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Actual Cash Value and
Contractor Fees
The Court of Appeals finds that, if a
general contractor may be needed for repairs
or replacement, payments to the insured
should include contractor overhead and
profit fees – even if no contractor is used
In the summer of 1998, the home of Mr. &
Mrs. Tritschler was damaged by rain. They
filed a claim under their homeowners policy
from Allstate Insurance, and Allstate hired
a general contractor – we’ll call it “XYZ
Construction” – to perform the needed
repairs.
XYZ Construction provided to Allstate a
written estimate that totaled about $44,000,
an amount that included a 10% profit and 10%
overhead charges for XYZ.
The Tritschlers assigned payment of their
insurance proceeds to XYZ, and XYZ began
work to repair the home. However, before the
repairs were completed, the Tritschlers
became dissatisfied with the quality of the
work. After XYZ left the job, the
Tritschlers informed Allstate that they
planned to make the remaining repairs
themselves.
When Allstate offered to “cash out” the
repair claim, the Tritschlers accepted.
Without investigating whether XYZ’s work was
truly substandard, Allstate paid XYZ $26,200
for the work it had performed. In addition,
Allstate paid the Tritschlers $11,500 – an
amount equal to the difference between XYZ’s
estimate and the amount paid to XYZ, less
the overhead and profit charges contained in
the estimate.
Allstate’s $11,500 payment to the
Tritschlers was accompanied by a letter that
stated, “If you decide to use a general
contractor, please submit signed contract or
paid bill and [Allstate] will reimburse the
contractor overhead and profit.”
After the house was repaired, the
Tritschlers submitted to Allstate an actual
cash value proof of loss and a demand for
$36,000. That amount included $8,000 for
general contractor’s overhead and profit,
even though the Tritschlers did not use a
general contractor.
In reimbursing the Tritschlers, Allstate
paid the entire amount of the claim, plus
$5,000 (based on Allstate’s estimate of
remaining repairs), but deducted the
overhead and profit portion of the claim.
Lawsuit. The Tritschlers sued
Allstate, claiming that Allstate had
breached its contract by failing to pay the
general contractor’s overhead and profit.
There were other allegations as well –
concerning alleged bad faith, collaboration
with XYZ to make substandard repairs, etc.,
and a claim for punitive damages – but much
of the attention focused on whether the
Tritschlers’ decision not to use a general
contractor excused Allstate from paying the
overhead and profit portion of the claim.
(XYZ was also named in the suit, but the
claims against the contractor were not
pertinent to the central theme of this
article.)
In Superior Court, Allstate filed a motion
for summary judgment on all elements of the
Tritschlers’ complaint. The trial court
granted Allstate’s motion, and the
Tritschlers appealed.
Appeal. The Tritschlers
argued, in Superior Court and again in their
appeal, that the actual cash value coverage
(as provided in their policy under a
subsection [b]) included the contractor’s
overhead and profit, and, thus, they were
entitled to receive those amounts regardless
of whether they used a general contractor.
Allstate countered that the provision cited
by the Tritschlers applied only to insureds
who choose not to repair their properties.
Allstate repeated its successful trial court
argument that, since the Tritschlers did
repair their property, Allstate was obliged
to pay only for coverage pertaining to the
building structure reimbursement provision
(a subsection [c]) of the policy, which
provided not for contractor overhead and
profit but, rather, “the amount actually and
necessarily spent” to repair or replace the
damaged property.
Findings. The Court of Appeals
did not view this issue with the same degree
of clarity as did the trial judge in
granting Allstate’s motion for summary
judgment:
“[T]he trial court erred in finding as a
matter of law that Tritschler was not
entitled to receive the actual cash value
under subsection (b) and that his claim
was governed solely by subsection (c).
Nevertheless, we may still uphold the
trial court’s grant of summary judgment to
Allstate on the issue of contractor fees
if it is correct for any reason.”
The Court then sought to determine whether
the “actual cash value” in the Allstate
policy included general contractor overhead
and profit when no contractor is used. The
Court noted that, while an endorsement
attached to the policy defined “actual cash
value” as “the current cost to repair or
replace covered property with new material
of like kind and quality less a deduction
for physical deterioration and depreciation,
including obsolescence,” the policy did not
specify how Allstate calculated the “cost to
repair or replace covered property” or
whether the value included contractor
overhead and profit fees.
Finding no binding judicial precedent in
Arizona, the Court looked to other states
for persuasive guidance.
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A 1987 Kentucky case, Snellen v. State
Farm Fire & Casualty Co., supported
Allstate’s position. The court in that
case determined that “since the goal is to
arrive at the actual cash value of the
damage, non-damage factors … such as
clean-up, profit, overhead, and permits,
were properly deducted.”
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Conversely, a 1994 Pennsylvania case,
Gilderman v. State Farm Insurance Co.,
favored the Tritschlers’ position. In that
case, the court noted that “there are
types of property damage where … there is
extensive damage to a home requiring the
use of more than one trade specialist.”
That court found that, in such instances,
an insurance company may not deduct
contractor fees from the actual cash value
when such fees are reasonably expected to
occur.
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Similarly, in a 1998 Michigan case,
Salesin v. State Farm Fire & Casualty Co.,
the court found that “the expense of a
general contractor cannot be deducted …
unless such services are not likely to be
required.” The homeowner in that case,
like the Tritschlers, had made his own
repairs and did not incur any contractor
fees. That fact did not affect the court’s
holding that it was improper for the
insurance company to automatically deduct
contractor overhead and profit from the
actual cash value payment.
The Arizona court noted that “several other
jurisdictions have since followed the
reasoning in Gilderman and Salesin
and ruled that an insurer may not
automatically deduct a contractor’s overhead
and profit from an actual cash value
payment.”
Conclusion. In the end, the
Court vacated the trial court’s granting of
Allstate’s motion for summary judgment and
sent the case back to Superior Court.
While that ruling does not provide ironclad
direction to insurance companies regarding
comparable claims, insurers would be wise to
note the Court’s holding on the issue of
actual cash value and contractor fees:
“Based on the foregoing analysis, we hold
that under this policy actual cash value
in adjusting a property loss includes any
cost that an insured would be reasonably
likely to incur in repairing or replacing
a covered loss[.] … And, if the cost to
repair or replace the damaged property
would likely require the services of a
general contractor, the contractor’s
overhead and profit fees should be
included in determining actual cash value,
even when an insured ultimately elects to
complete personally the needed repairs.”
Lang & Baker attorney Bill Klain contributed
to this article.
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