Foran Glennon Palandech Ponzi & Rudloff

February 2018

Undertaking Property Repair Or Replacement As An Insurer

A property insurance policy’s loss payment provision typically gives insurers the option to pay the value of damaged property, pay the cost to repair or replace damaged property, take the property at an agreed value, or repair, rebuild or replace damaged property. Each option carries different risks and benefits, and perhaps none are as risky as opting to undertake repair or replacement of damaged property. This article analyzes the risks, potential benefits and legal issues involved in an insurer’s decision to undertake repair or replacement, rather than pay the value of damage or take property at an agreed-upon value.

Loss Payment Provision

The standard Insurance Services Organization (ISO) HO-3 form provides an example of a typical loss payment provision. This form provides as follows:

4. Loss Payment – Building and Personal Property

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

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

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

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

(4) Repair, rebuild or replace the property with other property of like kind and quality, subject to Paragraph b. below.[1]

Notably, the insurer, not the insured, has the option to select the loss payment method. Most claims are ultimately resolved by the insurer making a payment under subparagraphs (1) or (2), based on the actual cash value, replacement cost value or actual replacement cost of the property at issue. Insurers will sometimes take an insured‘s property in the event of a total loss, if the property has some salvage value. This option is most commonly exercised in automobile policies, but some real property insurers will salvage scrap metal and similar materials from damaged buildings.

The Insurer’s Option to Undertake Repairs or Replacement

It is far less common for an insurer to undertake repairs. According to Couch on Insurance, “Where the insurer exercises its option to repair, it is in the same legal position as any person making repairs, insofar as liability to strangers is concerned.”[2] When an insurer directly assumes responsibility for the repair of damaged property, “[i]t is the general rule that where a policy gives the insurer an election to repair or pay, the exercise of the option to repair converts the original contract into a contract to repair, subject of course to various refinements and exceptions.”[3] In other words, “[W]hen an insurance company exercises its right to repair … the insurer thereby assumes the non-delegable duty of having the repairs made with due care.”[4] Therefore, exercising the option to repair places typically unwanted obligations on an insurer.

When insurers exercise the right to repair, courts generally enforce the added obligation to ensure that the repairs are made with due care. Transit Cas. Co. v. Transamerica Insurance Co., 387 F.2d 1011, 1012 (8th Cir. 1967), is one of the seminal cases analyzing an insurer’s third-party liability when undertaking repairs. In that case, the insured’s building was damaged by a windstorm.[5] With the insured’s consent, the insurer contracted directly with a contractor to repair the building.[6] The contractor used an arc welder, which started a fire that extensively damaged the building.[7] The insured alleged that the insurer was liable for the contractor’s negligence.[8] The trial court refused to submit the issue to the jury, reasoning that the insured’s consent to the contractor absolved the insurer of liability.[9] The 8th Circuit Court of Appeals reversed, holding, “[W]hen an insurer elects to repair a damaged building, the insurance contract is converted into a building contract.”[10] Even the insured’s consent to the contractor does not absolve the insurer of the “non-dischargeable duty to use due care in the performance of a contract.”[11] Accordingly, with courts generally endorsing the principal that insurance policies convert to building contracts once an insurer elects to undertake repairs, the potential bases of third-party liability are nearly endless. An insurer could be liable for property damage, as in the Transit Cas. Co. case, for injuries to the property owner, future property owners, or other third-parties, for breach of contract to unpaid subcontractors, or for any conduct to which vicarious liability may attach.

In electing to undertake repair or replacement, an insurer may also face bad faith liability if repairs are not completed in a satisfactory manner. In Williams v. Gulf Insurance Co., 39 Mass.App.Ct. 432 (Mass. App. 1995), an insurer was unable to reach agreement on the value of loss from a flood that damaged the insured’s building. The insurer elected to undertake repairs directly.[12] The trial court held that the insurer “failed to perform in good faith its obligation to restore the property,” since it failed to obtain specifications for repairs or request bids from multiple contractors.[13] The court concluded that the insurer’s failure to properly follow through on its election to repair evidenced a bad faith “pattern of conduct designed for the purpose of substantially reducing the amount it had to pay under its policy obligations.”[14] The Massachusetts Court of Appeals affirmed, recognizing that the insurer’s election to repair “converts the insurance agreement into a building contract.”[15] Thus, the insurer was obligated to make repairs “with reasonable expedition,” which it failed to do.[16]

Given the potential first and third-party liability arising from an insurer’s election to undertake repairs, it is not surprising that insurers have avoided this loss payment option in recent years. Indeed, there are few cases within the last 20 years discussing this option, and most predate 1950. In most instances, the risk of third-party liability and bad faith exposure is too great to justify undertaking repair or replacement.

Even if an insurer has no intention of undertaking repair or replacement, it may unwittingly elect to do so by its conduct. For example, in one New Jersey case, an insurer was held liable for the loss of use of an insured’s car where the repair shop recommended by the insurer’s adjuster failed to complete repairs.[17] In Dwane, the insured was in an auto accident, and the insurance company adjuster arranged to have the car towed to a repair shop. [18] Ultimately, the shop failed to complete the repairs.[19] In addition, the insured’s proof of loss was based on the adjuster’s repair shop’s estimate.[20] The court held that the insurer exercised its option to undertake repairs, and because repairs were not made, the insurer was liable for the insured’s loss of use of the car.[21] Thus, insurers that do not wish to undertake repairs must be mindful of their conduct. Taking possession of property, arranging for estimates on the insured’s behalf, and suggesting contractors to the insured could give rise to an unintended undertaking to effect repairs. Insurers are well advised to avoid such conduct, and to formally disclaim any such undertaking at every opportunity.

Despite these risks, some insurers still opt to directly undertake repairs or replacement of damaged property. This occurs most frequently in the auto context, in which it may be cost-effective for an insurer to contract with certain repair shops or operate its own repair facilities, despite the risks.

The option to repair or replace can also be an effective tool for insurers to avoid paying claims based on inflated estimates. If, for example, an insured has estimated the cost of building repair at $1 million, and the insurer has found a competent contractor willing to do the same work for $500,000, it might be worth the risk to undertake repairs. In some instances, the mere threat of undertaking repairs can lead to a negotiated settlement, in which the insured agrees to a more reasonable and accurate cost estimate.

Insurers that wish to undertake repairs or replacement must also be mindful of policy notice requirements. Many policies contain deadlines by which an insurer must notify an insured of its loss payment election. An insurer must give unequivocal notice of its intent. Courts have held as follows:

An insurer must give notice of its election to exercise its option and must exercise the option in accordance with the terms of the policy. It must by some unequivocal act indicate its intention to avail itself of the provisions of the policy in this respect and offer to replace with property of the same kind and quality as that destroyed.[22]

Further, courts have strictly enforced deadlines against insurers. Where a policy required notice within 30 days of proof of loss, an insurer was required to give unequivocal notice of its intent to rebuild property within 30 days of receiving a fire department report stating that the property was a total loss.[23] The insurer’s internal investigation of the loss did not toll the notice requirement.[24]


Before undertaking repair or replacement of damaged property, insurers must carefully evaluate their potential liability in light of cases like Williams and Transit Cas. Co. The potential risk of third-party and bad faith liability will usually outweigh the marginal savings of undertaking repairs. In handling a claim, insurers must avoid conduct giving the appearance that they are undertaking repairs, and should disclaim any undertaking in their communications with the insured. In some instances, however, the option to repair or replace could be an effective tool to resolve a claim, in which case an insurer must be mindful of a policy’s notice requirements.

Brian E. Devilling is a partner with Foran Glennon Palandech Ponzi & Rudloff PCPaul C. Ferland is a partner in the firm who concentrates his practice in civil litigation involving first-party property insurance coverage and subrogation.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] ISO Form MP T1 02 02 05

[2] Couch on Insurance 3d, § 176:41.Insurer’s Liability to Others, 12 Couch on Ins. § 176:41

[3] State Farm Mut. Auto. Insurance Co. v. Dodd, 276 Ala. 410, 416, 162 So. 2d 621, 626 (1964)

[4] Perez v. AMCO Insurance Co., No. 08-CV-4364, 2009 WL 755228, at *4 (N.D. Ill. Mar. 23, 2009); 15 Couch on Insurance 2d § 54:37, at 341; Venable v. Import Volkswagen Inc., 214 Kan. 43, 519 P.2d 667, 672–73 (Kan.1974); Gregoire v. Insurance Co. of N. Am., 128 Vt. 255, 261 A.2d 25, 28 (Vt.1969); Buerkle v. Superior Court of L.A. County, 59 Cal.2d 370, 29 Cal.Rptr. 509, 379 P.2d 941, 943 (Cal.1963).

[5] Id.

[6] 1016

[7] Id. at 1015.

[8] Id.

[9] Id.

[10] Id. at 1016

[11] Id.

[12] Id.

[13] Id. at 433.

[14] Id. at 437.

[15] Id. at 434.

[16] Id.

[17] Dwane v. W. Am. Insurance Co., 121 N.J. Super. 470, 476, 297 A.2d 865, 868 (Dist. Ct. 1972)

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Sav. Soc. Commercial Bank v. Michigan Mut. Liab. Co., 118 Ohio App. 297, 304, 194 N.E.2d 435, 439 (1963)

[23] Brouillette v. Fireman’s Fund Insurance Co., 563 So. 2d 1343, 1345 (La. Ct. App. 1990)

[24] Id.

Brian E. Devilling, Paul C. Ferland