131_C120

BUILDING OWNER "TRAPPED" IN ACV DISPUTE

Commercial Property	Breach Of Contract
Actual Cash Value	Bad Faith

 

Terrey Pirtle purchased an historic building intending to restore it. During the restoration process, the building was used as rental property. Pirtle purchased insurance for the property from Rockford Mutual Insurance Company (Rockford). The building was valued at $165,000 in 1999. A fire in November 2000 damaged it.

 

The Rockford policy provided replacement cost coverage up to $193,000 for the building, up to $8,000 for personal property, and up to $19,300 for fair rental value. It further provided: "5. Loss Settlement. Covered property losses are settled as follows: (c) Buildings under coverage A or B at replacement cost without deduction for depreciation, subject to the following: . . . (4) When the cost to repair or replace the damage is more than $1,000 or more than 5% of the amount of the insurance in this policy on the building, whichever is less, we will pay no more than the actual cash value of the damage until actual repair or replacement is completed."

 

Pirtle filed a claim under the policy. In January 2001, Rockford offered Pirtle $80,000 to "cash out" the policy, meaning that would be all the money he would receive, even though the Coverage A limit was $193,000. Pirtle rejected the offer, contending that it was insufficient to satisfy his mortgage obligation or repair the building so that he could continue to use it as a rental property. He then hired his own contractor, who estimated the damage at $232,915.

 

Rockford increased the settlement offer to the policy limit of $193,000 in May 2001 but stated that it would pay only $69,874, representing the "actual cash value" of the building, with the balance of the $193,000 to be paid when the property was repaired. This offer was made six months after Rockford said that Pirtle would be entitled to replacement cost coverage only after repairs to or replacement of the building had been completed. The parties continued to disagree as to the actual cash value. An independent adjuster eventually completed an analysis that established the actual cash value at $86,146.

 

Pirtle sued Rockford for breach of contract and bad faith on September 24, 2001. The parties eventually settled the bad faith claim when Rockford paid the $86,146 in March 2002, although Pirtle continued to dispute that amount. Rockford argued that Pirtle's recovery was limited to actual cash value because the building had not been repaired or replaced. The trial court rejected that argument and eventually found that Rockford breached its contract with Pirtle. Pirtle was awarded $124,149 on the breach of contract claim plus $406,136 for consequential damages. Rockford appealed.

 

On appeal, Rockford continued to argue that Pirtle was entitled only to the actual cash value of the building because he did not repair and replace the building after the fire. According to Rockford, Pirtle should have used the actual cash value funds to begin repairs on the building. The Court of Appeals of Indiana rejected this argument. The court noted that the parties had reached an impasse regarding the calculation of the actual cash value of the building.

 

According to the court, "Because of the impasse, Pirtle struggled to meet his obligations under the mortgage. Pirtle was trapped in a no-win situation. By the time he received the actual cash value payment in March 2002, he was behind on the mortgage payments and had no rental income. He had little choice but to use the funds to satisfy the mortgage at a loss to the mortgage holder, which left nothing to start the repairs."

 

The court further noted that the jury had been instructed: "When one party prevents the other from performing any part of the contract, the other party is excused from the remainder of his duties. The party excused may also recover for any work and any other damages sustained as a direct result of the prevention of performance." According to the court, Pirtle was excused from the "actual repairs" requirement because Rockford could have advanced money to assist in commencing rebuilding and could have entered into agreements with Pirtle for repairs.

 

Rockford also argued that damages should have been capped at the policy limits. The court rejected this argument as well, stating that the jury's award was within the scope of the evidence. The lower court's decision was affirmed.

 

Rockford Mutual Insurance Company vs. Pirtle-No. 77A01-0802-CV-94-Court of Appeals of Indiana-August 11, 2009-911 North Eastern Reporter 60