Sixth Circuit Holds that the Costs of Contractor's Overhead and Profit May be Included in Calculation of the Actual Cash Value of an Insured's Claim
The Sixth Circuit, applying Tennessee law, holds that “the actual cash value of [a] loss … includes overhead and profit where a contractor would reasonably be utilized to make repairs.” Parkway Associates, L.L.C. v. Harleysville Mut. Ins. Co., 129 Fed. Appx. 955, 963 (6th Cir. 2005).
Harleysville issued a commercial policy to Parkway covering an eight-story hotel in Nashville, Tennessee. On April 17, 1998, Parkway submitted an insurance claim to Harleysville for property damage at the hotel caused by a tornado. The next day, an adjuster for Harleysville inspected Parkway’s property and advanced it $50,000 to handle the immediate cleanup work. After conducting an inspection of the loss, Harleysville advanced Parkway a total of $348,995 in installments. On May 1, 1998, Harleysville’s retained accountant requested certain records to assist in the calculation of Parkway’s business interruption claim. As subsequent requests for documentation followed, the adjustment grew contentious.
In March 1999, Parkway filed suit against Harleysville alleging a bad faith refusal to pay its claim, violation of the Tennessee Consumer Practices Act (“TCPA”) and misrepresentation. At that time, Harleysville was still trying to obtain from Parkway all the documents it needed in order to reach a business interruption loss estimate. In October 1999, Harleysville moved for summary judgment. The district court granted Harleysville’s motion and ordered the parties to submit to appraisal as required by the insurance policy. In September 2003, the appraisers issued an award that contained two different valuations: “one for ‘replacement cost value,’ and one for ‘actual cash value,’ depending on which valuation was ultimately authorized by the policy.”
Both valuations included an allocation for the “‘general contractor’s overhead and profit’” in performing the work. Harleysville moved to confirm the appraisers’ award. In confirming the award, the district court held that the policy permitted Parkway to recover only the actual cash value and that Parkway was not entitled to overhead and profit. Parkway then appealed the summary judgment order entered in favor of Harleysville, as well as the district court’s decision to subtract the contractor’s overhead and profit.
The Sixth Circuit affirmed the district court’s entry of summary judgment in favor of Harleysville on Parkway’s bad faith and TCPA claims but vacated the district court’s deduction of expenses related to the contractor’s overhead and profit from the insured’s actual cash value claim. The Sixth Circuit recognized that Tennessee courts “have not determined what repair or replacement costs include.” Relying on courts from other jurisdictions, however, the Parkway court stated that “[r]epair or replacement costs logically and necessarily include any costs that an insured reasonably would be expected to incur in repairing or replacing the covered loss.” Therefore, because the repair efforts necessary at Parkway’s hotel were extensive, the Sixth Circuit stated that “the actual cash value of a loss is the repair or replacement costs less depreciation, and since the cost of a contractor would reasonably be incurred in repairing Parkway’s damaged property, then the costs of contractor’s overhead and profit would be included in the actual cash value of Parkway’s loss.” Furthermore:
Parkway contracted to receive the actual cash value of its loss … What Parkway actually spends to repair its property does not affect its right to recover the actual cash value of its loss, as the actual cash value is not calculated based upon what the insured ultimately pays to repair its property. Indeed, even if Parkway chooses not to repair its property at all, it would still be entitled to what it bargained for: the actual cash value of its loss, which includes contractor’s overhead and profit where a contractor would reasonably be utilized to make repairs. Id. at 962-63.
Parkway is the fourth in a line of cases from across the country that have allowed recovery for contractor’s overhead and profit in the calculation of an insured’s actual cash value property damage claim. See also, Gilderman v. State Farm Ins. Co., 437 Pa. Super. 217, 649 A.2d 941 (1994); Salesin v. State Farm Fire & Casualty Co., 229 Mich. App. 346, 581 N.W.2d 781 (1998); and Ghoman v. New Hampshire Ins. Co., 159 F. Supp. 2d 928 (N.D.Tex. 2001). We will follow this issue as it is addressed in other states and update our readers as new developments occur.•