Insurance Alert: Insurer Delay Extends Time to Repair or Replace Damaged Property

In Stephens & Stephens XII v. Fireman’s Fund Ins. (No. A135938, filed November 24, 2014), the plaintiffs obtained property insurance on a warehouse. Within a month, it was discovered to be stripped of all wiring and metal. Fireman’s Fund paid for emergency repairs but nothing more, concerned that the damage had occurred outside the policy period.

The policy provided for valuation of either “replacement cost,” meaning the expenditure required to replace the damaged property with “new property of comparable material and quality,” or “actual cash value,” defined as the actual, depreciated value of the damaged property. For replacement cost, Fireman’s Fund was not required to pay “until the lost or damaged property is actually repaired … as soon as reasonably possible after the loss or damage,” and only “[t]he amount [the insured] actually spend[s]….”

In the subsequent bad faith lawsuit, the jury awarded the full cost of repair, despite there being no repairs. The appeals court reversed, holding that there was no right to an immediate award for the costs of repairing the damage; however, the court nonetheless held that the insured was entitled to a “conditional judgment,” awarding those costs if repairs were actually made.

The insured had argued that it was excused from performing repairs because Fireman’s Fund had prevented it from doing so, and the appeals court had agreed: “We are persuaded by this reasoning and adopt it. When an insurer’s decision to decline coverage materially hinders an insured from repairing damaged property, procedural obstacles to obtaining the replacement-cost value should be excused.”

But that did not also eliminate the repair condition: “The policy, however, limits Fireman’s Fund’s obligation to ‘[t]he amount [the insured] actually spend[s] that is necessary to repair or replace the lost or damaged property.’ Just as we find no basis for excusing [the] obligation to repair, we find no basis for awarding [] a specific amount of replacement cost before [] the actual repairs. Instead, [the insured] is entitled to a judgment declaring its right to receive reimbursement for repair costs, if and when the repairs have actually been performed in a timely manner, and in an amount equal to [] actual expenditures for them.”

Besides approving a “conditional” declaratory judgment pending future repairs, the Stephens court went on to find coverage for a seemingly uncovered portion of the jury’s special verdict. An endorsement to the policy covered the insured’s lost business income and rental value resulting from a suspension of operations due to direct physical loss to the property. The jury found no loss of rental value but awarded lost income from a failed real estate deal to sell the property, which the court agreed would not be covered as a loss from suspension of the insured’s operations. But despite declaring the special verdict unambiguous, the court proceeded to find “latent ambiguity” and interpret the verdict as awarding covered damages.

The appeals court said that “[w]here the trial judge does not interpret the verdict or interprets it erroneously, an appellate court will interpret the verdict if it is possible to give a correct interpretation.” In particular, the court noted that the amount in dispute bore no relation to the evidence on the lost real estate sale, but corresponded exactly to the amount claimed for lost rental value. Although lost rental value had been crossed out by the jury, the court chalked it up to confusion and said that “[i]t does not matter whether these lost rents could also have qualified as lost business income. The special verdict must be interpreted as awarding [the insured] damages … for lost rent on the breach of contract cause of action. This interpretation is consistent with our obligation to uphold the verdict if possible.”

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November 24, 2014