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Insurance policies and overhead and profit

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Some insurance companies are telling Minnesota property owners and their contractors that insurers do not have to pay overhead and profit under Minnesota law.  There is no such law.  Some insurance companies say they have what amounts to an unwritten policy to not pay overhead and profit.  Unwritten policies do not matter.  When property owners have storm or fire damage they should expect the insurer to pay all costs that flow from the damage. 

The Minnesota legislature has not passed a law that speaks to insurer payment of overhead and profit.  Minnesota state agencies have not enacted a rule that speaks to overhead and profit.  The law that pertains to overhead and profit comes from past decisions arising from contested court cases.  A summary of relevant decisions show how insurers should issue payment after a storm or fire. 

Minnesota Insurance Policy “Loss Payment” Section

Minnesota law views insurance policies as a contract.  Fortunately for property owners, the law is on their side when interpreting this contract.  Unambiguous insurance policy language is given its plain and ordinary meaning.  St. Paul Fire & Marine Insurance Company v. Futura Coatings, Inc., 993 F.Supp. 1258, 1261 (D. Minn. 1998).  Any ambiguous language in an insurance policy is construed against the insurance company.  Progressive Specialty Ins. Co. v. Widness, 635 N.W.2d 516, 518 (Minn. 2001).  This is important for property owners.  In addition, the law requires an insurer to carry the burden to show one of its exclusions defeats coverage.  Travelers Indem. Co. v. Bloomington Steel & Supply Co., 718 N.W.2d 888, 894 (Minn. 2006).  Exclusions in an insurance policy that defeat coverage “are construed narrowly and strictly against the insurer.”  Id.  All of this law helps property owners. 

A court case decided last November in Minnesota federal court nicely summarizes how courts analyze insurance policies.  Property owners should follow how the Court reviewed the disputed insurance policy in this case and do likewise when reading their insurance policy.  The case is KRI Investments v. Country Mutual Insurance Company, 2013 WL 6190367 (D. Minn. 2013).  KRI owns property in Newport, Minnesota which was hit by a storm on June 25, 2010.  The property owner and insurer disputed coverage of damage to the roof, windows, and other items.  The dispute over the roof is most interesting to coverage of overhead and profit.

The Court’s analysis of the insurance policy began with the “Loss Payment” section of policy.  This section is very similar to how most Minnesota insurance policies read: 

In the event of loss or damage covered by this Coverage Form, at our option, we will        either:    

(1)   Pay the value of the lost or damaged property;

(2)   Pay the cost of repairing or replacing the lost or damaged property, subject to b. below;

(3)   Take all or any part of the property at an agreed to or appraised value; or

(4)   Repair, rebuild or replace the property with other property of like kind and quality, subject to b. below…   

Because the insurer decided to pay the cost to replace the roof, the Court turned to the “Replacement Cost” section to see what is covered.  The language in this section is also very similar to how most Minnesota insurance policies read.  The most important language in this section is the insurer is required to, “replace the lost or damaged property with other property.. [o]f comparable material and quality” and “[u]sed for the same purpose.” 

Policy language like this is what Minnesota courts look to when deciding what an insurance policy must cover after a storm or fire loss.  Courts look to and enforce the terms of the insurance policy.  Unwritten policies by the insurer are never relevant.  Sometimes Minnesota law modifies or dictates terms of an insurance policy, such as the applicable statute of limitations, but for the most part the insurer’s policy governs what is covered. 

Loss Payment Coverage Of Overhead And Profit

In the KRI case, the property owner’s general contractor submitted two bids for roof repairs to the insurer.  The insurer did not like either bid.  The insurer argued the bids went beyond the scope of the storm damaged and would result in a better roof than what it insured.  The insurer then received a bid to replace the roof for less than half the bids KRI’s general contractor submitted.  The insurer then voluntarily added an additional amount for overhead and profit. 

The Loss Payment section of the policy did not specifically speak to overhead and profit.  The insurer knew it had to pay for a new roof “[o]f comparable material and quality” that would be “[u]sed for the same purpose”, and it issued payment that included overhead and profit.  Once the insurer elected to pay for a new roof it had to pay all costs associated with roof replacement, including overhead and profit.  The litigated dispute was the type of roof to be reinstated, not whether overhead and profit must be paid. 

Payment of overhead and profit was not controversial in KRI.  Payment of overhead and profit should not be controversial in any case.  I am not aware of any jurisdiction in the United States with a law that says insurers need not pay overhead and profit after a fire or storm.  In fact, in states that have long had Minnesota’s new bad faith law it is bad faith for an insurer to adopt a practice of not paying overhead and profit.  Tritschler v. All State, 213 Ariz. 503 (Az. Ct. App. 2006).  Minnesota bad faith law needs time to develop through contested court cases.  Minnesota courts may hold insurers in bad faith for adopting unwritten “policies” that it will never pay overhead and profit, just like in Arizona.  The penalty for a finding of bad faith is payment of money to the property owner in addition to what is required under the insurance policy. 

Insurer payment of overhead and profit is standard operating procedure in many states. It ought to be in Minnesota too.  There are few if any insurance policies that specifically state the insurer will not pay overhead and profit.  Most insurance policies read like the one in the KRI case.  All insurers ought to voluntarily pay overhead and profit just like the insurer in KRI