The Impact of Coronavirus on the Replacement Condition

The impact of the coronavirus virus on business interruption insurance coverage is a hotly debated topic. But other property insurance coverages may be impacted by this global pandemic as well. Many property insurance policies require actual repair/replacement of damaged/destroyed property to be completed within a certain time period in order to receive replacement cost benefits. Given the “stay-at-home” orders issued in many states, including here in Illinois, it may not be possible to meet the replacement condition within the requisite timeframe.

Under the powers vested by sections 397 and 401 of the Illinois Insurance Code, the Director of Insurance has promulgated certain regulations that provide for a Standard Fire Policy.¹ Under the regulations, all fire insurance policies must “conform to such form of the Standard [Fire] Policy or, if another form is used, shall for the purpose of concurrence of contract be deemed to be the Standard [Fire] Policy.”² In essence, the Standard Fire Policy guarantees a minimum level of coverage that supersedes any attempt to limit or to restrict coverage to less than the statutory minimum.³ Stated differently, fire insurance policies may not provide coverage less than that set forth in the Standard Fire Policy.⁴

Two Illinois appellate court decisions⁵ have concluded that under the Standard Fire Policy’s insuring agreement, an insured is not required to make repairs or to replace fire-damaged damaged property within a certain time-period to recover the full replacement cost value of the loss. Instead, the insured is entitled to make repairs or to replace damaged property within a “reasonable time” of the fire without forfeiting the right to recover replacement cost benefits.⁶ What constitutes a reasonable time to repair or to replace fire-damaged property depends on the facts and circumstances of each case,⁷ which clearly would include any delay in completing the repairs due to the stay-at-home order.

While the Standard Fire Policy applies only to fire losses, I find it hard to believe that insurers will strictly enforce a repair/replacement time limit in non-fire losses, given the current state of affairs in this Country. Practically speaking, any insured coming up on a deadline to complete repairs in a non-fire loss should be requesting in writing an extension of time to meet the replacement condition if the virus is going to prevent timely completion. If the extension request is denied, then there are legal arguments available to the insured, including impossibility of performance. Hopefully, arguments like that will not be necessary, and insurers will grant an extension request. But, after 30 years of practice, nothing would surprise me.

For insurers who refuse to grant extension requests and will require strict compliance with the replacement condition, keep in mind that the insurance contract is a two-way street. If it is going to require the insured to strictly perform, then the insurer also must strictly perform its duties. One such duty is embodied in section 919.50(a) of Part 919 of the Illinois Administrative Code, which requires an insurer to affirm or to deny liability on claims within a reasonable time and to offer payment within 30 days after affirmation of liability if the amount of the claim is determined and not in dispute. For those portions of the claim which are not in dispute and for which the payee is known, the insurer shall tender payment within said 30 days.

The Illinois stay-at-home order does not apply to legal services and insurance services, as they are deemed “essential” businesses not subject to the order. It goes without saying, everyone should do what makes sense from a health and safety standpoint. But insurers and their counsel should not be using the order as both a sword (strictly requiring compliance with the replacement condition) and as a shield (an excuse for not making timely claim payments, including releasing depreciation holdbacks). Remind them of the order, and that all essential businesses need to operate as usual, subject obviously to health and safety concerns. Issuing checks consistent with section 919.50(a) of Part 919 of the Administrative Code would not seem to implicate health and safety concerns.
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¹ 215 ILCS 5/397 and 5/401(a); 50 Ill. Adm. Code § 2301 et. seq.
² 50 Ill. Adm. Code § 2301.30.
³ The Illinois Standard Fire Policy 165-line form is identical to the Standard Fire Policy 165-line form prescribed by the New York legislature in 1943. See Corday’s Dep’t Store, Inc. v. New York Fire and Mar. Underwriters, Inc., 442 F. 2d 100, 104 (7th Cir. 1971).
⁴ See Streit v. Metropolitan Cas. Ins. Co., 863 F.3d 770, 773 (7th Cir. 2017) (“Though the Illinois Supreme Court has yet to address the question, both the statutory text and Illinois appellate courts make clear that in the event of a conflict between an insurer’s policy and the Standard Fire Policy, the latter controls.”).
⁵ Chaney v. Allstate Indem. Co., 2017 IL App (1st) 161498-U (Ill. App. Sept. 5, 2017); Meza v. Country Mut. Ins. Co., 2020 IL App (1st) 181456-U (Ill. App. Jan. 14, 2020).
⁶ Chaney involved Allstate’s requirement that the insured dwelling to be repaired, replaced, or rebuilt within 180 days of receipt of the actual cash value payment to recover replacement cost benefits. Meza involved Country Mutual’s requirement that the insured dwelling to be repaired, replaced, or rebuilt within one year from the date of loss to recover replacement cost benefits.
⁷ See Tamco Corp. v. Federal Ins. Co. of New York, 216 F.Supp. 767 (N.D. Ill. 1963).