Contractor Overhead and Profit May be Included in “Actual Cash Value” in Homeowner’s Policies

August 18, 2017

In the recent case of Kurach v. Truck Ins. Exchange (C.P. Philadelphia 2017), a Pennsylvania Court held that under Pennsylvania law, insurance companies are required to include general contractor overhead and profits in actual cash value payments for losses where repairs would be reasonably likely to require a general contractor.

In this case, the homeowners sustained water damage to their homes. Both homeowners had purchased a higher cost insurance policy that provided that in the event of damage, they would receive “replacement cost”, a higher amount than the lesser insurance product which only provides for “actual cash value”. The policy provided a two step process whereby the homeowner would receive “actual cash value” upon getting an estimate for the repairs, and then upon completion of repairs would receive the difference between “actual cash value” and “replacement costs”. The policy defined “actual cash value” as replacement cost less depreciation. The insurance carrier agreed that repairs would require the involvement of a general contractor. However, the homeowners never actually went to step two of the policy to complete the repairs, and therefore never sought “replacement cost”. Rather they asserted that they were entitled to an “actual cash value” which included contractor overhead and profit, even though, by not completing the work, no such overhear or profit were ever incurred.

The court agreed with the homeowners, finding that the definition of “actual cash value” allowed the insurance carrier to subtract only depreciation from the “replacement cost” and that replacement costs necessarily included contractor overhead and profit, even if not actually incurred. Noteworthy is the fact that the policy language actually provided that “actual cash value settlements will not include estimated general contractor fees or charges for general contractor’s service unless and until you actually incur and pay such fees and charges, unless the law of your state requires that such fees and charges be paid with the actual value settlement.”

Relying upon Gilderman v. State Farm, 649 A.2d 941 (Pa. Super. 1994), the court found that because the policy actually failed to define “replacement cost” but used that term in defining “actual cash value”, that the policy language was “unclear” and therefore the language purporting to exclude general contractor overhead and profits from “actual cash value” appeared to be attempting an “end run.”

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