Pennsylvania’s highest court sides with the insurance company claiming that Farmers (Truck Insurance) contracted around the requirement to include General Contractor Overhead and Profit in the actual cash value (ACV) payment.
While the odd saying of “you can’t win ’em all” holds true, fortunately, in our industry, even a loss can be an important matter to consider, and indicative of potential changes to come.
In one of our latest cases, we represented a client in the pursuit of an answer to the question of whether General Contractor Overhead and Profit should be reflected in the Actual Cash Value of a case. While the end result in this particular matter did not result in a win, it did open the door to several underlying questions which could ultimately lead to a change at the legislative level.
Below is an in depth breakdown of the matter, but if you would like to discuss the matter further, Click here to speak with an attorney at Wheeler, DiUlio, & Barnabei.
What Was The Case?
Wheeler, DiUlio, & Barnabei recently took on the case of Kurach v. Truck Insurance Exchange. In this case, the plaintiff insured his property (located in Pennsylvania) under Farmers Next Generation Homeowners Policy – Pennsylvania (“Policy”) issued by Truck.
Kurach had a plumbing leak in his home, and after the claim was reported, Truck issued a payment for damages and excluded from this payment an amount which purported to represent General Contractor Overhead & Profit (“GCOP”).
Truck had determined that the loss was of such complex nature that it required the services of a general contractor to hire and coordinate the subcontractors, and included the allowance for GCOP in its estimate of both the Replacement Cost Value (“RCV”) and the Actual Cash Value (“ACV”) of Kurach’s loss.
The GCOP are customarily 20% of the estimated cost of repairs. Despite acknowledging that GCOP are necessarily part of the RCV and the ACV of Kurach’s loss, Truck withheld the GCOP from the ACV payment. Truck explained that it purportedly withheld the 20% pursuant to a condition set forth in the Policy; and would pay GCOP only when these costs were actually incurred by the insured.
While representing the Policyholder, we frequently referred to two prior litigatiolns: Gilderman v. State Farm Insurance Co., and Mee v. Safeco Insurance Co. of America. If you take a look at the Gilderman case, the Plaintiff stood for the idea that, unless the policy says otherwise, O&P was to be paid as part of the ACV payment. This case was cited in Mee v. Safeco.
After trial, our case made its way to the Superior Court of Pennsylvania.
What Was The Policyholder’s Argument?
During our representation, we argued several points on behalf of the Policyholder.
1. It is accepted industry practice – and mandated by Pennsylvania case law (specifically Gilderman and Mee) – that GCOP must be included as part of ACV whenever it is determined that the services of a general contractor are likely to be necessary in order to effectuate the repair of damaged property. Contrary to industry practice, the insurer’s actions do not fully compensate the homeowner for damage to their property and, therefore, does not accurately reflect the homeowner’s full cost to replace the damaged property which he has contracted to receive.
2. By refusing GCOP until repairs are commenced, Farmers has created an incentive for homeowners not to make repairs, as they must advance the cost of GCOP necessary to retain the services of a general contractor in order to get the repair process started. Since more policyholders will elect not to repair, insurers will be relieved of their obligation to pay depreciation costs, resulting in additional profits for the insurance company at the expense of the premium-paying customer. Consistent with an insurer’s duty of good faith and fair dealing, the insurer should be obligated to pay the property owner a sufficient amount so as not to deter them from making the repairs.
3. When the legislature enacted the Pennsylvania Insurance Code, and included 40 P.S. § 636, it used the term “actual cash value” without elaboration. Because the legislature was aware of Gilderman when it enacted this statute, it effectively approved of that decision’s definition of ACV, since it did not provide an alternative definition in the statute.
4. The Pennsylvania Insurance Department’s own guide created to assist consumers in understanding homeowners’ insurance coverage propounds definitions of a “replacement cost’ and “actual cash value” that are consistent with Gilderman, and recognizes GCOP as a necessary component of the amount a homeowner will need to be reimbursed for a loss in the event the services of a general contractor are needed, precluding the withholding of GCOP.
5. The policy is ambiguous in that one section of the policy unconditionally promises to pay ACV, then another provision makes the benefit conditional on the homeowner undertaking repairs. These two conflicting provisions are irreconcilable, and this inconsistency/conflict must be resolved against the insurer.
What Was The Insurer’s Argument?
1. There is no uniform system in Pennsylvania for administering homeowner’s insurance claims, and the only system is that which was established by the terms of the policy.
2. Unlike the Farmers’ policy at issue, the policies in Gilderman and Mee were silent as the policyholders’ entitlement to payment of GCOP as part of ACV.
3. The Court left open the prospect that insurers could write policy terms which did allow for withholding depreciation from ACV, which is what Farmers did.
4. There is no evidence to suggest that the withholding of GCOP would be a deterrent for an insured to begin repairs.
5. 40 P.S. § 636 addresses fire insurance policies, not “all-risk” policies like the one at issue here and, furthermore, those definitions were adopted in 1962, not in response to Gilderman or Mee.
6. The Insurance Department’s consumer guide is a general guide, which cautions the user the read his or her own specific policy to understand its terms, and thus has no bearing on this case.
7. The language was not ambiguous in that it “clearly and obviously” explains the payment of GCOP.
What Did The Trial Court Find?
The trial court found two things. First, that the policies in Gliderman and Mee were silent as to the definition of the term “replacement cost.” In accordance with the “majority rule,” based on its review of cases from other jurisdictions, and because “higher premiums for replacement cost policies justify consumer expectations, actual cash really means replacement value minus depreciation.”
Second, they found that the phrase “if the law of your state requires” was ambiguous and unenforceable, given that a lay-purchaser of such insurance cannot reasonably be expected to understand whether or not such payment is required under Pennsylvania law. It found the case that a person buying homeowners insurance would need legal assistance to understand this provision to be “troublesome.”
What Did The Superior Court Find?
After reviewing the case, the Superior Court found that the policy language can supersede definitions established by case law. Thus, the more specific definition of ACV in the policy at issue controlled over the general definition of ACV established by Gilderman.
And What Was The Majority Decision?
The majority decision was made by Justice Todd, joined by Chief Justice Saylor, Justice Baer, & Justice Donohue.
It was determined that the policy, by its plain terms, guarantees that the Policyholder will be paid ACV of the damaged property at the time of the loss; however it also specifies that the payment of GCOP is conditional in that such payment will not be made unless and until the Policyholder actually incurs such costs by commencing the repair process, “unless the law of [Pennsylvania] requires.”
The Court’s review of Pennsylvania law, including statutes, regulations, or caselaw, does not support Policyholders’ contention that it mandates that GCOP be included in ACV for every claim made under a replacement cost policy. Unlike here, the policies in Gilderman and Mee were silent as to whether GCOP could be withheld from ACV. Thus, in those cases, the only question answered was whether, in the absence of contrary policy language, GCOP should be included in ACV, and it concluded that it is. Gilderman and Mee do not control where there is specific policy language which conditions the timing of GCOP payments on the policyholder undertaking actual repairs of the damaged property.
The Court found that 40 P.S. § 636 does not apply because this section is inapplicable to all-risk policies of the type at issue in this case. 40 P.S. § 636(3).
The Court found that the homeowners’ insurance guide issued by the Pennsylvania Insurance Department is merely a general explanation of the relevant insurance principles a consumer may encounter when purchasing such a policy, and as such, it does not have the binding legal force of a regulation issued by the Department.
– Concurring/Dissenting 1 (Justice Mundy, joined by Justice Dougherty)
Justice Mundy, together with Justice Dougherty, disagreed that the policy language is “clear and unambiguous.”
The inclusion of the language “unless the law of your state requires” creates an ambiguity. There was an agreement with the trial court that the idea that a lay purchaser of a homeowner insurance policy likely needs legal assistance to understand what he or she is paying for is troublesome. Ultimately, the language at issue is ambiguous, and the law requires the Policy to be construed in favor of the insureds.
– Concurring/Dissenting 2 (Justice Wecht)
It may well be the case that shifting GCOP to a post-repair payment “prejudices the insured and creates a disincentive to repair the premises.” It may well be that the law is insufficiently protective of insureds. Policyholders should direct such arguments to their elected lawmakers in the General Assembly or to the duly appointed Insurance Commissioner; these are the officials who actually set public policy.
While Justice Wecht agrees with the majority that Pennsylvania law does not require that such fees and charges be part of an ACV payment, the fact that the Court had to determine this issue means that the Policy was ambiguous for Policyholders.
Both Gilderman and Mee are reasonably susceptible of different constructions and capable of being understood in more than one sense. The Gilderman and Mee Courts never explicitly limited their holdings to contracts where ACV was undefined, or contracts that did not mention GCOP, and in attempting to apply those decisions to a provision buried on the thirty-fifth page of a fifty-three page insurance contract, it is reasonable that individuals might disagree about “what the law of Pennsylvania requires.”
Pennsylvania law stands in need of clarification, clarification that this Court provides today.
The reasonable disagreement among the lower courts and the parties that brought us here is evidence that Policyholders could not have known what “the law of Pennsylvania required” with regard to GCOP at the time the Policyholders signed the contract.
Policyholders, and other individuals who will sign insurance contracts with similar provisions, now know that “the law of Pennsylvania requires.” But that law was unclear at the time the Policyholders signed their contracts. Because the Policyholders could not have known what Pennsylvania law required, the policy is ambiguous in that is susceptible of more than one reasonable interpretation.
Up until the moment this case was decided, our law did not state definitively whether an insurer must include GCOP in an ACV payment. Applicability of the pertinent provision of the Policy turned upon whether our Commonwealth’s law required a particular result. Until today, our law did not require a particular result. That ambiguity in our law led to the ambiguity in the Policy.
Furthermore, it was Farmers itself, as drafter of the Policy, who made the decision to have the policy turn on a development of state law.
Farmers could have investigated whether the law of Pennsylvania definitely stated whether ACV must include GCOP. If it was unsure, it could have removed the conditional phrase, “unless the law of your state requires.” Farmers could then have attempted to enforce that unambiguous provision. Farmers did not write such a provision. It was Farmers itself that chose to manufacture the ambiguity.
While this case ultimately resulted in a loss for this client, it opens the door wide open to future cases, and hopefully, to a change in the wording of the policy which so wrongly denies policyholders the full reimbursement they are owed.
If you’d like to voice your concerns or discuss this issue further, reach out to your legislator:
Click here to find your Pennsylvania Legislator.
To assist in lobbying efforts and help get these changes made at a legislative level, consider joining the following groups:
American Association of Public Insurance Adjusters
Massachusetts Association of Public Insurance Adjusters
The attorneys at Wheeler, DiUlio, & Barnabei are here to talk about this issue, review past cases, and come up with ways that we can work together to get these changes made.
Click here to discuss this matter further with an attorney at Wheeler, DiUlio, & Barnabei.
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