Pierce v. Farm Bureau Mut. Ins. Co.

• Decision Date: 22 May 1996
• Docket Number: No. 95-677,95-677
• Citation: 548 N.W.2d 551
• Parties: Larry L. PIERCE and Jeri L. Pierce, Appellees, v. FARM BUREAU MUTUAL INSURANCE COMPANY, Appellant.
• Court: Iowa Supreme Court

Page 551

548 N.W.2d 551

Larry L. PIERCE and Jeri L. Pierce, Appellees, v. FARM BUREAU MUTUAL INSURANCE COMPANY, Appellant.

No. 95-677.

Supreme Court of Iowa.

May 22, 1996.

Gregory A. Witke, Barbara A. Hering, and Cynthia A. Hurley, of Bradshaw, Fowler, Proctor & Fairgrave, P.C., Des Moines, for appellant.

Thomas R. Isaac, Des Moines, and Michael H. Adams, Des Moines, for appellee.

Considered by McGIVERIN, C.J., and CARTER, LAVORATO, NEUMAN, and ANDREASEN, JJ.

LAVORATO, Justice.

Farm Bureau Mutual Insurance Company issued a homeowners policy to Larry L. and Jeri L. Pierce. One of the provisions in the policy provided dwelling replacement cost coverage for property damaged or destroyed by fire under certain conditions. The policy specified a time frame for making a claim under this provision after the insureds suffered a covered loss. Fire damaged the Pierces' lake dwelling. At the Pierces' request, Farm Bureau extended the claim filing deadline so the Pierces would have more time to make their claim.

The Pierces found a substitute dwelling which was owned by Paul and Anna Martin. The Martins are Jeri Pierce's parents. The Pierces entered into a written real estate purchase contract with the Martins and took possession before the claim filing deadline. It is undisputed that the Pierces neither made the down payment nor any monthly installment payments before the deadline expired.

The primary issues are whether the Pierces (1) made a bona fide replacement, and (2) actually spent money to replace the damaged dwelling, thereby triggering the replacement cost provision. The district court determined the Pierces made a bona fide replacement and actually spent money to replace the damaged dwelling. We affirm.

I. Background Facts.

Before trial the parties stipulated to the following facts. On September 15, 1988, Farm Bureau issued a homeowners policy to the Pierces on their lake dwelling located in Ringgold County. The policy contained a dwelling replacement cost coverage provision. This provision furnished coverage in the amount of $64,200. The policy required claims under this provision to be made within 180 days after the loss.

On January 6, 1992, Farm Bureau modified the Pierces' original policy by increasing the replacement cost coverage limit to $80,000. About ten weeks later, on March 21, 1992, a fire damaged the Pierces' lake dwelling.

On or about May 14, 1992, the Pierces submitted their claim for damages and proof of fire loss to Farm Bureau. On or about August 21, 1992, Farm Bureau paid the Pierces $45,120. This was the actual cash value of the dwelling less the $100 deductible.

The replacement cost coverage provision required the Pierces to replace the damaged dwelling by September 17, 1992. At the Pierces' request, Farm Bureau extended the deadline for such replacement to January 19, 1993.

On November 19, 1992, the Martins completed a survey plat of their property located in Jefferson County. On December 18, 1992, the Pierces and the Martins executed a short form Iowa State Bar Association real estate contract on this property. The Martins' attorney prepared the contract, which identified the Pierces as purchasers and the Martins as sellers. The total purchase price of the property was $125,000. The Pierces and the Martins signed the contract before a notary. The parties recorded the contract on the extended deadline date--January 19, 1993.

Contract terms called for the Pierces to make a down payment of $40,000 on or about January 3, 1993, the date set for transfer of possession and closing. The contract also called for the Pierces to pay the remaining $85,000 in monthly installments of $500 commencing February 1, 1993, and ending February 1, 2001. At that time, any unpaid principal and interest would be due and owing.

No money changed hands on the real estate purchase on or before January 19, 1993. Between March 7, 1993, and March 9, 1993, the Pierces paid the Martins $40,000 by check. The check was backdated to December 18, 1992. The Martins cashed the check on March 9.

The Pierces continued to seek replacement cost benefits from Farm Bureau for the Jefferson County real estate. On April 26, 1993, Farm Bureau notified the Pierces by letter that it was rejecting their claim for benefits under this policy provision. In the letter Farm Bureau rejected the Pierces' claim because they failed to spend any amounts to repair or replace the damaged dwelling before the January 19, 1993, extended deadline.

The Martins served the Pierces with a notice of forfeiture on the real estate contract on November 22, 1993. See Iowa Code ch. 656 (1993). In the notice the Martins alleged the Pierces failed to make the $40,000 down payment due January 3, 1993, and any of the $500 monthly payments.

II. Background Proceedings.

The Pierces filed a four-count petition against Farm Bureau on April 30, 1993. Counts I and II were for breach of contract. Count III was for fraudulent misrepresentation. Count IV was for negligent misrepresentation. Count V was for bad faith.

Farm Bureau answered, asserting the affirmative defenses of (1) failure to state a cause of action, (2) failure to comply with the terms of the insurance policy, and (3) reliance on advice of counsel in rejecting the Pierces' claim. By agreement of the parties, the Pierces voluntarily dismissed all but the Count I breach of contract claim.

The parties submitted the case to the court in a bench trial on a joint stipulation of facts. Later, the court entered a judgment order adverse to Farm Bureau and in favor of the Pierces for $34,780.

Farm Bureau appeals from the district court's adverse judgment order.

III. Scope of Review.

Our review of actions filed at law is on error. Iowa R.App.P. 4. The district court's findings of fact have the force of a special verdict and are binding upon us unless they are not supported by substantial evidence. Waukon Auto Supply v. Farmers & Merchants Sav. Bank, 440 N.W.2d 844, 846 (Iowa 1989). Evidence is substantial if a reasonable mind could find it adequate to reach the same findings. Id. Although the district court's findings of fact are binding on us, its conclusions of law are not. R.E.T. Corp. v. Frank Paxton Co., 329 N.W.2d 416, 419 (Iowa 1983).

IV. Bona Fide Replacement and Monies Actually Spent.

Farm Bureau contends the replacement cost coverage provision required the Pierces to (1) complete replacement of their damaged dwelling by the January 19, 1993, extended deadline and (2) actually spend money to replace the property within that period. Farm Bureau vigorously asserts that the Pierces made no bona fide replacement of the property by January 19, 1993--the extended deadline. And Farm Bureau asserts the Pierces actually spent no money to replace the property by such date.

Replacement cost insurance, sometimes called depreciation insurance,

pays for full replacement cost new of the insured property, without deduction for depreciation. It provides indemnity for the expenditures the insured is obligated to make over and above the amount of the loss covered by full insurance under the standard fire policy in order to restore the property to its full usefulness as before the loss or damage. [Replacement cost insurance] substitutes a figure representing the cost of replacement new for the term "actual cash value."

Higgins v. Insurance Co. of North Am., 256 Or. 151, 469 P.2d 766, 772 (1970) (en banc) (citation omitted).

A. Replacement cost provision and its meaning. We begin our analysis with the replacement cost provision of the policy to determine what it required the Pierces to do. The provision states:

3. Loss Settlement. Covered property losses are settled as follows:

....

b. Buildings under Coverage A [residence] or B [other structures on the premises] at replacement cost without deduction for depreciation, subject to the following:

(1) If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, after application of deductible and without deduction for depreciation, but not more than the least of the following amounts:

(a) the limit of liability under this policy that applies to the building;

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

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

....

(4) We will pay no more than the actual cash value of the damage unless:

(a) actual repair or replacement is complete; or

(b) the cost to repair or replace the damage is both:

(i) less than 5% of the amount of insurance in this policy on the building; and

(ii) less than $2,500.

(5) You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss or damage to buildings on an actual cash value basis. You may then make claim within 180 days after loss for any additional liability on a replacement cost basis.

(Emphasis added.)

The parties agree a condition precedent to recovery by the Pierces is that "replacement" must be "complete" under the replacement cost coverage provision. See Randy R. Koenders, Construction and Effect of Property Insurance Provision Permitting Recovery of Replacement Cost of Property, 1 A.L.R.5th 817, 829 (1992) ("Generally, actual replacement of damaged or destroyed property has been held to be a prerequisite to collection of proceeds under a replacement cost endorsement of an insurance policy."). The reason for this "actual replacement" condition precedent is to prevent the insured from "mak[ing] a profit out of his loss...." 6 John A. & Jean Appleman, Insurance Law & Practice § 3823, at 20 n. 66.57 (Supp.1995).

The parties also agree that, upon completion of replacement, recovery is limited to the lesser of (1) the limit of liability, (2) the replacement cost of that part...