When a property loss occurs, policyholders often assume their insurance claim guarantees a payout. But under Texas law (and most property policies), insurance is not a cash advance—it’s designed to indemnify actual covered losses.
For sophisticated insureds—businesses, commercial property owners, and policyholders with significant resources—courts have made it clear: if you have the capital to repair, you must actually perform those repairs to recover Replacement Cost Value (RCV) benefits.
Actual Cash Value vs. Replacement Cost Value
Most property insurance policies distinguish between ACV and RCV:
- Actual Cash Value (ACV): Pays the depreciated value of damaged property.
- Replacement Cost Value (RCV): Pays the full cost to repair or replace with like kind and quality—but only if repairs are completed.
Courts routinely enforce this condition. A sophisticated insured cannot collect RCV without repairing or replacing the property.
The Doctrine of Prevention and Depreciation
The doctrine of prevention holds that a party cannot block a contractual condition and then claim the condition was not met. In insurance disputes:
- If the insured has the money to repair but delays or refuses to do so, they can’t demand RCV.
- Depreciation reflects the property’s age, use, and deterioration. If repairs are not made, the depreciated condition persists because of the insured’s own inaction.
Simply put: the law prevents insureds from causing or extending depreciation and still claiming full replacement cost.
Texas Cases Applying the Doctrine of Prevention
Courts applying Texas law have consistently enforced repair requirements for sophisticated insureds:
Devonshire Real Estate & Asset Management, LP v. American Insurance Co.
A federal court held that an insured must repair or replace before claiming RCV. The court emphasized that sophisticated parties in commercial disputes cannot sidestep clear policy terms once ACV has been paid.
Samurai Global LLC v. Landmark American Insurance Co.
The court reaffirmed that when both parties are sophisticated and ACV has been paid promptly, the insured must make repairs before RCV is owed. The doctrine of prevention did not apply.
Kahlig Enterprises, Inc. v. Affiliated FM Insurance Co. (5th Cir. 2024)
The Fifth Circuit ruled that if repairs are not made within the policy’s timeframe (often two years), coverage defaults to ACV only. The burden is on the insured to prove compliance with repair conditions.
Why Sophistication and Capital Matter
Courts expect sophisticated insureds to:
- Understand policy terms and conditions precedent.
- Fund necessary repairs before claiming RCV.
- Avoid relying on equitable doctrines unless the insurer outright denies or refuses to pay.
Being well-capitalized means courts assume you can repair, so failing to do so will likely limit recovery to ACV.
Key Takeaways for Sophisticated Texas Insureds
- You must complete repairs to claim RCV.
- The doctrine of prevention will not excuse non-compliance unless the insurer blocks performance
- Delay or inaction = ACV only.
Bottom line: In Texas, sophisticated insureds with the capital to repair must do so—or risk losing significant replacement cost benefits. Sophisticated insureds cannot blame their insurance companies’ delay in payment for failure to do repairs in order to recover depreciation.
