Claims Jounal July 27, 2023
Property insurance claims involving disputes about whether the insured is entitled to replacement cost value (RCV) typically involve whether the insured has actually repaired the damaged property. This is in large part because replacement cost provisions typically restrict an insured’s ability to recover on an RCV basis until covered repairs are completed, oftentimes requiring completion within a specified timeframe.
In Texas, courts generally strictly adhere to such provisions, requiring full compliance with policy requirements in order to recover on an RCV basis. Recently, however, a Texas court held that the prevention doctrine may allow a party to recover on an RCV basis, despite the insured’s non-compliance with an RCV provision. This decision diverges from the majority of decisions by Texas courts that have addressed the issue. These decisions confine application of the prevention doctrine to very limited circumstances.
The prevention doctrine, also referred to as the equitable doctrine of prevention, excuses a contracting party from performing a condition when the other contracting party wrongfully prevents them from doing so. Notably, Texas courts have properly recognized that application of this doctrine is appropriate only in narrow circumstances where “the insurer either completely denied the claim or refused to make any payments until it was too late for the insured, who was frequently an unsophisticated party, to make repairs.”
Accordingly, Texas courts typically decline to apply the prevention doctrine where: (i) there are sophisticated parties; (ii) the transaction is completed in a commercial setting; or (iii) the insurer has already paid the actual cash value (ACV) to the insured, particularly when the insured did not use any awarded funds to make repairs. Where ACV funds have been issued, and there is an optional RCV provision in the policy, ACV funds can be used to repair or rebuild, creating a two-step process in which the insured can obtain funds to begin repairs and thereafter request RCV damages if costs become higher during the repair process. In cases where Texas courts have elected not to apply the prevention doctrine, the courts have prioritized applying the plain meaning of the applicable policy provision to ensure that its requirements have been satisfied before the insured can recover RCV.
Most Texas courts have followed Devonshire Real Estate & Asset Management LP v. American Insurance Co. to address the prevention doctrine and consistently enforce RCV recovery requirements, including those with time-frame limitations. In Devonshire, the US District Court for the Northern District of Texas explicitly recognized that the prevention doctrine does not eliminate “an insured’s contractual obligation to repair or replace damaged property before claiming payment for replacement costs.” The Devonshire court appropriately made clear that “courts have refused to extend the doctrine where the insurer already paid the insured actual cash value or where the dispute took place in a commercial setting and involved relatively sophisticated parties.”
Similarly, in Lakeside FBBC, LP v. Everest Indemnity Insurance Co., the court rejected a policyholder’s argument that it was not reasonably possible for it to make or complete repairs due to the insurer’s purported payment delay. Relying on the analysis in Devonshire, the court confirmed that when the dispute takes place in a commercial setting and involves relatively sophisticated parties, the policy’s replacement cost provision should be enforced as plainly written. To further support its decision, the Lakeside court also acknowledged that the insurer had already made pre-appraisal and post-appraisal ACV payments, which it reasoned the insured could have used to make the necessary repairs.
Further, at least one court applying Texas law has recognized that where the policy contains a contractual time limit to make repairs, an insurer’s withholding of RCV prior to compliance with the requirement cannot serve as a basis for avoiding the requirement because: “[T]he insurer is not obligated to pay [the insured] upfront and so [the insurer’s] desisting cannot have made it beyond [the insured’s] control to replace the property within three years.”
Accordingly, the majority of Texas courts addressing the prevention doctrine have properly held that a policy’s requirement for costs to repair or replace be incurred prior to the recovery of RCV is a condition that should be recognized and enforced by the courts. These courts have reasoned that disregarding the clear policy language and allowing an insured to recover RCV in the absence of repairs, “would permit the insured to recover for a loss he has not suffered.”
Despite this clear legal authority, however, one Texas court recently indicated that the prevention doctrine may apply outside of the limited circumstances identified by other Texas courts. In Kabir Marina Grand Hotel, Ltd. v. Landmark American Insurance Co., the court held that an insured could present evidence that the insurer unreasonably delayed payment that prevented them from completing repairs. The court reasoned that “under the prevention doctrine, breach of contract damages in addition to policy limits may be awarded to redress an unreasonable delay in payment that results in different damages or higher repair costs.”
In a prior opinion in the case, the Kabir court acknowledged the standard set in Devonshire but nevertheless extended the Devonshire holding for the proposition that the doctrine of prevention may apply when “the insurance company has caused a delay past [a] contractual deadline.” Oddly, the Kabir court’s interpretation of the prevention doctrine comports with neither the Devonshire court’s analysis nor the majority of Texas courts that have rejected this insureds’ reliance on the prevention doctrine to avoid conditions to recovery on an RCV basis.
As discussed, Texas courts have routinely held that an insured is not entitled to recover on an RCV basis without making repairs beforehand unless the policy expressly and plainly states otherwise. The Kabir court’s decision to allow evidence that the insurer unreasonably delayed payment, however, seemingly signals a departure from established Texas precedent, including Devonshire and its progeny. Notably, Kabir did not involve unsophisticated parties engaging outside of a commercial context, nor did the insurer directly refuse to pay the insured, as the measured costs of damages fell below the policy’s applicable deductible. Instead, the dispute in Kabir centered on whether all the claimed damages were, in fact, covered under the subject policy’s terms and conditions. Simply put, the facts in Kabir did not warrant a departure from settled precedent that does not allow a party to argue that the prevention doctrine abrogates a clearly worded replacement cost provision.
Ultimately, the court’s decision in Kabir is an outlier that ignores the majority of Texas case law addressing the prevention doctrine and seemingly deemphasizes enforcement of a policy’s plain language, including clear conditions to recovery on an RCV basis. What remains clear is that insurers and insureds alike must give effect to the specific terms and conditions specified in policies regarding entitlement to recovery on an RCV basis and should be mindful of the limits on the prevention doctrine outlined in Devonshire.