The appellate court determined that a conditional judgment on replacement costs was appropriate after the insurer denied coverage. Stephens & Stephens XII, LLC v. Fireman's Fund Ins. Co., 2014 Cal. App. LEXIS 1073 (Cal. Ct. App. Nov. 24, 2014).
Stephens operated a large industrial warehouse. It initially purchased a commercial liability policy from Fireman's Fund when an tenant occupied the building. After the tenant left, Stephens purchased from Fireman's Fund property coverage on June 28, 2007. On July 1, Stephens discovered that burglars had caused more than $2 million in damage to the property. All conductive material was stripped from the building and taken away. There was water damage throughout the building. The estimated cost of repair exceeded $1 million.
Stephens notified Fireman's Fund. The insurer paid emergency repairs, but it neither accepted nor denied coverage for the loss. Finally, five years after the incident and on the eve of trial, Fireman's Fund denied coverage.
At trial, the jury found for Stephens on its claims for breach of contract and breach of the covenant of good faith and fair dealing. The jury awarded $2,100,293 for the replacement cost of the damage to the property and $2,135,936 in lost business income. Under the claim for breach of the covenant of good faith and fair dealing, the jury awarded $436,896 for "lost rents."
Fireman's Fund moved for a Judgment Notwithstanding Verdict (JNOV), contending Stephens was not entitled to replacement cost as a matter of law because it had not satisfied the precondition of the repair requirement under the policy. The trial court granted the motion, finding that Stephens was required to complete the repairs before it was entitled to receive replacement costs.The court also found that Stephens could not have suffered lost business income because it did not conduct any business at the property, as required by the policy. In addition, the court overturned the jury's award of bad faith damages because no compensatory damages had been properly awarded.
On appeal, the court noted that most replacement cost policies required actual repair or replacement of the damaged property as a condition precedent to recovery under the policy. Here, the court agreed Stephens was prevented from repairing the damage by Firemen's Fund's failure to accept coverage. When an insurer's decision to decline coverage hindered an insured from repairing damaged property, procedural obstacles to obtaining the replacement-cost value were excused. If coverage was resolved in favor of the insured, the insured should remain eligible to receive replacement costs, so long as the insured complied with other applicable policy terms, such as a repair requirement. Therefore, Stephens was entitled to a judgment declaring its right to receive reimbursement for repair costs, if and when the repairs were actually performed in a timely manner.
The appellate court also upheld the jury's award for lost business income because it was properly construed as an award for compensable lost rent.