Based on the amount and nature of the loss, it was evident that Kurach would need to hire a general contractor. Truck issued an ACV payment to Kurach in accordance with his policy; the costs associated with the GCOP, though Truck admitted and did not dispute that they would be necessary, were not included in the payment because they had neither been incurred and paid for nor required by Pennsylvania law.

Dispute Over GCOP and ACV

Kurach expressed his dissatisfaction with Truck’s exclusion of the GCOP expenses, but the insurer maintained that the policy permitted withholding those costs until Kurach actually completed the necessary repairs. The ACV payment was reluctantly accepted, but Kurach maintained his right to take legal action against Truck.

Kurach sued Truck for breach, claiming Truck’s exclusion of the GCOP fees from the ACV payments was a breach of contract. Truck again pointed to the policy provision that specifically stated Truck would “pay no more than the actual cash value of the loss until actual repair or replacement is completed” (emphasis added) and argued that excluding those costs was entirely permissible. Kurach argued the policy provision Truck relied on was ambiguous and violative of Pennsylvania public policy. Both parties filed a motion for summary judgment.

The judges approached the issue from the standpoint of a typical insured. In two earlier cases, Gilderman v. State Farm, 649 A.2d 941 (Pa. Super. 1994) and Mee v. Safeco, 908 A.2d 344 (Pa. Super. 2006), the Pennsylvania Superior Court had confronted a similar question: whether, when a policy was otherwise silent, any anticipated GCOP expenses should or should not be included in an insured’s ACV payment when the nature and extent of the necessary repairs indicated it was “reasonably likely” that the insured would need to hire a general contractor. In both cases, the court answered the question in the affirmative.

Based on Gilderman and Mee, the trial court in the instant case determined the unpaid GCOP expenses were integral to the replacement costs. It also found Kurach’s policy was ambiguous where Truck said it would pay GCOP expenses only if required to do so by Pennsylvania law. An ordinary insured, reasoned the judges, “[could] not reasonably be expected to understand whether or not such payment is required under Pennsylvania law.”

The trial court granted summary judgment in favor of Kurach, and Truck appealed.

The appellate judges pointed out that the policy at issue in Gilderman had not defined “actual cash value,” so the Gilderman court had simply construed the meaning of “actual cash value” in accordance with the intention of the parties. Kurach’s policy, on the other hand, specifically defined “actual cash value.” Therefore, the specific definition of actual cash value in Kurach’s policy took precedence over the generalized definition formulated in Gilderman. The intermediate appellate court reversed the trial court, and Kurach appealed.

“Reasonably Likely to be Necessary”

Kurach argued the nonpayment of GCOP expenses was a deterrent to making repairs because the GCOP expenses were necessary to hire a general contractor in the first place. Gilderman and Mee, he argued, “recognized [ACV] as an integral part of the ‘replacement costs’ in all instances where…the services of a general contractor are reasonably likely to be necessary.”

Truck pointed out that Kurach was hardly the first insured to challenge what expenses an insurer could or could not withhold from an ACV payment. In Kane v. State Farm Fire & Casualty Co., 841 A.2d 1038 (Pa. Super. 2003), among many other cases, the Pennsylvania Superior Court had upheld the enforceability of a policy that specifically withheld depreciation from an ACV payment. Truck also argued, as the appellate court had pointed out, that the policies at issue in Gilderman and Mee included no provisions regarding the deduction of GCOP expenses from the ACV, while Kurach’s policy had specific clauses regarding GCOP expenses.

Ambiguity 

Kurach also argued the policy was ambiguous because one part of the settlement provisions stated that claims would “be settled at replacement cost, without a deduction for depreciation, for an amount that is reasonably necessary,” while another stated he would be paid no more than the ACV of the damaged property until repairs were complete. It was not possible to balance these clashing clauses, and the court must therefore rule in his favor.

Truck claimed there was no ambiguity in the policy because it specifically informed insureds that it was necessary for them to incur the GCOP expenses before those expenses would be paid.

What the Supreme Court of Pennsylvania Said

The justices said Kurach had misunderstood the holdings in Gilderman and Mee. As both the appellate court and Truck had pointed out, both of those policies were silent regarding the treatment of GCOP expenses in relation to the insured’s ACV payment. Since there was no policy language specifying otherwise, the GCOP expenses in those cases could not be deducted from the ACV of the insured’s property. Kurach’s policy, by contrast, contained a specific clause conditioning the insurer’s payment of any necessary GCOP expenses on the insured’s actually incurring those costs.

This reasoning also precluded any alleged ambiguity. Kurach’s policy specified that Truck would withhold GCOP expenses from the ACV of his property until he actually incurred GCOP expenses unless Pennsylvania law stated otherwise. If there was a Pennsylvania law that required GCOP expenses to be included in an insured’s ACV payment–i.e. before they were incurred–then Truck would have included that amount in Kurach’s ACV payment. Since no Pennsylvania law described such a requirement, the inclusion of GCOP in the ACV of Kurach’s property was not necessary.

Conclusion

Since Pennsylvania law did not require the early payment of GCOP expenses, and Kurach had not actually incurred those expenses, it was permissible for Truck to withhold the anticipated GCOP expenses. The appellate verdict favoring Truck was affirmed.

Editor’s Note: In this case, the insurer properly applied the policy provisions. It’s not unusual for an insurer to pay the ACV of repairs first, and then pay the final amount once repairs have been completed. This method of payment ensures that the property is restored to pre-loss condition, and that the insured doesn’t leave the property unrepaired and use the money for a vacation. Insureds generally have the option to settle for ACV or RCV. While not being paid for the entire sum of RCV initially may put some insureds into an awkward financial position, it ensures that the repairs the insurer has paid for are accomplished.

Read More:

Overhead and Profit—A Controversial Subject of Property Insurance

Overhead and Profit Included in Repair Costs