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Florida Supreme Court Ruling Mandates Insurance Companies to Pay a Contractor’s Profit as Part of the Replacement Costs Coverage

overhead and profit.jpgIn Trinidad v. Florida Peninsula Insurance Company, the Florida Supreme Court reversed the Third District Court of Appeal, and concluded that insurers must pay a contractor’s overhead and profit as part of the expense of repairing a homeowner’s property despite the fact that the repairs may not have been made. Florida Peninsula Insurance Company (“FPIC”) believed that they did not owe money for the overhead because that is not covered under replacement cost insurance. As we previously discussed, the facts of the case are fairly straight forward. Amado Trinidad filed a claim with his homeowner’s insurance company, FPIC, for fire damage that occurred to his home in 2008. FPIC admitted coverage and made a payment for completion of the repairs, even though Trinidad did not make repairs to the home or hire a general contractor. FPIC’s payment did not, however, include an amount for a general contractor’s overhead and profit, claiming that it was entitled to withhold payment of overhead and profit until Trinidad actually incurred those particular expenses. Trinidad then filed a breach of contract lawsuit against FPIC. The trial court agreed with FPIC, and Trinidad appealed to the Third District Court of Appeal. The Third District Court of Appeal also agreed with FPIC, and Trinidad appealed to the Florida Supreme Court. Citing a conflict with Goff v. State Farm, 999 So.2d 684 (Fla. 2d DCA 2008), the Florida Supreme Court agreed to render a ruling on the case. One of the issues that the Florida Supreme Court was forced to address was whether or not Fla. Stat. Sec. 627.7011 was applicable to this case. That statute, as it existed in 2008, provided that in the case of a replacement cost policy, the insurer shall pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the damaged property, limited to the reasonable and necessary cost to repair or replace the damaged property. The Court went on to hold that if overhead and profit are “reasonable and necessary” to the repair, Fla. Stat. § 627.7011 mandates their payment as replacement costs. Overhead and profit are no different than any other costs of repair that an insured is reasonably likely to incur. Therefore, the Florida Supreme Court concluded that an insurer is required to pay overhead and profit under a replacement cost policy, where the insured is likely to need a general contractor in order to make the repairs to their home. State lawmakers in 2011 sought to address cases like Trinidad’s and grant insurers more control over monies actually used to make repairs. Under current state law in the event of a loss under a replacement cost policy, the insurer must initially pay at least the actual cash value of the insured loss, less any applicable deductible. Then as repairs are performed, the insurer must pay the full replacement cost of those repairs.

Overhead and Profit – Is it Included in the Replacement Cost Portion of the Insurance Policy?

overhead and profit.jpg

Overhead and Profit – Is it Included in the Replacement Cost Portion of the Insurance Policy?

In Trinidad v. Florida Peninsula Insurance Company, the Florida Third District Court of Appeal, held that a homeowner was not entitled to overhead and profit as damages from a fire in his home.

In this case, a fire damaged the insured’s home. The insured then submitted a claim for payment to his insurance company. The insurance company admitted coverage and made a payment towards repairs. The insured, however, believed that he was not paid in full for his claim as he was not paid overhead and profit. As a result, he filed a lawsuit against his insurance company.

The issue in the litigation focused on overhead and profit. Overhead and profit are elements of the costs paid to a contractor for repairs, and are included in repair contracts and estimates. Overhead includes fixed costs to run the contractor’s business, such as salaries, rent, utilities, and licenses. Profit is the amount the contractor expects to earn for his services.

Although the insured had not hired a general contractor, or submitted a contract by a contractor estimating the repairs, the insured claimed that he was nonetheless entitled to overhead and profit. The insured claimed that he was entitled to overhead and profit even though he did not hire a contractor because they are a “replacement cost” and it is his choice as to whether to make the repairs with a contractor or not.

The insured initially based his argument on his contention that the loss settlement provision of his policy provided for an “actual cash value” payment for his loss, and “actual cash value” includes overhead and profit. Actual cash value is the actual cost of repair, less depreciation. The parties later agreed, however, that the policy is a replacement cost policy. But the insured claimed that his insurance company still was required to pay him for overhead and profit even if he never hired a contractor and does not repair the damage. The insured also relied on Fla. Stat. Sec. 627.7011(3) to support his position.

On the other hand, the insurance company argued that replacement cost is the cost to replace the damaged property, which does not include depreciation or overhead and profit until the insured either incurs those costs or he signs a contract for repairs and submits the contract to the insurance company.

The Trial Court and the Third District Court of Appeal sided with the insurance company and concluded that the insurance company was only required to make payments for overhead and profit under a replacement cost policy when the homeowner actually incurred those costs or became contractually obligated to do so with a contractor. Since the insured did not hire a contractor and did not spend any money on overhead or profit he was not entitled to payment for overhead and profit under the replacement cost insurance policy.

In sum, the Third District Court of Appeal concluded that an insurance policy that promises to pay replacement cost value requires the insured to actually replace the damaged property. The case is currently pending before the Florida Supreme Court, and one of the issues to be decided is whether this ruling conflicts with Fla. Stat. 627.7011(3) which requires replacement cost payments to be made “whether or not the insured replaces or repairs the dwelling or property.” A ruling is expected soon from the Florida Supreme Court.

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