Stephens & Stephens XII, LLC v. Fireman’s Fund Ins. Co., 231 Cal. App. 4th 1131 (2014).
Can an insured recover the cost to repair or replace damaged property without actually doing the repair or replacement, merely because the insurer incorrectly denies coverage? This is the question the California Court of Appeals was recently faced with in Stephens & Stephens XII, LLC v. Fireman’s Fund Ins. Co., 231 Cal. App. 4th 1131 (2014).
The policy at issue was no different than the typical property insurance policy providing coverage for damaged property on a replacement cost basis. Under such policies, the actual repair or replacement of damaged property is required as a condition precedent to recovery of the actual replacement cost. Normally, the insured is paid the damaged property’s “actual cash value”, which is the replacement cost value less the amount the damaged property has depreciated. If the insured then repairs or replaces the property within a time period specified in the insurance policy, the insured receives an additional payment for the amount that the repair or replacement of the property exceeds the actual value payment.
In Stephens & Stephens XII, the insured made a claim for property damage to an insured warehouse stripped bare by vandals. Subsequent the loss, the insured never made any repairs to the damaged property. The insured claimed it was entitled to the full cost of repairs because it was excused from complying with the policy’s repair requirement as a result of Fireman’s Fund’s coverage denial. Firemen’s Fund claimed the insured was not entitled to replacement cost because the insured had not satisfied the precondition of the repair requirement.
The court found a middle ground. It held that the insured was entitled to a judgment requiring the insurer to pay actual cash value immediately and to repay replacement costs conditionally on the insured’s completion of repairs promptly from the date of judgment. Stephens & Stephens XII, 231 Cal. App. 4th at 1144. The court rejected the insured’s contention it was entitled to the full replacement cost because “a coverage dispute should not give an insured a benefit under the policy it never had in the absence of the dispute – such as the right to receive replacement cost without actually repairing the damage.” Id. at 1146-47. Interestingly, the court also held that the insured was not entitled to a judgment in a specific amount for the cost of repair. Id. at 1148. Instead, the insured was entitled to a judgment declaring its right to receive reimbursement for repair costs, if and when the repairs are actually performed in a timely manner, and in amount equal to the insured’s expenditures. Id.
Jonathan Gross is a partner and Victor Jacobellis is special counsel at Mound Cotton Wollan & Greengrass, LLP’s San Francisco Bay Area offices and both specialize in insurance coverage matters and insurance bad faith defense.