Oregon Court Addresses Replacement Cost Requirements

On October 8, 2014, the Oregon Court of Appeals issued an opinion in Patton v. Mutual of Enumclaw Ins. Co., 266 Or App —, — P3d — (2014) (“Patton II”) addressing the period of time an insured has to repair or replace property that was damaged by fire.  This was the second time the court considered the Patton case.  In the first appeal, Patton v Mutual of Enumclaw Ins Co., 238 Or App 101, 242 P3d 624 (2010) (”Patton I”), the Court of Appeals reversed a verdict in favor of the insured and remanded the case for a new trial.  In Patton II, the court determined that the express terms of the policy at issue did not require the insured to complete repairs within two years to recover replacement cost benefits; instead, the two year period applied only to the insured’s obligation to bring suit against the insurer.

The insurance coverage issues arose after the insured’s home burned down on November 8, 2001.  Under the terms of the insurance policy, the insured had two years from the date of the loss, or until November 8, 2003, to bring suit against the insurance company.  Following the fire, the insured made a claim with the policy and notified the insurance company of his intent to replace the damaged home pursuant to the replacement cost provision in the policy.  Over the next couple of months, the insured received three estimates on the cost of repairing the home: a first for between $3.6 and $4 million; a second for $3.858 million; and a third from the insurance company for $1.544 million.  The insured was not able to immediately begin reconstruction due to issues with obtaining the necessary permits.  The insurance company’s attorney advised the insured that, under the terms of the policy, he could not recover replacement cost benefits until the repairs were complete and that he only had two years to bring any action against the insurance company.  About two months before the two year period was to expire, the insured entered into a construction contract to rebuild the home at a cost of more than two-times the estimate provided by the insurance company.  Just prior to the expiration of the two year anniversary of the fire, the insured filed suit against the insurance company seeking a declaration that the insurance company was required to pay replacement costs incurred more than two years after the fire and that the insurance company breached the policy by refusing to pay any replacement cost benefits above its estimate.

After the case was remanded following Patton I, the insurance company sought summary judgment.  The basis of its argument was that the terms of the insurance policy “operated collectively to require completion of the reconstruction before the end of the second year following the date of loss.”  The insurer acknowledged that their argument was not based on the express terms of the policy, but the overall import of the provisions in the policy.  It also argued that the Court of Appeals’ holding in Patton I tacitly supported its position.  The insured responded that the plain language of the policy contained no such time limitation and that under the decision in Bourrie v U.S. Fid. and Guaranty Ins. Co., 75 Or App 241, 707 P2d 60 (1985), the insured was given a reasonable time to build—even if that meant he would not recover replacement cost benefits until construction was complete.  Citing the opinion in Patton I, the trail court granted the insurance company’s motion for summary judgment.  The insured appealed.

The Court of Appeals reverse the trial court’s decision.  It began by noting that the express language of the policy did not support the insurance company’s position.  First, the policy provided that the insurance company is not obligated to pay replacement cost benefits until actual repair or replacement is complete.  Second, it stated that no action could be brought against the insurance company until the policy provisions have been complied with and the action was started within two years of the date of loss.  The court then recounted its summary of the letters from the insurance company’s counsel to the insured, finding that neither those letters nor the court’s interpretation of those letters in Patton I, supported the interpretation espoused by the insurance company.  Citing the Bourrie case, the court concluded that the unambiguous terms of the policy do not require that an insured does not need to complete reconstruction within two years and, instead, has a reasonable period in which to rebuild.  The court went on to note, however, that the decision was based on the language of the policy, which did not include an express period of time in which restoration needed to be completed.

Maloney Lauersdorf Reiner regularly litigates insurance coverage actions involving issues of an insured’s entitlement to replacement cost benefits, including issues relating to the appropriate period of of restoration and suit limitation period.  Please contact us with any questions about this case, or any other matter you see addressed on the MLR Insurance Coverage Blog.

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