Indiana Court Of Appeals Allows Recovery Of Replacement Cost Without Replacement
November, 2009
The Indiana Court of Appeals, in a case of first impression, has ruled that the insurer's claims handling conduct can excuse compliance with the policy's requirement to repair before recovery of replacement cost. Rockford Mutual Ins. Co. v. Pirtle, 911 N.E. 2d 60 (Ind. App. 2009).
Facts
Mr. Pirtle purchased a historic building in Terre Haute which he intended to renovate. He took out a mortgage for $140,250.00 and insured the property through Rockford Mutual for $193,000.00 replacement cost value ("RCV"). The policy provided that the insurer would pay no more than actual cash value ("ACV") "until actual repair or replacement is completed."
On November 11, 2000 Pirtle sustained a covered loss by fire. An independent adjuster estimated the replacement cost of the loss at $79,907.49, but there were no contractors willing to do the work for that amount. Contrastingly, Pirtle's contractor estimated the damage at $232,915.00. In January 2001, a Rockford claim supervisor gave authority to settle the building claim for the independent adjuster's approximately $80,000 estimate, which the insured rejected as insufficient to satisfy the mortgage or to repair the building.
In May of 2001, six months after the loss, a second Rockford claims supervisor offered $69,874.62, which he said was the ACV based upon the insured's estimate, with the RCV amount to follow when the building was repaired. Pirtle rejected the offer and demanded the policy limits minus 10%. By this time all of the tenants were gone, the property was in foreclosure and the city had condemned the property. The second supervisor lacked authority to offer RCV until repairs were completed and repeated his ACV offer. In September 2001, Pirtle sued.
While the suit was pending, Rockford paid $86,146.66 as the agreed ACV of the damage. In exchange, the bad faith action was dismissed with prejudice, but the actions for policy damages and consequential damages for breach of contract proceeded to trial. At trial, the second claims supervisor testified that Rockford usually obtains a certified real estate appraisal when it cannot agree with the insured on the ACV amount. The insurer proposed a certified real estate appraisal here but never obtained it. The jury awarded Pirtle another $124,149.55 for damages pursuant to the insurance policy, even though Pirtle admittedly never repaired the damage. Additionally, Pirtle received a verdict for $406,136.58 in consequential damages for breach of contract.
Analysis
On appeal, Rockford argued that Pirtle was only entitled to recover the ACV of the building because he did not repair or replace the building after the fire, a condition precedent to receiving an RCV payment. Whether an insured could be excused from performing a condition precedent to recovery was an issue of first impression in Indiana. While acknowledging that typically the repair or replacement requirement is strictly construed before the RCV attaches, the Indiana Court of Appeals excused performance by the insured here based on "equitable principles" and affirmed the entire verdict, even though the amount of the consequential damages awarded seemed to have no basis in the record. The court emphasized that by the time Pirtle received the ACV payment, sixteen months had elapsed, he was behind on his mortgage and had no rental income. Accordingly, Pirtle had to give the ACV payment to the bank and had no money to start repairs. The court stated that "Rockford had the ability to advance sums of money under the endorsement (replacement cost) to assist in commencement of the rebuilding and could have joined Pirtle in agreements entered into for repairs."
The Pirtle court came very close to imposing a duty under the insurance policy to 1) make an advance; and 2) enter contracts for repair. Certainly this portion of the opinion will be cited by future claimants to support demands not called for by the coverage as issued.
Learning Point: When coverage is not in dispute, the actual cash value of the loss must be tendered at the earliest opportunity. Failure to do so may excuse compliance with the policy requirement to repair or replace, and may expose the insurer to substantial damages for consequential loss.
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