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In a significant opinion on property insurance issues, the Fourth District Court of Appeal reversed a jury award in favor of a homeowner and sharply resolved some common misconceptions over a homeowner’s entitlement to “Replacement Cost” and “Overhead & Profit” policy benefits.

In Prepared Insurance Company v. David Gal[1], the insured was not satisfied with the amount of money his insurance company offered to repair his kitchen cabinets after a kitchen sink leaked. He filed suit and, indeed, their valuation differences were stark — Prepared’s cabinetry expert believed that the cabinets could be easily repaired and restored for $2,585.00, but the insured’s expert opined that the project required a general contractor and that it would cost $107,902.50 to fully replace the damaged kitchen cabinets.

Led astray by the homeowner’s attorney, the trial court judge entered a series of pre-trial rulings that forced the parties to a jury trial on very limited issues. First, the trial court granted summary judgment in favor of the homeowner finding that the Replacement Cost provision of the policy required the company to replace the cabinets, not merely repair them. The trial court also granted summary judgment in favor of the homeowner finding that Prepared breached the policy, as a matter of law, by failing to pay the cost of hiring a general contractor (Overhead and Profit).

Having ruled that a general contractor was required as a matter of law to perform the work, the trial court struck Prepared’s cabinetry expert and field adjuster on the first day of trial and did not allow them to testify before the jury because they were not licensed general contractors. The court also did not allow cross examination of the insured’s expert about a separate water incident at the home that could have contributed to the damage on kitchen cabinets. Shackled with these findings, the parties presented their case and the jury entered a verdict of $44,304.85 to replace the homeowner’s custom built kitchen cabinets.

Following a plenary appeal, the 4^th DCA determined that the trial court’s summary judgment rulings wrongfully deprived Prepared of the opportunity to argue that it could repair the damaged kitchen cabinets and that gutting and rebuilding the entire kitchen was unnecessary. The appellate court reminded the trial court that the Supreme Court of Florida clearly established in Trinidad v. Fla. Peninsula Ins. Co, 121 So.3d 433 (Fla. 2013) that “replacement cost insurance is designed to cover the difference between what the property is actually worth and what it could cost to rebuild or repair the property after a covered loss.” The record established that that there was sufficient competing evidence that should have been weighed by the jury on the repairability of the damage.

The 4^th DCA also reversed the trial court’s ruling that payment for a general contractor’s overhead and profit was required as a matter of law. After many decades of uncertainty on the timing and payment of overhead and profit line items in homeowner insurance cases, the Trinidad case settled, once and for all, that overhead and profit is an integral part of an insurer’s replacement cost obligation “if the insured is reasonably likely to need a general contractor” for the project.

“Overhead and Profit” are costs paid to general contractors to oversee a construction project. Overhead is typically defined as costs that are necessary to run the contractor’s business (ex. rent, utilities, and licenses). Profit is the value that the contractor expects to earn for his work, such as sequencing, coordinating, supervising and obtaining permits, etc. Typically, the nature and extent of the property damage in question and the number of trades needed (carpentry, masonry, plumbing, electrical, etc.) to make repairs are key factors in determining whether use of a general contractor is reasonably necessary.

Given that property damages are hardly ever alike, the Trinidad court explained that the amount of overhead and profit owed “will generally be a question of fact for the jury.” Conversely, if the insurer reasonably believes, from its own assessment of the damages, that a general contractor will be required to perform the repairs (or replacement), overhead and profit is immediately due and payable. 121 So.3d at 441.

The trial court in Prepared, misunderstood these ethereal issues of property insurance law (likely at Plaintiff’s misguided insistence), but these mistakes formed the basis of subsequent evidentiary and trial rulings and the entire case crumbled like a house of cards. Given the exponential uptick of “water leak” lawsuits in South Florida, the Prepared case seems to send signal and reminder to lower courts that despite the statutory consumer protection provisions that govern homeowner’s insurance claims, replacement cost liability does not automatically mean that a homeowner can get a brand new kitchen or bathroom out of every small water leak, or that overhead and profit will always be necessary to complete certain repairs.

[1]  41 Fla. L. Weekly D2322 (Fla. 4^th DCA Oct. 13, 2016).