No Replacement of Property Within 2 Years Results in Dismissal of RC Holdback Suit

PROPERTY – REPLACEMENT COST COVERAGE – DEADLINE TO REPAIR OR REPLACE – CONTRACTUAL SUIT LIMITATIONS PERIOD – DECLARATORY JUDGMENT
Alloush v. Nationwide Mut. Fire Ins. Co.
(NDNY, decided 2/26/2008)

Went to the Mura & Storm archives for this one. Kudos to my partner, Scott Storm, for obtaining this excellent result.

This case addresses two, occasionally recurring questions in property claims: (1) How long does an insured really have to repair or replace an insured dwelling to obtain the RC holdback?; and (2) Can an insured use a declaratory judgment action to obtain a ruling on whether a certain, unpurchased property qualifies for RCV coverage? Answers from this decision are: (1) Two years. (2) No.

Mr. Alloush sustained a fire loss to his home on August 24, 2003. Nationwide estimated the dwelling damage to be $196,849.26 on a RCV basis and $141,825.24 on an ACV basis, leaving the potentially recoverable depreciation (commonly referred to as the "RC holdback") to be $55,024.02.

Nationwide paid the dwelling ACV on February 19, 2004. Mr. Alloush completed repairs on the insured dwelling but did not make a claim for the RC holdback because he could not substantiate expenditures in repairing the insured premises in excess of what Nationwide had paid in ACV. Instead, even though Mr. Alloush had decided to repair the insured premises and continued to reside there, he wanted to recover the RC holdback by purchasing another property.

In July 2005 (the month before the two-year anniversary of the loss date), Mr. Alloush contacted Nationwide and informed it that he intended to buy a single-family house in New Jersey as a replacement for the insured premises (Mr. Alloush's ex-wife happened to own that home and lived there with four of their eight children). In response, Nationwide reminded Mr. Alloush and his public adjuster of the policy's two-year contractual suit limitation condition and the need for Mr. Alloush to replace the insured premises and file his RC holdback claim before that time period expired. At the time he filed this action, however, Mr. Alloush had not replaced the insured premises.

In granting summary judgment to Nationwide, Senior Judge Frederick Scullin ruled that: (1) since the policy unambiguously stated that Nationwide was not required to pay any more than the ACV of the insured premises "until the repair or replacement is made," and Mr. Alloush had not replaced the insured premises, Nationwide had not breached the policy; and (2) Mr. Alloush was improperly seeking an advisory opinion about a future event that may or may not occur, namely, the replacement of the insured dwelling:

[T]his case would only be ripe for decision if and when Plaintiff purchased a replacement for the insured premises and incurred some costs in doing so. Moreover, dispute would still be hypothetical unless and until Plaintiff filed a claim to recover those replacement costs and Defendant refused to pay that claim. Therefore, the Court concludes that there is no current controversy between these parties and dismisses the complaint for lack of jurisdiction.

This claim scenario must be contrasted with one in which the insurer denies all coverage based on one or more coverage defenses and does not pay ACV to the insured. See, discussion of the O&E Growers, Inc. v. Selective Ins. Co. of Amer. case in If At First You Don't Succeed, Sue Again. We obtained a similar result for Security Mutual Insurance Company in New York state court in Finley v. Security Mut. Ins. Co., Index No. 02-0594 (Sup.Ct., Jefferson Co., decided 6/21/2005). This is now the second decision that we are aware of in which a court has agreed that a property insurance policy's two-year contractual suit limitations period, in effect, represents the deadline by which an insured who has received a building ACV payment must repair or replace the building and submit the RC holdback claim.

What this case adds to the legal landscape, however, is authority for rejecting insureds' attempts to use the declaratory judgment suit mechanism as a means of "staying" that two-year deadline and attempting to obtain what can only be regarded as an advisory opinion, something DJ actions are not intended to provide.