Replacement Cost Provision Construed by Sixth Circuit

Replacement Cost Provision Construed by Sixth Circuit

The U.S. Sixth Circuit Court of Appeals recently addressed an insured’s entitlement to replacement cost benefits following a fire loss.  In Hampton v. Safeco Ins. Co. of Am., Case No. 14-6064, 2015 WL 3555866, — Fed. Appx. — (6th Cir. 2014), the court addressed whether an insured could recover the estimated cost to replace a damaged structure or was limited to the amount actually spent to replace it.  The court ruled in favor of the insurance company, holding that it was required to pay the amount the insured actually and necessarily incurred to repair or replace the damaged structure.

The case concerned an insured’s home that was damaged by fire.  The insurance policy covering the home provided for replacement cost benefits.  The parties agreed the actual cash value of the home was $62,500, which the insurance company paid.  A few months later, the insured informed the insurance company that she planned to replace the home with a mobile home quoted at $66,729.12.  The insured provided a receipt showing her $500 deposit on the new home as evidence of her “intent” to purchase it.  The insurance company indicated that it would pay the difference between the actual cash value of the damaged home and the proposed replacement mobile home which totaled $3,229.12.  The insured countered that she was actually owed $45,245, which constituted the difference between the actual cash value and the estimated $108,745 cost to replace the home.  The insured filed suit seeking the greater amount.  The federal district court ruled in favor of the insurance company, and the insured appealed.

The Court of Appeals first interpreted the “replacement cost” provision in the policy, which provided that the insurance company would pay “the full amount actually and necessarily incurred to repair or replace the damaged building as determined shortly following the loss.”  The insured argued that she reasonably expected that replacement cost coverage would be available to restore a normal life following the fire.  The court rejected the insured’s argument, finding that the plain and ordinary meaning of the replacement cost provision provided that the insurance company would pay for the actual costs that were reasonably incurred by the insured.  It concluded that the insured was not permitted to purchase a less expensive structure and keep the difference between that amount and the estimated rebuilding cost in cash.

Additionally, the court addressed whether actually purchasing the new home was a prerequisite to recovering replacement cost benefits and whether the insurance company’s refusal to pay the price of the replacement mobile home constituted an anticipatory breach.  The insured argued she was entitled to the payment although she had yet to purchase the replacement mobile home.  Again, the court sided with the insurance company, holding that the policy language unambiguously required the insured to actually incur the cost of purchasing the replacement home before she could recover the replacement cost holdback.

The attorneys at Maloney Lauersdorf Reiner regularly represent clients facing insurance coverage issues, including litigation involving interpretation of replacement cost provisions.  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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