"Replacement Cost" Includes Profit and Overhead Even if Not Actually Incurred
December, 2003
In Mazzocki v. State Farm Fire & Cas. Corp., 766 N.Y.2d 719 (3d Dept, several homeowners sustained storm damage to buildings on their respective properties and thereafter brought a putative class action suit against State Farm. Plaintiffs alleged the carrier’s exclusion of the profit and overhead expenses of a general contractor in calculating the “actual cash value” of the plaintiffs’ damaged properties constituted a breach of State Farm’s homeowners’ policies.
In the policies at issue, State Farm agreed to pay the cost to repair or replace damaged buildings. However, until the damaged property is actually repaired or replaced, State Farm only agreed to pay the “actual cash value” of the damage not to exceed “replacement cost” or the policy limits. Under these terms, State Farm maintained a practice of paying profit and overhead only when a general contractor is actually employed to repair or replace property.
The policy language at issue had previously been interpreted by a Michigan Court in Salesin v. State Farm Fire & Cas. Co., 229 Mich. App. 346 (1998), albeit under slightly different circumstances. Nonetheless, the Supreme Court found that the collateral estoppel effect of Salesin precluded State Farm from contesting plaintiffs’ claims. The trial court thereby granted summary judgment for plaintiffs on their breach of contract claims and certified the proposed class on the basis of Salesin.
As a preliminary matter, the Appellate Division found that collateral estoppel did not apply in this case, since the issue in Salesin was not identical to the case at bar and since the interpretation of the policy language presented a pure question of law.
In reviewing State Farm’s policies, the Court went on to consider the meaning of “actual cash value” and whether the term “replacement cost” includes a general contractor’s profit and overhead even if not actually incurred. The Court looked to the Salesin case for guidance and ultimately found that the term “replacement cost” can reasonably be interpreted to include profit and overhead whenever it is reasonably likely that a general contractor will be needed to repair or replace the damage. Therefore, the court found that State Farm was obligated to include profit and overhead in its calculation of replacement cost, and thereby in actual cash value, whenever a general contractor was likely to be needed to repair or replace property.
Under this interpretation, the court found a triable issue of fact in the record as to whether the various plaintiffs at issue were reasonably likely to require a general contractor to repair or replace their damaged property. Further, unless State Farm’s loss estimates could be used to establish such a reasonable likelihood for all plaintiffs, then a class action would not be appropriate and each plaintiff would need to establish the likely need for a general contractor for each individual property at issue. The Court remitted the matter to the Supreme Court for further proceedings not inconsistent with the Court’s decision.
Learning Point:
Under the Court’s analysis, the term “replacement cost” used in the State Farm policies could potentially be construed to include any costs or expenses which are deemed “reasonably likely” to be needed to repair or replace property, even if such costs are contingent or never incurred. Further, the determination of such an issue will likely raise questions of fact (i.e., which costs are “reasonably likely” to be incurred) which do not lend themselves to summary judgment motion practice. •
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