A federal court in New York recently cast light on the permissibility of property insurance policy provisions that require an insured to repair or replace damaged property within a certain period of time in order to be compensated for the full cost of the repair or replacement, instead of just the actual cash value of the property at the time it was damaged.        

In Sher v. Allstate Ins. Co., 2013 U.S. Dist. LEXIS 75363 (S.D.N.Y. May 28, 2013), plaintiffs brought a class action complaint against Allstate arising out of Allstate’s “alleged practice of requiring that insured property owners replace or complete repairs of damaged property within 180 days of receipt of an actual cash value payment…” As interpreted by Allstate, under such a policy, if an insured failed to repair or replace within that period of time, that insured would not be reimbursed for costs over-and-above the actual cash value payment. 

The Shers found themselves in this situation after a July 2008 fire loss in which their house was struck by lightning.  After forwarding a repair estimate of $733,000 to Allstate, Allstate paid the Shers $388,000 in actual cash value in December 2008. Repairs to the plaintiffs’ home were not completed until February 2011, and Allstate refused to pay the Shers repair/replacement costs above the actual cash value of the property because they had not completed repairs or replacement within 180 days of receiving the actual cash value payment. The Shers failed to replace many items of personal property within the 180-day window as well, and Allstate therefore refused to pay the approximately $70,000 being claimed above the actual cash value of those items.   

The plaintiffs’ amended complaint contained a number of counts, including breach of contract, impossibility, fraud, breach of fiduciary duty, and deceptive business acts and practices under New York General Business Law § 349. Allstate moved to dismiss the claims pursuant to Federal Rule of Civil Procedure 12(b)(6). 

Before addressing the legal issues presented, the court provided some factual background on the drafting history of Allstate’s 180-day provision. In the early 1990s, the typical Allstate policy only required that an insured that suffered a loss “make [a] claim within 180 days after the loss for any additional payment on a replacement costs basis if you repair the damaged property.” Under that policy language, an insured “was not required to complete or even start repairs within 180 days of the loss.” Around 1994, Allstate changed the policy language to state:

If you do not repair or replace the damaged building structure, payment will be on an actual cash value basis . . . You may make claim for additional payment . . . if you repair or replace the damaged, destroyed, or stolen covered property within 180 days of the actual cash value payment.

The New York State Insurance Department approved that change, although plaintiffs argued that Allstate did not specifically disclose the change to the Department. In 2009, the Department directed Allstate to replace the 180-day provision; Allstate’s policies now give insureds two years to repair or rebuild to qualify for replacement cost coverage.

As presented by the court:

[t]he central issues animating nearly all of the plaintiffs’ claims are (1) whether the 180-day provision completion requirement is inconsistent with New York law and (2) whether Allstate’s interpretation is inconsistent with the terms of the insurance policy.

As to the first issue, the court found that the policy was not inconsistent with the New York Standard Fire Policy because, under the Standard Fire Policy, an “insurer is only required to provide the ‘lesser amount’ of actual cash value, or the cost of repair or replacement, or an otherwise fixed limitation-of-liability amount.” In this case, and despite numerous novel interpretations of the Standard Fire Policy advanced by the Shers, the court found Allstate’s policy offered coverage for at least actual cash value, with the possibility of obtaining replacement/repair cost coverage. In so deciding, the court cited heavily to the recent case of Woodhams v. Allstate Fire & Cas. Co., 748 F. Supp. 2d 211 (S.D.N.Y. 2010), aff’d, 453 F. App’x 108 (2d Cir. 2012), which addressed similar issues and allegations as those presented in this case.

As to the second issue, the plaintiffs argued “that the 180-day provision is ambiguous and/or should be interpreted to require only that an insured ‘undertake’ repairs within 180 days.” The court disagreed, finding that the plaintiffs’ argument had been foreclosed by the decision in Woodhams, and that the policy language clearly and unambiguous required repairs or replacement to be completed within 180 days. Because the language was clear and unambiguous, the court refused to consider extrinsic evidence presented by the plaintiffs, including plaintiffs’ argument that, by requiring that Allstate change its policy in 2009, the Insurance Department implicitly rejected the 180-day limit, particularly when the Department never withdrew its prior approval of the form.

In summary, the court found that

the 180-day provision is not inconsistent with the standard fire policy and the language of the Allstate policy unambiguously provides that an insured must completely repair, rebuild, or replace damaged property within 180 days of receipt of the actual cash value payment in order to be eligible for reimbursement for those expenses.

With that in mind, the court then dismissed each of the nine causes of action alleged against Allstate.

The potential applicability of this decision to other insurers’ policies will require examination of the relevant policy language together with the insurer’s practices. Some insurers have provisions that, like Allstate’s, require completion of repairs within a specified time period, while other insurers have provisions that require only that repairs be commenced within a specified time period.