In January, I conducted a jury trial for a case involving water loss.  The policy provided for replacement coverage, and also provided my client’s insurance company with the “right to repair” the damage. For the first time—while the insurance adjuster was testifying on the stand—the insurance company tried to argue it was not required to pay a general contractor’s 10% overhead and profit.  I objected and the testimony was stricken.  Ultimately, the jury gave my client every penny of the damages we asked for.

Today, the Florida Supreme Court issued an opinion in a case with analysis substantially similar to the trial court’s analysis in my case.  In Trinidad v. Florida Peninsula Insurance Company, SC11-1643, ___ So. 3d ___ (July 3, 2013), the insurer FPIC argued it was not required by policy or statute to pay the 10% overhead and profit charged by general contractors for repair.  In Trinidad, like in my case, the insured had not repaired (or entered into a contract to repair) the damage.  The court 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.

Id. at *2.  The court noted neither the insurance policy nor the version of Section 627.7011, Fla. Stat., in effect at the time the policy was issued required the insured to actually repair the property prior to recovery under the policy.

Although the insurance company in my case argued it would never owe the overhead and profit because it could elect the right to repair, in the Trinidad case, FPIC argued it did not owe the 10% overhead and profit until it was actually incurred, rather than when it was “reasonably likely” to be incurred.

The Supreme Court’s opinion hinged on its interpretation of the policy language and Section 627.7011, Fla. Stat.  Similarly, in my case, the judge ruled based on his the plain language of the policy and the same statute.

Initially, the Supreme Court noted overhead and profit are included in the scope of a actual case value policy like all other costs of a repair. The court noted if the overhead and profit were not required under a replacement cost policy, it would be anomalous to have a result where the insurer was required to provide less coverage under a replacement cost policy (which is designed to provide more coverage) than under an actual cash value policy.

The court proceeded to analyze Section 627.7011, Fla. Stat., the replacement cost statute, and interpreted the statute the exact same way the judge did in my case.  The applicable version statute provided for the insurer to pay the replacement cost without reservation or holdback of depreciation, “whether or not the insured replaces or repairs the dwelling or property” and required payment of “the reasonable and necessary costs to repair [or replace] the damaged, destroyed, or stolen covered property.”

Finally, the court analyzed the insurance policy, and came to the conclusion that the policy also required payment of overhead of profit regardless of whether it was actually incurred.  The court determined a contrary reading of the policy language would run afoul of Section 627.7011, Fla. Stat., and consequently be unenforceable.

Fortunately, the trial judge in my case saw through the insurer’s arguments and, consistent with the Supreme Court’s recent opinion, held the statute required payment of general contractor overhead and profit.

Unfortunately for insureds, Section 627.7011 was amended in 2011.  For Replacement Cost policies issued or renewed after the effective date of the change, insurers can hold back a portion of what they owe.  The change reads as follows:

For a dwelling, the insurer must initially pay at least the actual cash value of the insured loss, less any applicable deductible. The insurer shall pay any remaining amounts necessary to perform such repairs as work is performed and expenses are incurred. If a total loss of a dwelling occurs, the insurer shall pay the replacement cost coverage without reservation or holdback of any depreciation in value, pursuant to s. 627.702.

However, the insurance policy must contain policy language that allows this type of payment scheme.   And, the insurance company must have given the insured appropriate notice of this type of change