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California Appellate Court Upholds Replacement Cost Condition but Authorizes “Conditional Judgment” for Replacement Cost Benefits

12.02.14 | INSIGHTS

By Samuel H. Ruby and Andrew B. Downs

Last week, a California Court of Appeal upheld the standard condition that a policyholder must actually repair or replace in order to claim replacement cost value. However, the court held a policyholder could recover a “conditional judgment” for replacement cost benefits and satisfy the condition after trial.

Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co., — Cal.App.4th —, 2014 WL 6679263 (11/24/2014), involved a vacant industrial building that had been stripped of copper and other materials by thieves. The policyholder did not repair or replace the damage, allegedly due to the insurer’s declination of coverage. At trial, the jury found coverage and awarded replacement cost benefits, but the judge granted judgment notwithstanding the verdict in favor of the insurer.

Reversing the judgment, the Court of Appeal concluded the loss was covered and that the policyholder should have an opportunity post-trial to repair or replace. The appellate court directed the trial court to enter a judgment for replacement cost benefits “conditioned” on eventual proof of the amount actually expended to repair or replace. The precise mechanics of such a “conditional judgment” remain to be developed.

Although the Court of Appeal agreed with the policyholder that the loss was covered, it disagreed with the methodology used to prove damages at trial. The court found the insurer’s failure to accept coverage and advance payment on an actual cash value basis prevented the policyholder from satisfying the policy’s 180 day replacement condition. However, the court rejected the policyholder’s argument that the condition was therefore permanently excused, waived, or otherwise unenforceable. Because no actual replacement had taken place, the court took the relatively unusual step of authorizing a conditional judgment for the cost of replacement, contingent upon proof of actual replacement and limited to the amount actually expended.

Courts have struggled for years to reconcile the condition of actual replacement with policyholder arguments regarding prevention, waiver, and estoppel due to the insurer’s conduct. The conditional judgment remedy fashioned by the Stephens court is a novel judicial remedy that strikes a balance. It preserves the insurer’s right to condition payment on actual replacement (thus avoiding the moral hazard associated with permitting a policyholder to recover more than its actual loss), while preserving the policyholder’s right to replacement cost recovery after prevailing on coverage.

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