Viewpoint: What Is ‘Incurred Cost’ in Insurance Policy? Florida Appeals Court Weighs in

Property insurance contracts often contain provisions requiring insureds to “incur” costs before insurance companies issue payments. For example, “ordinance or law” provisions provide “you may use up to 25% of the limit of liability that applies . . . for the increased costs you incur due to the enforcement of any ordinance or law,” and “reasonable emergency measures” provisions provide “we will pay up to $3,000 for the reasonable costs incurred by you for necessary measures taken solely to protect covered property . . . from further damage.”

Some policies contain “supplemental claims” provisions, providing, “a supplemental claim means a claim for additional loss or damage from the same peril, which we have previously adjusted or for which costs have been incurred while completing repairs or replacement pursuant to an open claim.” Perhaps most notably, the “loss settlement” provision in many policies provides, “we will initially pay at least the actual cash value of the insured loss, less any applicable deductible. We will then pay any remaining amounts necessary to perform such repairs as work is performed and expenses are incurred.”

Florida’s 5th District Court of Appeal, in State Farm Florida Ins. Co. v. Joretha M. James, No. 5D22-1404 (Dec. 1, 2023), recently addressed the meaning of “incurred cost” in an insurance policy. In James, State Farm appealed a final judgment issued in favor of the insureds, asking the appellate court to overturn the trial court’s decision and find that James did not “incur” tear out costs as required under the policy to obtain coverage. Although the DCA rejected State Farm’s argument, the court provides helpful guidance on what a court will consider to be an “incurred cost” under an insurance policy.

In James, the policy contained a “tear out” provision: “if a loss insured to Coverage A property is caused by water or steam escaping from a system or appliance, we will also pay the reasonable cost you incur to tear out and replace only that particular part of the building or condominium unit owned by you necessary to gain access to the specific point of that system or appliance from which the water or steam escaped.” This provision, like the ones noted above, requires the insured to “incur” a cost before payment is made.

Even though the term “incur” is used frequently in insurance policies, it is almost never defined. In James, the DCA specifically stated, “we begin by noting … the policy was drafted by State Farm, which failed to include a definition of the meaning of the word ‘incur,’ thereby leaving it open to potentially different meanings.” James, at 3. The DCA also noted that “[b]ecause ‘incur’ is not defined, ‘it should be given its plain and ordinary meaning’ in the context presented.” Id. citing to Gov’t Emps. Ins. Co. v. Macedo, 2017.

Merriam-Webster’s dictionary defines “incur” to mean “to become liable or subject to.” In layman’s terms, to “incur the cost of something” means to spend money on something. In the context of an insured “incurring” a cost as required under an insurance policy, however, the term “incur” is slightly broader. The Florida Supreme Court has held that “‘to incur’ means to become liable for the expense, but not necessarily to have actually expended it. We agree.” Ceballo v. Citizens Prop. Ins. Corp., 2017. In other words, under Florida law, an insured does not actually have to spend money in order to “incur” a cost.

The question remains: What must insureds do to prove that they have incurred costs under their policies? Obviously, the first way would be to prove they have actually spent money on something. However, as noted above in the Ceballo case, the Florida supreme court held that an insured does not actually have to spend money to incur a cost. In James, the DCA identified another method to prove insureds have incurred costs. The DCA found that the insured “incurred the loss for which reasonable repair costs are due and payable as reflected by the contract.”

This interpretation is more clearly set out in the concurring opinion offered by Judge Makar: “State Farm makes the argument that incurring costs means the policyholder must have an ironclad irrevocable contract; or that the policyholder must have paid such costs. Both arguments are less reasonable than the middle ground that the policyholder advances, i.e., that by entering the contract at issue she has incurred the costs for purposes of payment under the tear out clause.” The decision is consistent with a Fourth DCA decision which held “at the time of the original appraisal, Jossfolk had not applied for repairs of the roof. Thus, he had not incurred or become liable for any additional expense.” See Jossfolk v. United Prop. & Cas. Ins. Co., (Fla. 4th DCA 2013).

The James court’s decision was impacted by the fact that the word “incur” was not defined in the policy. The court noted that “the policy could have been written to say that State Farm would reimburse ‘the reasonable costs you have paid for tear out’ repairs, but it was not.” In other words, if an insurance company wants to limit incurred costs to expenses the insured actually pays for, then the insurance company can either rewrite the applicable provision to define the term “incur” or provide a dollar limit.

However, even for policies where the term “incur” is not defined, the James decision still has a significant application. It makes clear that for insureds to “incur” costs they can do one of two things: They can spend their own money or they can sign a valid and enforceable contract for work to be performed.

What insureds cannot do after James is simply rely on an estimate to prove their incurred costs. The insureds must present an actual contract signed by the insureds with someone who will actually perform the work in order for costs to be “incurred.”