Replacement Cost In Insurance Policy

People in Grand Prairie, Arlington, Mansfield, Fort Worth, North Richland Hills, Saginaw, Keller, Roanoke, and other places in the Tarrant County area and Texas would want to know how their insurance policy pays for their property that is damaged in a loss that is covered by the policy.
A 1998, Austin Court of Appeals case helps us understand how some losses are calculated and paid. The case is styled, Great Texas County Mutual Insurance Co. v. Emmett C. Lewis. This is an appeal from the trial court finding in favor of Lewis.
The facts are undisputed. While covered by a policy issued by Great Texas, Lewis’s 1989 Dodge Caravan car sustained damage to the engine. The car had 110,000 miles on it. Great Texas inspected the car and calculated the cost of repairs to be $3,608.27. which included the cost of a re-manufactured engine, replacement parts, and labor. From the $3,608.27, Great Texas subtracted the policy deductible of $527 and $2,031.72 for betterment or depreciation, leaving a net sum of $1,049.55. Great Texas offered Lewis that sum to discharge the obligation under the policy.
Lewis sued alleging the policy did not allow deduction for betterment or depreciation and seeking to recover the $3,608.27 estimated cost, less the deductible of $527, together with the other sums not in dispute. The trial court agreed with Lewis and rendered judgment accordingly. Great Texas’s appeal was over the $2,031.72 claimed by Great Texas for betterment or depreciation.
The policy provided as follows under the heading “Limit of Liability.”
Our Limit of Liability for loss will be the lesser of the:
1. Actual cash value of the … damaged property;
2. Amount necessary to repair or replace the property with other of like kind and quality; or 3. Amount stated in the Declarations of this policy.
Number 3 above was not at issue in this case.
This court stated, “In arriving at the correct measure of damages in an action to recover under an automobile collision policy, it must be kept in mind that the action is not a suit for damages but one on the contract of insurance, and that therefore … the language of the contract sued upon must prevail ….”
The contract provision quoted gave Great Texas an election. They could pay Lewis (1) the actual cash value of the damaged property or (2) the amount necessary to repair or replace the property with another of like kind and quality. After inspecting the engine, they elected to pay the “amount necessary to repair or replace the property with other of like kind and quality.” Both sides agreed that the engine required repairs totaling $3,608.27 and that the car had been driven 110,000 miles when the engine — original to the car — was damaged.
The words betterment and appreciation were not in the policy. Great Texas argued that these words are implied because the replacement engine costing $3,608.27 is tantamount to a new engine — it would carry a warranty. Thus the engine would have an expected useful life much longer than Lewis’s used engine that has been driven 110,000 miles when it was damaged. Calculating that the 110,000 miles were equivalent to 3/4 of the useful life of the damaged engine, Great Texas argued that Lewis would receive an equivalent windfall unless Great Texas was allowed its claimed entitlement to a deduction for betterment or depreciation. As the court pointed out, for this interpretation to be sanctioned, there must be policy language to that effect. And as the court pointed out, there was no such language.
It is generally accepted that depreciation is a factor to be considered when an insurer elects to pay the “actual cash value” of damaged property, which Great Texas declined to do here. By electing to pay Lewis the “amount necessary to repair or replace” the engine with another “of like kind and quality,” Great Texas elected a measure of loss that does not allow for depreciation.
The words “repair” and “replace” mean restoration to a condition substantially the same as that existing before the damage was sustained. Because Lewis’s car was a functioning or operating car before the damage, Great Texas was required to pay an amount necessary for a repaired or replacement car of that character. The qualifying words “of like kind and quality” permit but do not require an engine of similar age, use, condition, or present cash value; they refer simply to repairing the damaged automobile so that it is suitable or fit for its intended purpose.
The law is clear, “when an insurer elects to repair, the insured is entitled to the amount required to repair the automobile.” The insurer’s obligation in such a case is not discharged until the insurer pays the cost of repair less any deductible specified in the policy. The only evidence in this case regarding the cost of repairing Lewis’s car was the agreed sum of $3,608.27; the specified deductible was $527.
In conclusion the court said, “If the company may discharge its obligation by paying Lewis $1,049.55, he will not have, under the evidence, a sum sufficient to restore his engine and automobile to a functioning or operating state. He will be deprived of the protection ostensibly purchased in his policy — protection against the risk of having to pay out of his own pocket to restore his motor car and its component parts to a functioning or operating state in the event they were damaged.”
These disputes about the amount to be paid on a claim are not uncommon. When they arise an experience Insurance Law Attorney should be spoken with. A reading of the policy language and applying the language to the facts of the case will help in giving an opinion as to what should be done next.