Can my Insurance Company Withhold Payment Until I Repair Damage to my Home Following a Covered Loss?

Homeowners insurance policies issued in Michigan incorporate and are subject to the Michigan Fire Insurance Contracts Act with respect to coverage for property damage.

Two provisions of the Act, MCL 500.2826 and MCL 500.2827, govern when an insurer may withhold payment of replacement-cost benefits until repairs are completed.

MCL 500.2826 authorizes a fire policy that pays the difference between the property’s “actual value” at the time of loss and the amount actually expended to repair, rebuild, or replace the property with new materials of like size, kind, and quality, up to the policy limits.

A key feature of § 2826 is that the insurer may condition payment of the replacement-cost difference on the property actually being repaired, rebuilt, or replaced. If repairs are not made, the insurer may limit payment to the property’s actual value at the time of loss (commonly understood as replacement cost less depreciation).

MCL 500.2827 also authorizes replacement-cost coverage, but it adds important structure and protections. It defines the replacement standard as repair or replacement to a condition and appearance similar to that which existed at the time of loss, using conventional materials and construction methods currently available without extraordinary expense.

2827 also expressly preserves the insured’s right to elect a cash settlement based on actual cash value. In other words, an insurer cannot force an insured to rebuild in order to recover the value of the loss.

Section 2827 further allows an insurer to withhold amounts above actual cash value unless the property is actually repaired or replaced. However, that limitation does not apply if the loss calculated under the statutory replacement standard exceeds the policy limits. In that situation, the insurer may not rely on the rebuild condition to avoid paying the full coverage limits.

Because policy language does not always track the statutory wording verbatim, courts examine the structure and substance of the replacement-cost provision to determine whether it was issued pursuant to § 2826 or § 2827.

A policy provision that is contrary to the Michigan Fire Insurance Contracts Act is absolutely void and the insurer will be liable to the insured in the same manner and to the same extent as if the provision were not contained in the policy.