The Florida Supreme Court in Trinidad v. Florida Peninsula Ins. Co., 2013 WL 3333823 (Fla. July 3, 2013) held that replacement cost coverage was required to include overhead and profit in cases where the insured was reasonably likely to need a general contractor for the repairs. The Court further held that insurance companies were not statutorily permitted to hold back any portion of the replacement cost payment, including costs for overhead and profit, contingent upon the insured’s actually repairing or replacing the property and as such found that insureds were not required to actually incur expenses for the repairs in order to be entitled to overhead and profit.
The Court began its analysis by recognizing that “[r]eplacement cost insurance is designed to cover the difference between what property is actually worth and what it would cost to rebuild or repair that property.” The Court also noted that “[r]eplacement cost is measured by what it would cost to replace the damaged structure on the same premises.” In contrast, actual cost value was generally defined as “fair market value” or “replacement cost minus normal depreciation,” with the depreciation representing a “decline in an asset’s value because of use, wear, obsolescence, or age.”
After making these observations, the Florida Supreme Court then stated that “[b]ecause replacement cost insurance provides coverage based on the cost to repair or replace the damaged structure on the same premises, we conclude that overhead and profit necessarily must be included within the scope of a replacement cost policy where it is reasonably likely a general contractor would be needed for the repairs.” As such, overhead and profit was a necessary component of replacement costs inasmuch as replacement cost insurance was intended to compensate the insured for what it would cost to repair or replace the damaged property.
Next, the Court analyzed § 627.7011, Fla. Stat. (2008) in light of its ruling that RCV included overhead and profit when it was reasonably likely the insured would need a general contractor to perform the repairs. This statute required insurers to pay RCV without reservation or holdback of any depreciation in value irrespective of whether the insured replaced or repaired the dwelling or property. However, insurers were permitted under the statute to limit their liability under the policy by providing that the loss would be adjusted on the basis of RCV which was the lesser of (a) the limit of liability shown on the declarations page; (b) the reasonable and necessary cost to repair the damaged, destroyed, or stolen covered property; or (c) the reasonable and necessary cost to replace the damaged, destroyed, or stolen covered property.
The Court found that the statute did not permit insurers to exclude overhead and profit in a payment simply because overhead and profit had not yet been incurred. Under the statute, if the insured is unlikely to incur overhead and profit, section 627.7011(6) would permit the insurer to withhold payment of overhead and profit cost consistent with section 627.7011(3) because those costs would not be “reasonable and necessary” to the repair. That is to say that if the insured is not reasonably likely to incur overhead and profit in repairing the damaged property, then overhead and profit are not replacement costs of the insured’s covered loss. However, if overhead and profit are going to be “reasonable and necessary” to the repair, then the statute mandates their payment as replacement costs irrespective of whether they were incurred.
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