Florida Supreme Court Rules Replacement Cost Includes Contractor’s Profit

Florida’s high court has ruled that insurers under a 2008 law must pay a contractor’s overhead and profit as part of the expense of repairing a homeowner’s property despite the fact the repairs may not have been made.

The Florida Supreme Court recently ruled in the case [Trinidad v. Florida Peninsula Insurance Company, SC11-1643], which involved a homeowner, Amado Trinidad, whose home was damaged in a fire in 2008.

At the time, Trinidad had a homeowner’s policy from Florida Peninsula Insurance Co. that called for him to receive full replacement coverage in the event of any damage to his home.

Under a replacement policy, insurers are liable to pay for damage to a home without taking into account any depreciation based on the home’s age, condition, value or other similar factors. By comparison, a policy that pays actual cash value for damages factors in those depreciation factors.

The 2008 law also required insurers to provide the coverage and pay any cost regardless of whether the homeowner made any repairs.

Florida Peninsula conceded that the law required the insurer to pay replacement costs without depreciation. However, the insurer argued that since the law is silent on the issue of whether the insurer must pay a contractor’s profit and expenses, it was not required to do so in cases where those costs had not yet been incurred.

Justice Barbara Pariente, however, said that line of reasoning could lead to instances where insurers may depreciate a contractor’s overhead and profits in an actual cash value policy while providing no such payments at all under a replacement policy.

“This result, in which the insurer is required to provide less coverage in a replacement cost policy than in an actual cash value policy, would be anomalous because replacement cost insurance is specifically designed to provide greater coverage,” wrote Pariente.

Florida Peninsula also argued the law did allow insurers in their policies to limit their liability for repairs to “reasonable and necessary costs.”

Pariente, however, said such an interpretation of the law would open the door to allowing insurers to potentially not pay other costs associated with making repairs.

“If overhead and profit were not included in the scope of replacement cost insurance where it is reasonably likely the insured will insure those costs, then no other repair costs, such as labor and materials, would be considered replacement costs,” wrote Pariente.

As such, Pariente concluded that “overhead and profit are no different than any other costs of a repair that the insured is reasonably likely to incur, all of which are considered replacement costs and are not actually incurred until the repair is made.”

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.