An insured homeowner suffered $5,000 worth of covered wind damage to his roof as a result of a hurricane. The insured was paid for the loss on an actual cash value basis, but did not repair the roof until 10 months later. At that time, the insured sought the remaining holdback amount under a replacement-cost basis.

For purposes of this discussion, assume that the insured's HO-3 form requires him to notify the insurer of his intent to recover on a replacement-cost basis within 180 days after the date of loss. Would the insured be entitled to the holdback amount when it took him more than 180 days to repair his roof?

Whether the insured is entitled to the holdback amount depends upon whether (1) the insured put the insurer on notice within 180 days of the loss of his intent to seek recovery on a replacement-cost basis, and (2) the repairs where made within a reasonable amount of time (which, depending on the facts of a claim, could exceed 180 days).

180-Day Requirement

The HO-3 form does not require that the repairs be made within 180 days for the insured to be entitled to a replacement cost recovery. Instead, the insured simply must put the insurer on notice within 180 days from the loss of his “intent” to make a replacement cost recovery.

In Blanchette v. York Mut. Ins. Co., 455 A.2d 426 (Me. 1983), the insurer paid actual cash value of $10,000, and the insured later tried to recover an additional $5,000 under the replacement cost provisions of his homeowner policy. Replacement of the home had been delayed by the onset of winter and, six months after the loss, the insured learned that he could not rebuild the home on the same lot because of local ordinances pertaining to sewerage treatment. The insurer denied the claim, stating as one basis the insured's failure to substantially complete construction within 180 days (plus, in this case, a 90-day extension granted by the insurer). The insured had made oral claim for replacement cost, but the insurer did not grant this request. The trial court awarded the insured the $5,000 sum that he had sought.

The Supreme Judicial Court of Maine held in favor of the insured, reasoning:

[T]here is no merit in defendant's claim that eligibility for replacement cost reimbursement is contingent upon the replacement structure's being “substantially complete” within 180 days of the loss … . [T]he contract provides that, in order to qualify for reimbursement for replacement cost, the insured must “make claim within 180 days after the loss.” There simply is no support for the company's argument that the obligation to make a claim imposes the requirement that the replacement building must be “substantially complete” at the time that the claim is made. The language of the contract is clear and unambiguous, and it supports the judgment rendered in this case.

In major catastrophes, such as Hurricane Katrina, there may be regulations or bulletins that extend the amount of time that the insured has to give notice to the insurer. (See, for example, the recent Alabama Department of Insurance's bulletin that provides a grace period for Katrina victims that could affect the time that insureds have to notify insurers of their intent to repair.) The reason for such extensions of time is that, in major catastrophes, insureds may be prevented from gaining access to their property for some time in order to determine the extent of damage and whether to rebuild.

Reasonable Time

If the insured has put the insurer on notice within 180 days of the date of loss of his intent to make a replacement cost recovery, the insured actually must repair or replace within a reasonable amount of time. A “reasonable time” is implied by law when the contract itself is silent as to the time in which repair or replacement must be completed, according to Bourrie v. United States Fid. & Guar. Ins. Co., 707 P.2d 60 (Or. App. 1985).

What constitutes a reasonable amount of time varies depending on the facts of the particular claim. For example, in 2004, due to widespread hurricane damage throughout Florida, in some parts of the state there were shortages of skilled contractors and materials that lead to lengthy delays in repairing covered losses. These delays were not within the control of the insured and, therefore, in many cases were reasonable. Thus, in a major hurricane situation with widespread damage, it may take significantly longer to repair a wind-damaged roof than in situations in which wind damage is confined to smaller areas.

The 180-day notice rule for replacement cost recovery was intended, in part, to give insurers a time frame for knowing what reserves to set. It was not, however, intended to serve as a cut off for when the repair or replacement must be completed. Instead, the insured has as much time to repair or replace as is deemed “reasonable.” What constitutes “reasonable” must be decided on a case-by-case basis. Factors to consider include the location of the property (is it in a remote location?), the amount of damage to the insured property, and, in times of catastrophic losses, the extent to which widespread damage will create shortages in labor and materials needed to repair covered losses.

Jeffrey Kerensky is assistant vice president of Property Legal Services for the Property Loss Research Bureau.

[This month's Coverage Analysis Column is prepared by the Property Loss Research Bureau as a service to Claims readers. It is designed to present information about case law and other authority applicable to the interpretation of insurance policy provisions. Every effort has been made to insure that the information provided is accurate. However, the opinions expressed here are for internal use only. They do not constitute a substitute for legal advice as to the law of a particular jurisdiction as applied in the full factual context of a particular claim.]

The opinions expressed in this month's column are those of the staff of the Property Loss Research Bureau and do not necessarily represent the opinions of members or other insurers. The opinions of PLRB staff do not represent an indication or prediction of any future action or position of any member or other insurer. Readers should consult with management to determine their company's positions on the issues discussed in this column.

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