Replacement cost property policies cover contractor’s OH&P — says Florida Supreme Court


The Florida Supreme Court gave insureds a Fourth of July present one day early — July 3 — by ruling that property policies providing replacement cost coverage include the cost of a contractor’s overhead and profit, even if the insured does not actually pay a contractor overhead and profit to replace the damaged property. We’ll explain the decision, Trinidad v. Florida Peninsula Insurance Company, in detail after the jump, but first some commentary.

We’ve often seen this issue in the “no good deed goes unpunished” situation where a contractor steps in to perform repair work on a builders risk policy and the carrier refuses to pay the contractor’s overhead and profit. If the contractor did not perform the repairs, either the owner or the carrier would have to hire a different contractor who was not already on site to mobilize to the site and perform the repair work. The carrier would obviously have to pay that contractor overhead and profit. And that contractor would be much less efficient and more expensive. But the carrier tries to take advantage of the original contractor’s willingness to step in by carving overhead and profit off the payout.

This Florida Supreme Court decision validates our position: A carrier must pay the overhead and profit whether or not the insured actually pays a contractor to do the work. Now, for the details.

In Trinidad, a homeowner filed a claim with his insurance company for fire damage. The insurer admitted coverage under the homeowner’s replacement cost policy and issued a payment for completion of repairs, even though the homeowner did not make repairs to his home or hire a contractor to do so. The insurer’s payment did not include overhead and profit, and the insurer claimed that it was not obligated to pay these amounts until the homeowner actually incurred such expenses in repairing his home.

The homeowner sued for breach of contract arguing that he was entitled to all costs of repair, including overhead and profit. The insurer responded that it was not required to pay these costs under Section 627.7011 of the 2008 Florida Statutes until such costs were actually incurred. On summary judgment, the trial court found in favor of the insurer and stated that the policy language only required the insurer to pay costs that had been “actually spent.” The Third District affirmed the trial court’s decision and refused to interpret the Florida Statutes as requiring payment for overhead and profit which had not been incurred.

The Supreme Court of Florida reversed and held 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 contrator to perform repairs. The court noted that neither the homeowner’s policy nor the 2008 version of the Florida Statutes required an insured to actually repair his property before recovering the full replacement cost, including overhead and profit. The court stated that overhead and profit were “no different that any other costs of a repair” that an insured is reasonably likely to incur.

NOTE: The section of the Florida Statutes at issue in this case, Section 627.7011, was amended in 2011 to allow insurers in some situations to hold back certain amounts until work is performed and expenses are incurred.