Recently in Central Mut. Ins. Co. v. White Stone Prop., Ltd., A-12-CA-275-SS, 2014 WL 1092121 (W.D. Tex. Mar. 19, 2014), a Federal District Court Judge ruled that the insured take nothing after a bench trial on coverage issues.  The Court found the insurer complied with all its obligations under the Policy and was not liable to the insured for further payment regarding previously withheld depreciation. 

Insured White Stone Properties (“WSP”) reported a claim to Insurer Central Mutual Insurance Company (“CMI”) concerning hail damage to the roof of WSP’s building from a hailstorm that occurred on in May 2009.  CMI hired adjuster Lon Smith to inspect the property and prepare a roof replacement cost estimate.  However, CMI made payments to WSP based on the actual cash value as the Policy states that CMI will not pay on a replacement cost basis until the damaged property is actually repaired or replaced.  The actual cash value payments made by CMI totaled $1.4 million of which $1.2 million was allocated to the roof.

After receiving the actual cash value payments, WSP contracted with Innotech Construction to perform the replacement of the hail damage to the property.  The contract between Innotech and WSP was for “Insurance Proceeds Received Only.”  Innotech placed its contract price with WSP at approximately $2.5 million.  After the work was completed, WSP went back to CMI in order to recover the withheld depreciation.  When CMI sought documentation from WSP regarding the cost to replace damaged property, CMI discovered that the construction work was actually performed by CEI Roofing Texas, which eventually led to its decision to refuse to provide WSP with the withheld depreciation.

Evidence presented at trial showed that the replacement work performed by CEI on the roof totaled approximately $817,000 and that amount was paid to CEI by Innotech.  At trial, no party could explain Innotech’s work, expenses or efforts on the project and there was no reasonable justification for why Innotech could be making a claim for over $2,000,000 to re-roof the Property.  The Court went further to state the evidence in the record supported the finding there was little-to-nothing legitimate about Innotech’s role as a general contractor on the Project.

CMI filed the lawsuit seeking a declaratory judgment that it has no further liability to WSP above the actual cash value previously paid.  WSP counterclaimed against CMI for breach of contract and extra-contractual claims arguing it was owed $2.5 million because that was the amount of the Innotech contract.  The Court found this position taken by WSP was without merit because the only amounts actually spent that were necessary to replace the roofs were the payments made to CEI.  The Court noted that even if Innotech’s alleged overhead and profit were added to the CEI contract amount, the total cost would not exceed the $1.2 million actual cash value payment.  Therefore, the Court found WSP failed to show CMI breached the insurance contract.

The Court further found CMI was not liable for any extra-contractual claims because WSP failed to show it was entitled to the withheld depreciation and CMI was correct in not paying that sum.  It was held both CMI and WSP had satisfied their obligations under their insurance contract, and neither party had anymore obligations concerning the insurance claim. 

[Editor’s Note: although the facts in this claim are unusual, the holding is very helpful for carriers defending property claims in Texas.  Insureds and their lawyers always make replacement cost damages claims and their coverage and bad faith claims always attack the carrier for not paying their RC claim.  The ACV calculation and payments, however, are almost always ignored.  Because most RC policies require the property to be actually repaired or replaced before any RC benefits are owed, more carriers and their counsel should make this argument when sued.]

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