From the desk of Jeff Eberhard: What time limits can the insurer place on claims for replacement cost benefits?
Claims Pointer: If an insurer intends to require repair or replacement within a specified period of time, it must clearly specify such in the insurance policy.
Patton v. Mutual of Enumclaw Ins. Co., — P3d — (Oct. 8, 2014).
Lowell E. Patton (“Patton”) had a homeowner’s insurance policy with Mutual of Enumclaw Insurance Company (“MOE”). On November 8, 2001, Patton’s house burned down. Patton made a claim under his insurance policy with MOE and, within 180 days of the loss, notified MOE of his intent to claim replacement cost benefits. After receiving estimates for the cost to build a new house construction was delayed because Patton was initially unable to obtain the required building permit approval.
Patton’s homeowner’s policy with MOE included an endorsement for “guaranteed replacement cost” of the house. In the event of loss, MOE agreed to pay the lesser of: (1) The cost to rebuild with like kind and quality construction on the same premises; or (2) The amount actually spent to replace the damaged building, and nothing more. Actual repair or replacement was a condition precedent to recovering more than the actual cash value of the loss. Finally, the policy included a suit limitation period, which the court labeled a “no action” provision, which provided: “[n]o action can be brought unless the policy provisions have been complied with and the action is started within two years after the date of loss.”
Patton notified MOE of the issue with the building permit and the resulting delay in reconstruction of the house. Just before the two-year anniversary of the fire, Patton entered into a construction contract to rebuild his house. Patton then sued MOE arguing that MOE was obligated to pay the replacement cost before construction began based upon the estimated cost to replace, not the actual cost to replace.
At trial, Patton successfully argued that a letter from MOE’s attorney altered the policy entitling Patton to recover the cost of whatever he decided to rebuild, without limitation, so long as the new house was of “like construction and use”. The trial court interpreted “like construction and use” to mean single family residential. The trial court also struck MOE’s affirmative defense that Patton must actually complete construction before seeking compensation for replacement costs. MOE appealed.
The Court of Appeals reversed the trial court, concluding that the policy provisions relating to the recovery of replacement costs were straightforward, that Patton can only recover what he lost and that completion of construction was a condition for recovery of replacement costs. The court further concluded that the letters from MOE’s attorney did not alter the terms of the policy. The case was sent back to the trial court on remand. On remand, the trial court ruled that the policy requires that repairs be completed within two years of the date of loss and that this requirement was not met. Patton appealed.
The Court of Appeals disagreed with the trial court, ruling that although the unambiguous policy terms required that MOE pay no more than the actual cash value of the damage unless actual repair or replacement is complete, the “actual replacement” condition was not subject to the two-year “no action” period.
The MOE policy did not expressly provide a time limit for reconstruction of the house to be completed. Discussing Bourrie v. U.S. Fidelity and Guaranty Ins. Co., 75 Or App 241 (1985), a previous case with similar facts, the court concluded that if an insurer intends to require repair or replacement within a specified period of time, it must clearly specify such in the insurance policy.
Here, the policy merely states that no action can be brought unless the policy provisions have been complied with and the action must be filed within two years after the date of loss. The provisions imply a two year time limitation, but do not expressly limit the time within which Patton had to rebuild his house. Therefore, Patton had a reasonable time to rebuild his house, and was not precluded from seeking replacement cost benefits if construction is not completed within two years.
The relevant provisions of the policy in Bourrie provided that (i) the defendant would “pay no more than the actual cash value of the damage until actual repair or replacement is completed” and that (ii) the insured could “make claim within 180 days after loss for any additional liability on a replacement cost basis.” Id. at 245. The trial court considered whether “make claim” meant actual replacement, or simply announcing intent to repair or replace. The trial court ruled that “make claim” requires actual replacement and the ultimate costs liquidated, meaning the insured must both complete the replacement and to “make claim” within 180 days.
The Court of Appeals in deciding Bourrie disagreed, ruling that the insured was required only to notify the insurer within 180 days of his intention to replace the building and its contents and then to complete the replacement within a reasonable time. If the insurer had intended to require repair or replacement within a specific period of time, it would have been a simple matter to so require in clear, express language. Because the policy was silent as to the time within which replacement must be completed, it must be done within a reasonable time.
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