Gilderman v. State Farm Ins. Co.

• Decision Date: 30 November 1994
• Citation: 437 Pa.Super. 217,649 A.2d 941
• Parties: Alex GILDERMAN and Janet Gilderman, Appellants v. STATE FARM INSURANCE COMPANY.
• Court: Pennsylvania Superior Court

Page 941

649 A.2d 941

437 Pa.Super. 217

Alex GILDERMAN and Janet Gilderman, Appellants v. STATE FARM INSURANCE COMPANY.

Superior Court of Pennsylvania.

Argued March 1, 1994.

Filed Sept. 21, 1994.

Reargument Denied Nov. 30, 1994.

Jonathan Wheeler, Philadelphia, for appellants.

James T. Moughan, Philadelphia, for appellee.

Before CIRILLO, SAYLOR and HESTER, JJ.

HESTER, Judge.

The issue presented herein is whether an insurer, which has agreed to pay repair or replacement costs less depreciation in advance of actual repair or replacement of a covered loss, may automatically withhold both depreciation and a flat twenty percent representing contractor overhead and profit from its advance payment. We conclude that it may not and reverse the grant of summary judgment in favor of the insurer in this action. ¹ We remand for further proceedings.

Alex and Janet Gilderman instituted this class action on behalf of themselves and other insureds suffering a covered loss on or after January 1, 1991, under a homeowners' policy of insurance issued by State Farm Insurance Companies ("State Farm") in Pennsylvania and containing the following or similar language:

(2) We will pay the cost of repair or replacement, without deduction for depreciation, but not exceeding the smallest of the following amounts:

(a) the limit of liability this policy applying to the building;

(b) the replacement cost of part of the building damaged for equivalent construction and use on the same premises; or

(c) the amount actually and necessarily spent to repair or replace the damaged building.

(3) We will pay the actual cash value of the damage, up to the policy limits, until actual repair or replacement is completed.

(emphasis added).

The type of homeowners' policies at issue provide replacement cost coverage. We quote the brief of Pennsylvania Defense Institute, which was granted permission to file as amicus curiae. The brief succinctly describes what replacement cost coverage is designed to provide for an insured:

Replacement cost coverage was devised to remedy the shortfall in coverage which results under a property insurance policy compensating the insured for actual cash value alone. That is, while a standard policy compensating an insured for the actual cash value of damaged or destroyed property makes the insured responsible for bearing the cash difference necessary to replace old property with new property, replacement cost insurance allows recovery for the actual value of property at the time of loss, without deduction for deterioration, obsolescence, and similar depreciation of the property's value.

Brief of Amicus Curiae at 8, quoting, Annot., Construction and Effect of Property Insurance Provision Permitting Recovery of Replacement Cost of Property, 1 A.L.R. 5th 817, 827-28 (1992).

In the type of policy at issue, however, the insured may not receive the full repair or replacement cost of a covered loss until repair or replacement occurs. Instead, they receive "actual cash value" for a loss until repairs are made, as follows. Under clause three, the insurer agrees to pay "actual cash value" until repair or replacement actually occurs. Under clause two, the insured receives full repair or replacement costs (not exceeding the policy limits), without deduction for depreciation, after the repairs have been made. Thus the insured may reap the benefit of his depreciation coverage only if he actually repairs or replaces the covered loss.

"Actual cash value" is not defined in the policy. However, as the above quote would indicate, actual cash value consistently has been interpreted as meaning "the actual cost of repair or replacement less depreciation." Canulli v. Allstate Insurance Co., 315 Pa.Super. 460, 462 A.2d 286 (1983). Indeed, State Farm concedes, "In Canulli, the court defined actual cash value as 'the actual cost of repair or replacement less depreciation.' " Appellant's brief at 31.

The issue presented in this appeal concerns State Farm's routine practice of deducting both depreciation and a flat twenty percent from all its repair or replacement cost estimates and offering an advance check for this amount to its insureds as payment of "actual cash value." The twenty percent represents contractor overhead and profit.

At this point, we are compelled to indicate precisely what this appeal does not involve. This action is necessitated by the fact that the entire brief of amicus curiae and a substantial portion of the brief of State Farm is devoted to an issue not raised by appellants. The issue discussed is whether the provision allowing for payment of full repair or replacement costs only in the event of repair or replacement is void as against public policy. Amicus curiae and State Farm strenuously defend the enforceability of its requirement that repair or replacement occur before full repair or replacement costs are paid. However, at no point do appellants argue that they were entitled to full repair or replacement costs without a depreciation deduction prior to actual repair or replacement.

Instead, appellants have framed the interpretation issue presented to this court as follows:

I. THE ACTUAL CASH VALUE OF A COVERED PROPERTY LOSS INCLUDES A GENERAL CONTRACTOR'S OVERHEAD AND PROFIT. WHERE THE CONTRACT OF INSURANCE FAILS TO DEFINE ACTUAL CASH VALUE AND IS SILENT AS TO WHAT IS SUBSUMED WITH THAT TERM, STATE FARM CANNOT WITHHOLD PAYMENT FOR A GENERAL CONTRACTOR'S OVERHEAD AND PROFIT FROM THE ACTUAL CASH VALUE PAYMENT OF BENEFITS UNDER ITS REPLACEMENT VALUE POLICY.

Appellants' brief at 1; see also Appellants' brief at 8 ("The fundamental inquiry underlying this litigation is precisely where the cost for a general contractor's overhead and profit fit into the loss payment equation, i.e. replacement cost less depreciation = actual cash value.").

Appellants' argument is: prior to repair or replacement, they are entitled to "actual cash value," as expressly provided in the policy; "actual cash value" means "repair or replacement cost less depreciation"; repair or replacement costs necessarily include contractor overhead and profit; and thus, State Farm may not deduct automatically twenty percent representing contractor costs from its estimate of actual repair or replacement costs.

This misguided effort to re-frame the issue on appeal creates the appearance of a thinly disguised attempt by State Farm and amicus curiae to have us limit the holding of Ferguson v. Lakeland Insurance Co., 408 Pa.Super. 332, 596 A.2d 883 (1991). In Ferguson, we struck down as void against public policy a provision requiring an insured who procured replacement coverage to actually replace property before receiving the full replacement value of the property. In that case, the insurer denied coverage. We reasoned that it was unconscionable to require insureds to procure from their own funds, which they may not have, replacement property prior to receipt of full replacement cost since the insureds expected to receive such coverage by purchasing replacement value coverage.

State Farm and amicus curiae are correct in noting that appellants ask us to apply the reasoning in Ferguson. However, appellants do so only in the context of the stated issue on appeal, viz, appellants suggest that it is unfair for State Farm to require them to pay twenty percent for contractor's overhead and profit from their own funds when they may not have such funds in light of the fact that the insurer has agreed to pay repair or replacement costs less only depreciation prior to repair or replacement and in light of the fact that contractor's overhead and profit is a component part of repair or replacement costs. Appellants have not asked us to declare void as against public policy the provision requiring repair or replacement prior to payment of full repair or replacement costs. Amicus curiae and State Farm will have to wait to have the issue re-visited--in a case wherein it is raised.

We now examine the record to determine whether State Farm always deducts the twenty percent or whether it does so only in cases where it seems unlikely that an insured would procure a contractor to repair or replace a covered loss. We do this since it is relevant to our determination of whether the practice is improper.

Appellants instituted this action with regard to losses occurring on or after January 1, 1991. They allege in their complaint that since that date, State Farm has always deducted twenty percent from the top of its repair or replacement estimates for purposes of computing the actual cash value of a loss. State Farm never filed an answer to this allegation. Instead, it filed preliminary objections, and the parties proceeded to file cross-motions for summary judgment pursuant to stipulated facts. In the cross-motions for summary judgment, the issue presented, which both parties concede involved a question which controlled the outcome of the case, was whether State Farm was permitted to deduct this twenty percent.

Thus, there seems to be no question that State Farm always deducts the twenty percent in addition to depreciation from its actual cash value calculation. Further, at page twenty-nine of its brief, where State Farm begins its discussion of whether this twenty percent should be included in its repair or replacement cost estimates,...