Repair or Replacement Cost as a Measure of Indemnity in New York
By Jennifer van Voorhis, Esq.
Recently we received a request from a reader inquiring as to who has the responsibility to determine whether a sustained covered loss to a dwelling can be repaired or must be replaced. We always urge a thorough reading of the policy first, in order to determine what coverages exist, but not all policies are clear. Here’s a breakdown of the law in New York.
A standard fire insurance policy will provide coverage of either (1) the actual cash value (ACV) of the property at the time of the loss; (2) the amount which it would cost to repair or replace the property with materials of “like kind and quality” within a reasonable time after such loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair, and without compensation for loss resulting from interruption of business; or (3) to an amount not exceeding a specified amount. The policy will generally state the coverage is for the lesser amount of the three cost valuations. Ins. Law § 3404(e).
The definition of “Actual Cash Value”, as a measure of indemnity coverage, is generally defined as “replacement cost minus depreciation.” Replacement cost is not usually defined in the policy however. As it is not defined in the policies, the Courts have had to define the term in case law. A recent case in the Southern District of New York, SR International Business Insurance Co. LTD., v. World Trade Center Properties, LLC, et al. v. Allianz Insurance Company, et al., 445 F.Supp.2d 320 (S.D.N.Y.2006) dealt with litigation to determine the amount of property insurance recoverable for destruction of the World Trade Center. On cross-motions for summary judgment on issues affecting appraisal proceedings, Judge Mukasey held: “(1) hypothetical replacement cost included full replacement value of non-removable tenant improvements owned by insured; (2) actual replacement was not a condition precedent to calculation of hypothetical replacement cost; (3) strict congruity of tenants was not requirement for new improvements in replacement buildings to constitute replacement of old tenant improvements; (4) insureds had an insurable interest in full value of improvements at time of loss; (5) broad evidence rule did not apply to calculation of actual cash value (ACV) under policy definition; (6) policy definition of obsolescence in formula for calculation ACV did not include economic obsolescence; and (7) market value had no role in calculation of ACV.
The second measure of indemnity coverage starts out pretty straightforward: repair or replace to like kind and quality; the second part though states “without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair.” The New York Court of Appeals states in Midwood Sanatorium v. Firemen’s Fund Ins. Co. of San Francisco et al., 261 N.Y. 381 (1933), the Court reasoned that an insurer cannot be held to any liability beyond that which is assumed. In other words, the policy is written to protect an insured against certain perils, and upon that the premium is based. To allow an insured to recover on an amount not contemplated by the insurer would not be fair.
The third measure of indemnity coverage under §3404(e) is “to an amount not exceeding a specified amount”.
Just because your policy has a “Guaranteed Replacement Coverage” endorsement, it doesn’t mean that damages will automatically be replaced rather than repaired. The case of Kumar v. Travelers Ins. Co., 211 A.D. 2d 128, 627 N.Y.S.2d 185 (4th Dept. 1995), presented a case of first impression for the appellate courts in New York regarding that provision of a homeowner’s insurance policy. The usual language in the clause is something to the effect that the insurer agrees to pay the full cost “to repair or replace the damaged dwelling or other structures with equivalent construction on the same premises” without regard to liability. The dispute arose regarding the interpretation that required replacement of the damaged dwelling on the same premises or whether it merely establishes the limit of liability on the insurer. Id. The Kumar court held: it does NOT require the replacement of a damaged dwelling on the same premises, it merely established the limit of coverage of what it would cost to replace the damage to the structure on the same premises in order to recover the replacement cost.
Now, if you’re anything like me you’re thinking “but she never answered the question.” My answer is: “Depends on the policy.” Always look to see what the policy covers and how coverages are worded. In the standard fire insurance policy quoted above, “repair or replace” always appear together, even in the guaranteed replacement coverage endorsement. If you’ve read your policy and are still unsure, reach out to someone who can help interpret the policy language and has insight into how courts in the applicable state interpret certain provisions of the policies.
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Jennifer M. Van Voorhis, Esq. dedicates her practice to the representation of policyholders engaged in disputed first party insurance claims.
Jennifer received a BA degree from Hawaii Pacific University and her JD from Rutgers University School of Law. Prior to entering private practice, she was the law clerk of the Honorable F.J. Fernandez-Viňa in the Superior Court of New Jersey, Camden County.
Following her clerkship, Jennifer focused her career on insurance litigation. She has represented policyholders in not only first party coverage issues, but as defendants in matters of automobile and premises liability defense.
