Replacement Cost Value May Be Recoverable In Limited Circumstances Even When the Insured Does Not Rebuild

Policyholders purchase property insurance to ensure that their home or real estate investment is protected against accidents such as fires. Although property insurance coverage will usually be either actual cash value or replacement cost coverage, the standard type of coverage offered by most insurers is replacement cost coverage. Actual cash value is usually an undefined term in a policy, but is generally equal to the replacement costs minus any depreciation. It represents the dollar value that the policyholder could expect to receive if the property in the marketplace immediately prior to the accident.

In contrast, replacement cost coverage is usually defined in the policy as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation. Unlike actual cash value coverage, with replacement cost coverage the policyholder expects to avoid the risk of having incomplete coverage in exchange for higher premiums.

Typically with policies that offer replacement cost coverage, the contract will include a provision that the insurer will not pay more than actual cash value until the policyholder replaces the damaged property. A policyholder dispute may arise when it is impossible for the policyholder to replace their damaged property and the insurer denies full payment based on the replacement condition provided in the contract. The insurer may be estopped from relying on such contract language when the policyholder’s inability to replace the property is the result of the insurer’s actions.

Zaitchick v. American Motorists Ins. Co., 554 F. Supp. 209 (S.D.N.Y. 1982) is instructive on this issue.   In Zaitchick, the insured brought an action against the insurer to recover replacement cost value of their home after it was destroyed by a fire. The insurer refused to make any payments to the insurer under the policy due to alleged fraud and arson. After rejecting the insurer’s defenses of fraud and arson, the court then determined the proper measure for damages. The insurer argued that it was only liable for actual cash value of the destroyed home because the insurance contract required the insurer to replace the property before the insurer would pay replacement costs. The insured argued that they were prevented from rebuilding their home because the insurer had refused to pay them even actual cash value to enable them to begin repairs. The court agreed and concluded that the insurer’s conduct made it impossible for the insurer’s to fulfill the replacement condition excusing the insurer from the replacement condition.

Similarly, in a 2014 action brought on behalf of a client who lost her business in a fire, Trief & Olk was able to secure a jury verdict finding the insurance broker negligent in undervaluing her property and failing to procure adequate insurance coverage. On the eve of trial, the broker argued that we should be precluded from offering evidence of replacement cost damages because the only relevant measure of damages was actual cash value since our client had not replaced the property as required by the policy terms. Trief & Olk successfully argued that because our client was prevented from rebuilding as a result of the broker’s negligence he could not rely on the policy’s terms to limit damages to actual cash value and the jury was allowed to hear evidence concerning replacement cost damages.

In sum, under limited circumstances a policyholder may be able to recover replacement costs despite not fulfilling the replacement condition included in a policy when the conduct of the insurer or insurance broker prevented the insured from rebuilding.