The takeaway from this article is to understand that the acronyms of RCV and ACV simply characterize the inclusion or exclusion of recoverable depreciation. These terms do not, under any circumstance, reflect the “scope of the damages” required to be paid at the time of the initial coverage decision.
“A replacement cost policy does not mandate that the insurer replace the damaged property.” See Prepared Ins. Co. v. Gal., 209 So. 3d 14, 17 (Fla. 4th DCA 2016). “Such a policy does not prohibit repairing the damaged property.” (Italicize in original) Id. “In fact, both the governing statute [Fla. Stat. § 627.7011(6)(d)] as well as the parties’ insurance policy expressly provide that an insurer may limit its liability to the ‘reasonable and necessary cost to repair the damaged . . . property.” Id. at 17. (Italicize in original). See also Trinidad v. Florida Peninsula Ins. Co., 121 So. 433, 440 (Fla. 2013)(Florida statute “provides that the insurer may limit its liability to the ‘reasonable and necessary cost to repair or replace’ the damaged property.”). “Provisions in an insurance policy must be construed and applied to be in full compliance with the Florida Statutes.” Id. at 441.
In Prepared v Gal, “the insurer’s expert claimed he could restore the [kitchen] cabinets for $2,585.00.” See Prepared v. Gal., 209 So. 3d at 16. “The insured’s expert claimed repairing the cabinets would be impossible due to their unique nature and they had to be replaced entirely [for] . . . $107,902.50.” Id. “The trial court found that because the insurance policy was a replacement cost policy, the insurer was required to replace the cabinets, not repair them.” Id. The Fourth District reversed and remanded the case:
“As discussed, there remained disputed issues of fact as to whether the cabinets could be repaired . . . The insurer should have been permitted to present relevant testimony directed at these issues and others.”
Id. at 18. The trier-of-fact was entitled to consider whether the limited portion of the kitchen cabinets, that were actually damaged, could be repaired; and, if so, for how much. According to the Fourth District, the Replacement Cost policy did not mandate replacement of the cabinets.[1]
“Replacement cost insurance is designed to cover the difference between what property is actually worth and what it would cost to rebuild or repair that property.” See Trinidad, 121 So. 3d at 438 (“Replacement cost is measured by what it would cost to replace [or repair] the damaged structure on the same premises.”). This is known as RCV.
The ACV is simply the RCV minus the recoverable depreciation. See Trinidad, 121 So. 3d at 438 (“. . . actual cash value is generally defined as . . . [r]eplacement cost minus normal depreciation . . .”) citing favorably to Goff v. State Farm Ins. Co., 999 So. 2d 684 (Fla. 2d DCA 2008)(“As replacement cost policies are intended to operate, following a loss, both actual cash value and the full replacement cost are determined. The difference between those figures is withheld as depreciation until the insured actually repairs or replaces the damaged structure.”).
If payment is made to “replace” a damaged item, then the carrier “may” withhold recoverable depreciation. If recoverable depreciation is withheld, then the payment made (irrespective of the amount paid and/or the scope covered) will be characterized as the ACV.
If payment is made to “repair” a damaged item, then there is no need to withhold recoverable depreciation.[2] If no recoverable depreciation is deducted, then the payment made to “repair” the damaged property (irrespective of the amount paid and/or the scope covered) will be characterized as the RCV.
If the carrier pays the ACV, it has performed as required. If the carrier pays the RCV, it has overperformed.
Assume a claim is made based on damage caused by a leak from a supply line underneath a kitchen sink. The scope of actual damage is limited to “a water stain on the base shelf” in the box below a kitchen sink. The carrier finds coverage for the claim. The carrier issues a payment to repair/restore the kitchen cabinet box below the sink. Under these facts, the payment issued by the carrier would be an RCV payment. Why? Because, generally, payments for repair would not include recoverable depreciation.
The carrier could choose, however, to withhold the recoverable depreciation from the payment to repair the limited area of damages. If the carrier did so, then the payment issued would be an ACV payment. An ACV payment would be considered performance under the Policy. An RCV payment would be considered overperformance. It is critical to understand that the characterization of the type of payment made, whether it is RCV or ACV, has no legal relevance on the scope of liability under the policy.
Now, let us assume a water discharge causes damage to all of the lower kitchen cabinets, rather than only the base shelf below the sink. The carrier agrees that all of the lower kitchen cabinets must be “substituted” for new cabinets. The payment issued by the carrier for the complete substitution (replacement) would be an ACV payment. Why? Because the payment would now subtract recoverable depreciation, taking into account the decline of the cabinets’ value due to wear and tear.
At the time of the initial coverage decision, a carrier is entitled to limit its liability to “direct physical loss” caused by an occurrence. The Third District has defined the phrase “direct physical loss” to mean the cost to repair the actual damages without having to pay for matching. See Vazquez v. Citizens Property Ins. Corp., 304 So. 3d 1280, 1283 (Fla. 3d DCA 2020)[3] citing favorably to Ocean View Tower Ass’n Inc v. QBE Ins. Corp, 2011 WL 6754063 (Fla. S. Dist. 2011)(“matching is not a direct physical loss.”).
In Vazquez, supra, the plaintiff filed suit claiming $84,542.93 in damages. The plaintiff’s own expert agreed that $70,000.00, of the estimate was for “matching costs,” while the cost to repair the actual damages was $14,542.93, well below the original coverage amount of $33,759.52. In Vazquez, the cost to repair the “actual” damages was less than the original payment made by Citizens. Citizens filed a motion in limine to exclude all evidence of “undamaged items.” The trial Court granted the motion in limine, and the Third District affirmed that decision.
The Third District explained:
‘Direct’ and ‘physical’ modify loss and impose the requirement that the damage be actual.’ Homeowners Choice Prop. & Cas. v. Maspons, 211 So. 3d 1067, 1069 (Fla. 3d DCA 2017).
Consistent with this plain meaning, the trial court determined that the ‘insured loss’ is the property that was actually damaged. Accordingly, the trial court limited evidence of actual cash value to the property that was actually damaged based on the contractual and statutory language requiring Citizens to ‘initially pay the actual cash value.” (Emphasis added). Id at 1284-1285.
Vazquez is an example where the Third District did not allow the Plaintiff to rely on the doctrines of waiver or estoppel to require Citizens to pay for “matching” simply because Citizens initial payment of $33,759.52, did include “matching.” The Third District held that the carrier is only required to pay the costs associated with the repair of “actual” damages. See Lloyds Underwriters at London v. Keystone Equipment Finance Corp., 25 So. 3d 89, 92 (Fla. 4th DCA 2009)(“Florida law expressly provides that the doctrines of estoppel and waiver may not be applied to create and extend insurance coverage.”). The Florida Supreme Court has been consistent on this specific issue. See Crown Life Ins. Co. v. McBride, 517 So. 2d 660 (Fla. 1987); AIU Ins. Co. v. Block Marina Invest., Inc., 544 So. 2d 998 (Fla. 1989)(“This court recently reiterated the general rule that . . . the doctrine of estoppel . . . may not be used to create or extend coverage.”). See also AON Trade Credit Inc. v. Quintec, S.A., 981 So. 2d 475 (Fla. 3d DCA 2008); JN Auto Collection Corp v. U.S. Sec. Ins. Co., 59 So. 3d 256 (Fla. 3d DCA 2011); Citizens Property Insurance Corporation v. Amat, 198 So. 3d 730 (Fla. 2d DCA 2016).
Even if the carrier overperforms by including costs for “matching” in its initial payment, Vazquez held that this overperformance will not act as an estoppel to force the carrier to pay for matching if the insured challenges (files a lawsuit) the payment. The filing of the lawsuit is not a “place holder” for a plaintiff to raise future claims. The lawsuit is a demarcation point.[4] The only issues for trial are those that exist at the time the lawsuit is filed. In a first party property lawsuit, the only issue that would exist at the time a lawsuit is filed would be: “what is the cost to repair the actual damages, without the need to pay for matching?”
If the cost to repair the actual damages is equal to or less than the initial gross coverage amount, then there can be no breach of contract as a matter of law. Whether a claim is covered or denied, the meaning of the phrase “direct physical loss” does not change. See Vazquez, at 1286 (“Based on the record before us we find the predecessor judge adhered to the plain language of the policy and Florida law in granting Citizen’s motion in limine to preclude matching costs.”). Therefore, the carrier’s liability is always limited to the payment for the repair or replacement of actual damages without the need to include “matching.”
As noted in the introduction, the acronyms of RCV and ACV simply characterize the inclusion or exclusion of recoverable depreciation. These terms do not, under any circumstance, reflect the “scope of the damages” required to be paid at the time of the initial coverage decision.
[1] See also Gal v Prepared Insurance Company, 230 So. 3d 413 (2017)(the Florida Supreme Court accepted jurisdiction and discharged the appeal, finding that there is no conflict between the Fourth District decision and the Florida Supreme Court decision in Trinidad.).
[2] See Trinidad v Florida Peninsula Ins. Co., 121 So. 3d 433, 438 (Fla. 2013)(“. . . depreciation is defined as a ‘decline in anasset’s value because of use, wear, obsolescence, or age.’”).
[3] Vazquez, supra, is controlling because there are no other District Courts in conflict. See Pardo v.State, 596 So. 2d 665 (Fla. 1992)(“Thus, in the absence of interdistrict conflict, district court decisions bind all Florida trial courts.”). See also Ellis v. Burk, 866 So. 2d1236, 1237 fn. 1 (Fla. 5th DCA 2004)(“In Florida, a trial court is obligated to follow a decision by an appellate court absent a conflicting decision by the Florida Supreme Court or another appellate court.”).
[4] “It is [well] established in Florida that in law actions ‘the right of a plaintiff to recovery must be measured by the facts as they exist when suit was instituted.” See Coral Gables v. Sakolsky, 215 So. 2d 329 (Fla. 3d DCA 1968). See Meredith v. Long, 96 Fla. 719 (Fla. 1928)(“. . . the general rule is that the right of a complainant to the relief prayed must be determined according to the facts existing at the time the original bill [complaint]was filed.” See Meredith v. Long, 96 Fla. 719 (Fla. 1928) cited favorably by O'Connell v. Citizens Nat'l Bank, 254 So. 2d 236 (Fla. 4th DCA1971).
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