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The Office of General Counsel issued the following informal opinion on June 27, 2005, representing the position of the New York State Insurance Department.

Re: Architect Fees.

Question Presented:

Is an insurer required to pay for architect fees not actually incurred by an insured after the insured has rebuilt/replaced a structure that was lost due to fire?


On a replacement cost policy, an insurer is not required to pay for architect fees not actually incurred by an insured after the insured has rebuilt/replaced a structure that was lost due to fire, provided that the policy terms do not provide otherwise.


A fire has destroyed a structure that is covered by a fire insurance policy. The policy provides that architect fees are recoverable under the replacement costs provisions. The insurer and the insured have agreed on the total replacement cost and the actual cash value of the loss. The insured is paid the actual cash value prior to the rebuilding. Thereafter, the insured rebuilds and submits proof of payment to recover the "holdback" or the difference between the actual cash value and the replacement cost. However, the insured cannot produce the proof of payment for architect fees because an architect was not used to rebuild the structure.

The inquirer did not provide the exact terms of the fire insurance policy but requests that the Insurance Department clarify a previous opinion letter issued February 3, 2003 regarding the recovery of architect fees after a settlement, that includes architect fees, has been reached. In that letter, the Insurance Department opined that "pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, § 216.7(f) (1/31/98) (Reg. 64), the insurer is required to "pay any amount finally agreed upon in settlement of all or part of any claim not later than five business days from the receipt of such agreement by the insurer . . ."


In Harrington v. Amica Mutual Insurance Company, 223 A.D.2d 222 (4th Dept. 1996), the replacement cost provisions of the fire insurance policy in question required that defendant, pay the cost to repair or replace [the building], after application of deductible and without deduction for depreciation, but not more than the least of the following amounts:

(a) the limit of liability under this policy that applies to the building;

(b) the replacement cost of that part of the building damaged for like construction and use on the same premises; or

(c) the necessary amount actually spent to repair or replace the damaged building.

The Court held that, "Replacement cost coverage inherently requires a replacement (a substitute structure for the

insured) and costs (expenses incurred by the insured in obtaining the replacement); without them, the replacement cost provision becomes a mere wager. Because plaintiff has not incurred replacement costs in this case, plaintiff's loss is defined by the building's actual cash value."

Under the facts presented in this inquiry, the insured has satisfied the first requirement that the structure be replaced to recover replacement costs but has not satisfied the second requirement to recover replacement costs, that the costs or expenses to replace the structure actually be incurred by the insured. This is distinguishable from our February 3, 2003 opinion letter because that opinion applied to actual cash value coverage.

Therefore, if a fire insurance policy contains a replacement cost provision similar to that presented in the Harrington case, the insurer is not required to pay for architect fees that are not actually incurred by an insured after the insured has rebuilt/replaced the structure that was lost due to fire.

For further information you may contact Special Counsel Athan Shinas at the New York City Office.

Department of Financial Services


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