Kurach v. Truck Ins. Exch.

235 A.3d 1106

Konrad KURACH, Appellant

v.TRUCK INSURANCE EXCHANGE, Appellee

Mark Wintersteen, Individually and on Behalf of All Others Similarly Situated, Appellant

v.Truck Insurance Exchange, Appellee

No. 12 EAP 2019

No. 13 EAP 2019

Supreme Court of Pennsylvania.

Argued: March 10, 2020

Decided: August 18, 2020

OPINION

JUSTICE TODD

In these consolidated appeals, we consider the question of whether, under the terms of the "replacement cost coverage" policies at issue, the insurer was permitted to withhold from any actual cash value ("ACV") payment general contractor's overhead and profit ("GCOP") expenses, unless and until the insureds undertook repairs of the damaged property, even though the services of a general contractor were reasonably likely to be needed to complete the repairs. After careful review, we affirm the order of the Superior Court, which found the insurer was entitled to withhold such costs.

I. Facts and Procedural History

Appellants Konrad Kurach and Mark Wintersteen ("Policyholders") each purchased identical "Farmers Next Generation" insurance policies from Appellee Truck Insurance Company ("Insurer"), to cover their residential dwellings situated in Pennsylvania.¹ Further, each paid Insurer an additional premium for "replacement cost coverage."² Subsequent to the purchase of these policies, both Policyholders sustained water damage to their houses in excess of $2,500, and both filed claims with Insurer under the policies.

The policies provide a "two-step" settlement process governing the manner in which Insurers would handle property damage claims of this nature, as described in Section 5 of the policies, the relevant portion of which provides:

5. How We Settle Covered Loss

a. Coverage A (Dwelling) and Coverage B (Separate Structures). We will only settle covered loss or damage on the basis of use as a private residence.

(1) Settlement for covered loss or damage to the dwelling or separate structures will be settled at replacement cost, without deduction for depreciation, for an amount that is reasonably necessary, for the lesser of the repair or replacement of the damaged property, but for no more than the smallest of the following:

(i) the applicable stated limit or other limit of insurance under this policy that applies to the damaged or destroyed dwelling or separate structure(s);

(ii) the reasonable replacement cost of that specific part of the dwelling or separate structure(s) damaged for equivalent construction with materials of like kind and quality on the residence premises, determined as of the time of loss or damage;

(iii) the reasonable amount actually necessarily spent to repair or replace the damage to the dwelling or separate structure(s); or

(iv) the loss to the interest of the insured in the property.

Reasonably necessary replacement cost does not include damage to property otherwise uninsured or excluded under this policy.

When the cost to repair or replace damaged property is more than $2,500, we will pay no more than the actual cash value of the loss until actual repair or replacement is completed. If the dwelling or a separate structure is rebuilt or replaced at a different location, the cost [sic] described in subsection (ii) above are limited to the costs which would have been incurred if the dwelling or separate structure had been built or replaced at its location on the resident's premises.

* * *

e. General contractor fees and charges will only be included in the estimated reasonable replacement costs if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the repairs. However, actual cash value settlements will not include estimated general contractor fees or charges for general contractor's services unless and until you actually incur and pay such fees and charges, unless the law of your state requires such fees and charges be paid with the actual cash value settlement.

Truck Insurance Policy ("Policy") (Exhibit A to Wintersteen Amended Class Action Complaint, 10/2/15) at 34-35 (R.R. 139a, 141a).³ Furthermore, the policies define "actual cash value" as

the reasonable replacement cost at time of loss less deduction for depreciation and both economic and functional obsolescence.

Policy at 6 (R.R. 111a).

Thus, where, as here, the cost of repairing or replacing a policyholder's damaged property exceeds $2,500, Insurer is first required to pay the ACV of the property at the time of the loss to the policyholder ("step one"). Once the repair or replacement of the damaged property is commenced, Insurer is then obligated (in "step two") to pay the depreciated value of the damaged property and also the expense of hiring a general contractor,⁴ "unless the law of [Pennsylvania] requires" payment of GCOP as part of ACV. It is this latter condition which is the core of the dispute between the parties.

Insurer paid Policyholders’ claims in accordance with this two-step process. Specifically, after Policyholders utilized their own claims’ experts to prepare estimates of the costs of repair and replacement of the damaged property, which, given the nature of the loss, included the services of a general contractor, and Policyholders requested payment of these estimated costs, Insurer tendered to both Policyholders a "step one" payment for the ACV of the damaged property. This payment did not include an amount for depreciation of the property, nor did it include any amount for GCOP, even though Insurer conceded, and does not now dispute, that the services of a general contractor would be reasonably necessary for the completion of the repairs.

Policyholders each challenged Insurer's failure to include GCOP in its ACV payment, but Insurer took the position that, under the policies, it was entitled to withhold GCOP until such time as Policyholders actually made the repairs to the property. Both Policyholders ultimately accepted the ACV settlement amount tendered by Insurer, but reserved their right to pursue available legal remedies. Ultimately, neither Policyholder carried out any repairs.

Both Policyholders filed individual suits against Insurer in the Court of Common Pleas of Philadelphia County alleging, inter alia , breach of contract for Insurer's failure to include GCOP as part of its ACV payment, which Policyholders contended was required under the terms of the policies.⁵ The trial court, by the Honorable Ramy I. Djerassi, consolidated both actions. Thereafter, the parties filed cross-motions for summary judgment requesting that the trial court determine whether Insurer was permitted under the terms of the policies to withhold GCOP from ACV payments, even where, as here, it was indisputable that the services of a general contractor would be reasonably necessary.

Before the trial court, Insurer argued that, under Section 5(e) of the policies, it was permitted to withhold payment of GCOP from ACV payments until the time repairs were actually made and Policyholders incurred the costs of retaining a general contractor. For their part, Policyholders contended that the language of the policies was ambiguous in this regard, given that "its unclear use of the term ‘replacement cost’ as a component of ‘actual cash value’ is contrary to Pennsylvania law and unenforceable." Trial Court Opinion, 4/20/17, at 9.

In resolving this question, the trial court noted that Insurer's policies defined ACV as a "function of ‘replacement cost’." Id. at 8. Hence, the court considered cases from the Superior Court which had determined whether GCOP must be included in ACV "step-one" payments under other replacement cost insurance policies. See id. at 9-11 (discussing Gilderman v. State Farm , 437 Pa.Super. 217, 649 A.2d 941, 945 (1994) (holding that, when insurer agreed to pay ACV of damaged property under policy until actual repairs and replacement were completed, but did not define the term, ACV must be construed to mean, as it had been traditionally interpreted, as reasonable replacement costs, less depreciation; thus, insurer was not authorized by the policy to automatically withhold 20 percent of the ACV payment for GCOP when the use of a general contractor was "reasonably likely" for the repairs), and Mee v. Safeco , 908 A.2d 344, 345 (Pa. Super. 2006) (where policy defined ACV as "the cost of repairing the damage, less reasonable deduction for wear and tear, deterioration and obsolescence," insurer was not permitted to withhold GCOP from an ACV payment, given that repair was of such a nature that the use of a general contractor was reasonably likely, and whether or not one was actually hired was immaterial)).

The trial court observed that the policies in question utilized the same definition of ACV as the policies in Gilderman and Mee , in that they define this term as replacement cost less depreciation. The court reasoned that a determination of ACV necessarily then first requires a determination of the term replacement cost, which, as noted above, is not defined in the policies. However, the court concluded that the Superior Court's decisions in Gilderman and Mee "include GCOP as necessary components of ‘replacement cost’." Trial Court Opinion, 4/20/17, at 11. The court interpreted those decisions as requiring insurers to include GCOP in ACV settlements, in accordance with what it perceived as the "majority rule" based on its review of cases from other jurisdictions, because, in its view, "higher premiums for [r]eplacement [c]ost policies justify consumer expectations that actual cash value really means replacement value minus depreciation." Id.

The court rejected Insurer's claim that the specific language it included in Section 5(e) required a different result. The court found that the language requiring Insurer to pay GCOP as part of an ACV settlement only if "the law of your state requires" was ambiguous and unenforceable, given that a lay purchaser of such insurance cannot reasonably be expected to understand whether or not such payment is required...