Cost of Matching Not Included in Actual Cash Value Payment

The U.S. Court of Appeals for the Third Circuit recently issued an unpublished opinion in Pellegrino v State Farm Fire and Cas. Co., 2014 WL 2446063 (June 2, 2014), addressing whether an insured is entitled to payment for matching materials as part of the actual cash value payment.  Applying Pennsylvania law, the Third Circuit held that the insurance company was not obligated to include the matching costs in the actual cash value payment.  It agreed with the federal district court opinion, which found that permitting the insured to recover matching costs as part of the actual cash value payment may result in a windfall to the insured.

The insured residence sustained storm damage, including damage to small portions of the roof and three faces of siding.  The loss settlement provision in the insurance policy provided that the insurance company would pay the “actual cash value … of the damaged part of the property” and, once repair or replacement is complete, the amount actually and necessarily spent to repair or replace “the damaged part of the property.”  Following the loss, the insurance company prepared an estimate that calculated the actual cash value of the damage.  The estimate included the cost to repair the damaged portions of the roof, but did not provide for complete replacement.

After receiving the estimate, the insureds chose not to complete the repairs and seek reimbursement from the insurance company.  Instead, they filed suit seeking a declaration that he insurance company was obligated to pay them the cost of a full roof and siding replacement as part of the actual cash value payment, regardless of whether the repairs were made or not.  The insureds’ complaint alleged that the insurance company determined it was contractually required to replace the entire roof and siding because a repair could not be completed with “matching” materials.  Despite that, the insureds claimed that the insurance company impermissibly deducted the cost of a full replacement from the actual cash value payment.

The insurance company moved to dismiss the complaint.  The trial court granted the motion to dismiss.  It held that “there is no duty upon the [insurance company], either within the contract or derived from Pennsylvania law, to provide its insureds with matching costs on an actual cash value basis prior to replacement.”  The insureds appealed.

The Third Circuit panel upheld the district court’s dismissal.  It also concluded that neither Pennsylvania law nor the insurance contract obligated the insurance company to pay matching costs as part of the actual cash value payment.  The court found that because the insurance company agreed to pay the for the repairs upon execution of a contract that they be completed, there was no risk that the insureds would be burdened with paying the full replacement cost up front.  Finally, the court agreed with the district court that allowing the insureds to recover the cost of replacing they entire roof and siding when they had no intention of completing the repairs would result in a “windfall” and produce “absurd results.”

The attorneys at Maloney Lauersdorf Reiner frequently represent clients in property insurance coverage litigation, including dealing with issues of matching.  Please contact us with any questions about this case or any other matter you see on the Insurance Coverage Blog.

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