On July 3, 2013, the Florida Supreme Court held that an insurer making a replacement cost payment to a homeowner who had yet to repair the damaged property could not withhold payment of that component of replacement cost that represents a general contractor’s overhead and profit until such time as the repairs had actually been made.

Trinidad v. Florida Peninsula Ins. Co., -- So.3d --, 2013 WL 3333823 (Fla., July 3, 2013) involved a homeowner with a replacement cost policy whose dwelling was damaged by fire on February 11, 2008. The version of F.S.A. § 627.7011 that was in effect at the time of loss required payment of “the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling or property.” Florida Peninsula admitted coverage and made a replacement cost payment even though the policyholder had yet to effect repairs. The insurer did not include any amount for a general contractor’s overhead and profit, however. The insured filed a breach of contract action as a result. The trial court and Florida’s Third District Court of Appeals agreed with the carrier, but the state’s Supreme Court, in a 5-2 opinion, held that this was error. (The two dissenters would have dismissed the appeal for lack of jurisdiction on the basis that review had been improvidently granted.)

Florida Peninsula’s policy had the standard tripartite definition of replacement cost. The term connoted “the cost to repair or replace … without deduction for depreciation, but not more than the least” of: (1) the policy’s building limit of liability; (2) the “replacement cost of that part of the building damaged for like construction and use on the same premises;” or (3) the “necessary amount actually spent” to effect repairs. In lower courts, the insurer successfully argued that it was not obligated to pay overhead and profit because those costs had yet to be “actually spent” by the policyholder in accordance with the third formulation.

The Florida Supreme Court disagreed. Justice Pariente began by noting that a general contractor’s “overhead and profit are like all other costs of a repair, such as labor and materials, [that] the insured is reasonably likely to incur.” As a result, they had to be included in a replacement cost payment any time “the insured is reasonably likely to need a general contractor for the repairs.” The court found support for this conclusion in the definition of replacement cost because Florida Peninsula admitted that its payment had been made pursuant to the second prong of that language rather than the third. In other words, the carrier had made a payment for the “replacement cost of that part of the building damaged” rather than a payment for the “necessary amount actually spent.” As the decision explained:

the plain language of the policy clearly requires Florida Peninsula to pay overhead and profit if the insured is reasonably likely to need a general contractor. Neither the policy nor … the applicable Florida statute … permitted withholding any component of the replacement costs until the insured actually incurred expenses for the repairs.

The case was remanded to the trial court for determination as to whether the insured was “reasonably likely to need a general contractor” to perform the work.

F.S.A. § 627.7011 was amended effective May 17, 2011. Payment of the full replacement cost is still required where a total loss occurs, but in partial loss situations, the carrier now need pay only “the actual cash value of the insured loss;” the present-day statute requires payment of “any remaining amounts necessary to perform such repairs as work is performed and expenses are incurred.” Trinidad governs claims arising from a loss prior to May 2011, however, and it probably forecasts how the state’s Supreme Court will treat total losses under the new formulation even though the 2011 version does not state the insurer must pay full replacement cost in such situations “whether or not the insured replaces or repairs the dwelling or property” as its predecessor did.