Most policies require a policyholder to repair or replace property in a timely manner. Only then, after this is accomplished, will the insurance company reimburse the policyholder under the terms of the insurance contract. But what happens when it is too expensive to make these repairs? Is the policyholder barred from collecting insurance if he cannot fulfill his duty to timely repair or replace under the contract?
No, according to a recent Nebraska Supreme Court case. In D & S Realty, Inc. v. Markel Insurance Co., 284 Neb. 1, 816 N.W.2d 1 (2012), the policyholder sued the insurance company for failing to indemnify it for a covered loss. The insurance company denied payment because the policyholder did not fulfill a specific clause requiring the policyholder to repair or replace the damaged property in a timely manner before reimbursement.
The policyholder argued that it could not afford to perform the repair work without reimbursement. It simply did not have the money, and was forced to sell the remainder of the damaged building at a substantial loss. The Nebraska Supreme Court held that even a good faith denial of coverage does not excuse failure to pay if that failure prevents the policyholder from performing a condition precedent under the contract. “If the delay in determining the insurer’s liability materially contributed to a situation where the insured can no longer perform the condition after the coverage dispute is resolved, then the condition will be absolutely excused.”
What does this mean for a policyholder and an insurance company in Nebraska? The Supreme Court gave instructions on how to handle this situation within the opinion. The Court suggested that, to the extent coverage can be determined at the outset; the parties obtain a declaratory judgment action for coverage. It coverage is found, the policyholder can use that decision as collateral for a loan to repair or replace the damage – thus fulfilling the policy terms for indemnity for a loss. In reality is this practicable? Let me know your thoughts.