Overhead and Profit Included In Replacement Cost Coverage
Overhead and Profit Must Be Included In Replacement Cost Policy Payout
In Trinidad v. Florida Peninsula Insurance Company, (Florida Supreme Court, SC11-1643, July 3, 2013) the Florida Supreme Court took up the issue as to whether a property owner was required to actually carry out repairs before being entitled to payment from its insurer for reasonable overhead and profit that would otherwise be incurred in retaining a contractor to carry out such repairs, when the loss was covered by a replacement cost policy. The Supreme Court held that the insured was entitled to such payments as long as they could show that they would be reasonably likely to require a contractor to carry out such repairs.
The insured, Trinidad, made a claim with its insurer, Florida Peninsula Insurance Company for fire damage occurring to its Miami-Dade home. The insurer admitted coverage for the loss, and even made payment for completion of the repairs. Such payment did not include an amount to cover the reasonable overhead and profit that would be charged by any contractor agreeing to furnish such repairs. The insurer argued that it could withhold such payments until the insured actually incurred those particular expenses in repairing the home.
The subject policy was a replacement cost policy, which provided in pertinent part that the insured would pay for replacement cost without deduction for depreciation, and would “pay the cost to repair or replace, after application of deductible . . .not more than the least of the following amounts:
(a) The Limit of liability under the policy that applies to the building:
(b) The replacement cost of that part of the building damaged for like construction and use on the same premises; or
(c) The necessary amount actually spent to repair or replace the damaged building.”
The insured sued their insurer seeking the reasonable overhead and profit that would be incurred to retain a contractor to remediate the insured loss. The insurer responded that they were not required to pay such costs until actually spent by the insured. The trial court and appellate court agreed with the insurer, and the case was appealed to the Florida Supreme Court.
The Florida Supreme Court explained that Replacement Cost is measured by what it would actually cost to replace the damaged structure on the same premises. Unlike a cash value policy, replacement cost coverage is designed to provide for added coverage to the insured. As such, it was held that reasonable overhead and profit must be included in replacement cost coverage. The insured need not actually expend such costs to recover, but rather, must only be reasonably likely to require a general contractor to carry out such repairs.
The Florida Supreme Court further explained that the appellate court applied flawed reasoning in determining that such overhead and profit must be actually expended prior to payment being due to the insured for a covered loss. The Florida Supreme Court stated that it is immaterial to the insurer’s obligations under a replacement cost policy whether or not the insured actually carries out the repairs. When the insured is reasonably likely to incur overhead and profit costs in repair of the premises, the insurer may not withhold such payments.
The Florida Supreme Court explained further that reasonable overhead and profit are no different than other costs of a repair that the insured is likely to incur. All of those costs are considered replacement costs, whether or not the insured has actually expended those costs. A true win for property owner’s and adjusters handling claims under replacement cost policies.