When a Structure Can be Said to Have "Replaced" Another Structure for Replacement Cost Coverage Purposes -- The "Functional Similarity" Test

What do you think? 

Can a multi-building commercial property comprising a supermarket, a wine and liquor store, a hardware store, a drug store, and an automatic car wash reasonably be said to have "replaced" a single-family, 5-bedroom dwelling rented to 10 fraternity brothers within the meaning of and under a landlord's package insurance policy that limits loss payment to actual cash value "until actual repair or replacement [of the damaged building] is completed"?

I thought not, and now Clinton County Supreme Court Justice John T. Ellis thinks not.  In an action I was defending in which the policyholder was seeking the balance of the Coverage A-Residence limit for the total fire loss of the rental dwelling, and on the eve of a jury trial, my insurer client moved and the plaintiff cross-moved for summary judgment.  

The policyholder argued that its "replacement" of the single-family, five-bedroom dwelling shown above--found in an appraisal to have had a replacement cost value of just over $1 million--with the three-parcel, six-building commercial shopping plaza shown above--at an alleged cost of nearly $1.9 million--qualified it for payment of the depreciation holdback equal to the balance of the policy's Coverage A-Residence limit.

In GRANTING my client's motion, Justice Ellis summed it up best:

Significantly, the insured premises is a dwelling, covered under a residential policy of insurance, which is rented to tenants who reside therein. The Gorman Properties are a multi-parcel, multi-building commercial shopping plaza, containing commercial tenants, who use the property for commercial reasons. Overall, a commercial shopping plaza, which has as its primary function the conduct of shopping, is not functionally similar to a residence, which functions primarily as a place for people to live. The Court therefore finds that actual replacement, as contemplated by the Replacement Cost Provision of the policy has not occurred. Based on such finding, the Defendant has not breached the contract between the parties by failing to pay the balance of the fire insurance policy. Accordingly, and for the foregoing reasons, it is hereby 

    ORDERED that the Plaintiff's cross-motion for summary judgment is hereby denied; and it is further

   ORDERED that Defendant's motion for summary judgment is granted, and the Complaint is hereby dismissed.

New York and other jurisdictions utilize the "functional similarity test" for determining whether Property B can be said to have "replaced" Property A (the insured property) for replacement cost coverage/depreciation holdback recovery purposes.  The case law establishing and discussing that test (which my senior associate Will Lorenz and I cited in our initial and reply memoranda of law) can be found beginning on page 10 of Justice Ellis' Decision and Order of October 28, 2021:

Unless modified or reversed on appeal (none has not been filed yet), this decision (which I've submitted to the New York State Reporter for consideration of publishing in the New York Official Reports) can be cited for the following propositions, in my opinion:

1. The term "replacement" is not ambiguous.


2. New York utilizes the "functional similarity test" for determining whether a purported replacement property qualifies for replacement cost coverage/depreciation holdback under a property insurance policy.


3. A commercial shopping plaza is not functionally similar to a residence, even if the policyholder rented/rents both to tenants.  
   

Bookmark or save this post or this decision.  If you handle property claims in New York and are more than a year or two from retirement, chances are you'll encounter this issue again in one of your files.