Supreme Court Defines Overhead and Profit Obligation
In Trinidad v. Florida Peninsula Insurance Company issued July 3, 2013, the Florida Supreme Court considered the scope of replacement cost coverage under the 2008 version of Section 627.7011, Florida Statutes. The statute provided that the insurer would pay the insured the replacement cost of his damaged property without regard to whether the insured repaired or replaced the property. The case arose when the insured did not repair, or contract to repair, damage to his home. In its payment to the insured, the insurer did not include an amount associated with the overhead and profit that would have been paid to a general contractor if the repairs had been made. The Third District Court of Appeal found that the insurer was not responsible under its policy or the statute for the amount of a general contractor’s overhead and profit when the repairs were not made. The Florida Supreme Court accepted jurisdiction based upon a conflict among Florida’s appellate courts, although two justices argued that no such conflict existed.
The Florida Supreme Court held that an insurer is obligated to include an amount for overhead and profit when paying a loss under a replacement cost policy when the loss is of a type for which the insured would be reasonably likely to need a contractor if the repairs were made. The 2008 version of Section 627.7011 and the corresponding policy provision did not require the insured to repair the property as a condition precedent to receiving the replacement cost payment. Nonetheless, the Court reasoned that the amount of the “replacement cost” should be measured by what it would cost the insured to repair or replace the damaged structure if the insured chose to do so. The Supreme Court remanded the case to the trial court for further evaluation of whether the insured would have been reasonably likely to have needed a general contractor to make the repairs arising from the covered loss.
In its opinion, the Supreme Court cited a definition of replacement cost as a measurement of what it would take to replace the damaged structure on the same premises. The Court then contrasted actual cash value coverage, which is the replacement cost less normal depreciation. The Court observed that the difference between replacement cost coverage and actual cash value coverage lies in the treatment of depreciation. Notably, then, the difference is not attributable to overhead and profit. The Court favorably cited Goff v. State Farm Insurance Company, 999 So. 2d 684 (Fla. 2d DCA 2008), for its interpretation that overhead and profit are like all other costs of a repair, like labor and materials, that an insured is reasonably likely to incur. In other words, a portion of the overhead and profit, like a portion of other costs, can be depreciated when determining the actual cash value as opposed to replacement cost. However, it is not permissible for the insurer to deduct the entirety of the overhead and profit. According to the Court, if an insurer were to reduce the amount of payment under a replacement cost policy by the entire amount of the overhead and profit, the insurer would be paying less for the overhead and profit component of coverage than it would under an actual cash value policy. This would be at odds with the purpose of the replacement cost coverage, which is to provide broader coverage than is available under an actual cash value policy.
The Florida legislature has amended Section 627.7011, Florida Statutes, since the 2008 version construed by the Florida Supreme Court in Trinidad. Even so, in the case of a total loss, the statute continues to require an insurer to pay the replacement cost even if the insured does not repair. In addition, the Court’s analysis of the difference between replacement cost coverage and actual cash value coverage clarifies an issue it perceived to have been treated differently in Florida’s appellate courts.