Property insurance policies typically require that the insured repair or replace the damaged property before recovering on a replacement cost value (RCV) basis.  The difference between RCV versus actual cash value (ACV) can be substantial, especially where an older building is involved.  The Indiana Court of Appeals recently held that an insurer can waive its right to pay only ACV where it fails to inform the insured of its intentions to rely upon the ACV policy provisions, and/or fails to advance money to allow the insured to repair or replace the damaged property.

In Westfield National Insurance Company v. Nakoa, Docket No. 64A03-1108-PL-345 (Ind. App. Feb. 10, 2012)¹, the insured’s home was destroyed by fire.  The issue of the value of the loss was submitted to appraisal, and the umpire found the RCV to be $237,414.57.   On the issue of ACV, the umpire stated that the ACV of the loss could be obtained from the second appraiser, if necessary, as the first appraiser had not submitted an ACV figure.  The second appraiser had determined the ACV to be $108,359.78.

The insurer, Westfield National Insurance Company (“Westfield”), argued that it should be required to pay only the $108,359.78 ACV, as the insured had not satisfied two conditions precedent under the policy for RCV:  (i) the insured had not completed replacement of the home, and (ii) the insured had not provided Westfield with notice within 180 days of the loss that she would seek replacement cost coverage.  The insured argued that she should be entitled to recover on an RCV basis, and the trial court agreed.   It held that Westfield had waived its right to rely upon the policy’s RCV conditions, and that it therefore must pay for the loss on an RCV basis.  Westfield appealed.

The Indiana Court of Appeals affirmed the trial court decision.  It found that “the first mention Westfield made that [the insured] failed to satisfy alleged conditions precedent for receipt of replacement cost coverage occurred over three years after the fire that destroyed her home.  In the interim, Westfield paid nothing to [the insured], aside from the $5,000 personal property advance.”  It stated that “Westfield stood silently and idly by and acquiesced to the appraisal process without giving any indication to [the insured] or the trial court that its valuation of [the insured’s] loss was based upon actual cash value, not replacement cost.”

The Indiana Court of Appeals agreed with the trial court that Westfield had waived its right to rely upon its policy’s RCV conditions, stating that,

“Westfield’s conduct in this case [is] such that it led [the insured] to believe that it would not insist upon the policy provisions regarding payment of replacement cost versus actual cash value. The Court of Appeals also found that it can be unreasonable for an insurer to expect an insured to begin repairs where it has not advanced money towards those repairs.  It stated, “We also note, as did the trial court, that it seems unreasonable and unrealistic for Westfield to have expected [the insured] to begin reconstruction of her house when Westfield never paid anything to her towards her real property loss – not the actual cash value of the loss, not replacement cost, nothing at all.  [The insured] might have been able to use such funds, even if it was just actual cash value and not full replacement cost, as ‘seed money’ to begin reconstruction.”

Given its finding of waiver, the Court of Appeals held that Westfield must pay RCV, an amount, in this case, that was more than twice the stated ACV.

The facts set forth in this case may not constitute a basis for a finding of waiver under the law of other jurisdictions, and whether an insured’s waiver contention has merit will depend on the law of the applicable jurisdiction and the particular facts involved.  This case demonstrates that insurers are well-served by providing timely notice to insureds of their intent to make payment on an ACV basis.  Payment of undisputed ACV amounts is required by the law of some jurisdictions and may be in the best interests of insurers.

¹ Reproduced by Robinson & Cole LLP with the permission of LexisNexis. Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.  All rights reserved.  No copyright is claimed as to any portion of the original work prepared by a government officer or employee as part of that person’s official duties.