The Florida Supreme Court recently joined numerous other jurisdictions holding that general contractor overhead and profit should be included in an estimate on a property insurance claim when, based on the unique facts of the claim, it is reasonably likely that the insured will need to use a general contractor in completing the repairs.
In Trinidad v. Florida Peninsula Insurance Company, 2013 Fla. LEXIS 1379 (Fla. July 3, 2013), the Florida Supreme Court determined that the Third District Court of Appeal erred with respect to statutory and policy constructions when it held that a homeowner was not entitled to general contractor overhead and profit as damages from a fire in his home. A general contractor is a person or entity who does not make the repairs themselves but rather coordinates and supervises subcontractors on complicated repair jobs. A general contractor’s fee is known in the industry as overhead and profit. Such fees are sometimes included in repair estimates when the loss is sufficiently complex to require a general contractor’s services. In Trinidad, the homeowner filed suit claiming that the insurer determined that a general contractor was reasonably necessary but improperly withheld payment of that amount unless and until the homeowner actually incurred expenses for the overhead and profit. The trial court granted summary judgment in favor of the insurer, finding that the policy language was unambiguous and that the insurer was not required to pay general contractor overhead and profit because those costs had not been “actually spent” in accordance with the terms of the policy. The Third District agreed, finding that the insurer was only required to make payments for general contractor overhead and profit under a replacement cost policy when the homeowner actually incurred those costs or became contractually obligated to do so with a contractor.
The Florida Supreme Court provided a general overview of replacement cost insurance (as contrasted with actual cash value coverage), addressed the subject 2008 statutory provision, analyzed the relevant policy provisions, and held:
[W]e hold that an insurer’s required payment under a replacement cost policy includes overhead and profit, where the insured is reasonably likely to need a general contractor for the repairs, because the insured would be required to pay costs for a general contractor’s overhead and profit for the completion of repairs in the same way the insured would have to pay other replacement costs he or she is reasonably likely to incur in repairing the property.
The court considered the statutory arguments raised by the parties. The 2008 version of Fla. Stat. § 627.7011, the applicable statutory provision for the period of time during which the homeowner incurred his loss, provided in relevant part as follows:
(3) In the event of a loss for which a dwelling or personal property is insured on the basis of replacement costs, the insurer shall pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling or property.
(6) This section does not prohibit an insurer from limiting its liability under a policy or endorsement providing that loss will be adjusted on the basis of replacement costs to the lesser of:
(a) The limit of liability shown on the policy declarations page;
(b) The reasonable and necessary cost to replace the damaged, destroyed or stolen covered property; or
(c) The reasonable and necessary cost to replace the damaged, destroyed or stolen covered property.
Fla. Stat. § 627.7011 (2008) (emphasis added).
The court first recognized that the statute has two primary objectives: (1) insurers must pay the replacement cost of a covered loss irrespective of whether the insured actually repairs or replaces the damaged property; and (2) depreciation shall not be withheld pending the actual repair. Next, after concluding that general contractor overhead and profit is part of the replacement cost where the insured is reasonably likely to need a general contractor for the repairs, the court ruled that, as with other components of the replacement cost, § 627.7011(3) does not permit an insurer to withhold overhead and profit, where it is necessary, pending completion of the repairs.
In addressing the policy language, the Court concluded that the Third District erred because it relied upon the wrong subsection of the policy. The Third District relied upon an “actually spent” provision which, according to the Supreme Court, was merely an alternate method of calculating the payment amount when the insured has actually undertaken the repairs. In this case, the insurer acknowledged that the payment was made pursuant to another provision, which governs payment when no repairs have been made. Accordingly, the insurer was required to pay, in accordance with the relevant policy language, “[t]he replacement cost of that part of the building damaged for like construction and use on the same premises.”
This decision brings Florida law in line with that of numerous other jurisdictions, which have held that general contractor fees should be included in an estimate based on a case-by-case analysis of the facts of each individual claim. Only when a general contractor’s coordination and supervisory services are reasonably necessary is overhead and profit appropriate for inclusion in the estimate. This is determined in the discretion of the adjuster based on the particular facts involved.