractor is “reasonable and necessary” to the repair, which is a question of fact for a jury.

As claims from Hurricane Matthew enter the adjusting pipeline, policyholders in Broward and Palm Beach should be prepared to establish both the reasonableness and necessity of hiring a general contractor to repair storm damage. If you have any questions about insurance coverage issues, The Simring Law Group can help. Contact us