Opinion ID: 1711869
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Heading: Replacement Cost Coverage.

Text: Under the applicable provisions of the insurance policy, Schott was required to replace the damaged buildings in order to qualify for replacement cost coverage. The parties agree that this provision operates as a condition precedent to recovery of replacement costs. See Kolls v. Aetna Cas. & Sur. Co., 503 F.2d 569, 571 (8th Cir.1974); Snellen v. State Farm Fire & Cas. Co., 675 F.Supp. 1064, 1067 (W.D.Ky. 1987); Pierce, 548 N.W.2d at 554; Bosch v. Garcia, 286 N.W.2d 26, 28 (Iowa 1979); Higgins v. Ins. Co. of N. Am., 256 Or. 151, 469 P.2d 766, 772 (1970); Hess v. N. Pac. Ins. Co., 122 Wash.2d 180, 859 P.2d 586, 589-90 (1993); see generally Randy R. Koenders, Annotation, Construction and Effect of Property Insurance Provision Permitting Recovery of Replacement Cost of Property, 1 A.L.R.5th 817, 848-52 (1992) [hereinafter Koenders]. The reason insurers place this provision in insurance policies is to prevent an insured from making a profit from a loss. See Pierce, 548 N.W.2d at 554; see also Johnny Parker, Replacement Cost Coverage: A Legal Primer, 34 Wake Forest L.Rev. 295, 298-99 (1999) [hereinafter Parker]; Koenders, 1 A.L.R.5th at 829. When a policy distinguishes between coverage for actual loss, which considers depreciation as a component to value, and the cost of rebuilding, which does not consider depreciation, an insured can profit by receiving replacement costs which are not then used to replace property which depreciated in value prior to the loss. However, Conrad Bros. contends John Deere's conduct in denying responsibility for coverage to Conrad Bros. excused its failure to comply with the condition precedent. It is widely recognized that a party may not rely on a condition precedent when by its own conduct it has made compliance with that condition impossible. State Farm Fire & Cas. Ins. Co. v. Miceli, 164 Ill.App.3d 874, 115 Ill.Dec. 832, 518 N.E.2d 357, 362 (1987). This rule has been frequently applied to insurance contracts. Id. In fact, several courts have excused performance by the insured when the insurer's conduct actually prevented the insured from rebuilding the damaged property. See, e.g., Maine Mut. Fire Ins. Co. v. Watson, 532 A.2d 686, 689 (Me. 1987); Bailey v. Farmers Union Co-op. Ins. Co., 1 Neb.App. 408, 498 N.W.2d 591, 598-99 (1992); see Parker, 34 Wake Forest L.Rev. at 314, 323. Courts often hinge their findings of excuse on the insurer's bad faith or deceitful conduct towards the insured during the claims process. Dickler v. CIGNA Prop. & Cas. Co., 957 F.2d 1088, 1096 (3d Cir.1992) (insurer prevented insured from learning of its right to replacement costs); Maine Mut. Fire Ins. Co., 532 A.2d at 689 (blatant misrepresentation of critical policy language by insurance adjuster); Parker, 34 Wake Forest L.Rev. at 323; see O-So Detroit, Inc. v. Home Ins. Co., 973 F.2d 498, 503 (6th Cir.1992) (condition precedent of actual replacement excused only if nonperformance due to insurer's bad faith actions). Yet, in finding an excuse, courts have universally based their determination on the theory of impossibility or frustration of performance. Ward v. Merrimack Mut. Fire Ins. Co., 332 N.J.Super. 515, 753 A.2d 1214, 1218 (2000) (even if the insured asserts or the court mentions estoppel, the courts generally resolve the issue on the impossibility theory); see Parker, 34 Wake Forest L.Rev. at 321-25; Koenders, 1 A.L.R.5th at 855-59. The district court and the court of appeals relied upon this approach to excuse the performance of the condition to rebuild the property under the insurance agreement. See Mel Frank Tool & Supply, Inc. v. Di-Chem Co., 580 N.W.2d 802, 806 (Iowa 1998); Nova Springs Co-op. Co. v. Brandau, 247 N.W.2d 744, 747 (Iowa 1976). However, when nonperformance is only temporary, the duty to perform is merely suspended during the period the performance is not possible. Nova Springs Co-op. Co., 247 N.W.2d at 747. Thus, while a coverage dispute may excuse performance by the insured of certain conditions that could no longer be performed even after the coverage dispute is resolved, it would not be necessary to excuse the performance of a condition precedent that would still be capable of performance following the resolution of the coverage question, at least in the absence of bad faith by the insurer. See Tamco Corp. v. Fed. Ins. Co., 216 F.Supp. 767, 775 (D.C.Ill.1963). In this case, Conrad Bros. would be capable of performing the condition once coverage was determined. Nevertheless, the district court and court of appeals excused performance of the condition to rebuild based upon a finding that it would be a useless and unreasonable act without assurance of coverage. While this reasoning is sound, another doctrine exists that properly considers this rationale, and enables Conrad Bros. to obtain a judgment for the replacement costs without first replacing the buildings. Where one party to a contract repudiates the contract before the time for performance has arrived, the other party is relieved from its performance. See Restatement (Second) of Contracts § 253(2) (1981); 13 Richard A. Lord, Williston on Contracts § 39:37, at 663 (4th ed.2000) [hereinafter Williston ]. Additionally, once a party repudiates a contractual duty before performance is due, the other party may enforce the obligation by filing a claim for damages without fulfilling any conditions precedent. Restatement (Second) of Contracts § 253 cmt. b; 13 Williston § 39:37, at 666, 668. A repudiation of a contract is accorded the same effect as a breach by nonperformance. Restatement (Second) of Contracts § 255 cmt. a. The rationale for the repudiation doctrine is explained as follows: The rationale behind the rule that a repudiation of a contract by one party will excuse the other party from the duty to perform contractual obligations and conditions, is the prevention of economic waste, in the sense that, following a clear repudiation, the other party should not be required to perform the formal, economically wasteful, and useless act of further performing. It would seem to be reasonable and just, upon the repudiation of the contract by one party, that the other be held justified in ceasing performance, stopping expenditure, and thus curtailing the damages which the other party would be ultimately liable to pay. To further comply with the contract requirements where the other party has repudiated the contract would be a useless act, and the law does not require the doing of a useless act. 13 Williston § 39:37, at 666-67 (footnotes omitted); see Restatement (Second) of Contracts § 255 cmt. a (No one should be required to do a useless act....). Normally, repudiation consists of a statement that the repudiating party cannot or will not perform. II E. Allan Farnsworth, Farnsworth on Contracts § 8.21, at 535 (2d ed.1998) [hereinafter Farnsworth]. The statement must be sufficiently positive to be reasonably understood... that the breach will actually occur. Id.; see Lane v. Crescent Beach Lodge & Resort, Inc., 199 N.W.2d 78, 82 (Iowa 1972) ([a]nticipatory breach requires a definite and unequivocal repudiation); Waterman v. Bryson, 178 Iowa 35, 40, 158 N.W. 466, 467 (1916) (positive notice of an intended breach). Thus, we must consider whether there was substantial evidence of repudiation. It can be particularly difficult to determine if a statement amounts to a repudiation when it results from an honest but mistaken misunderstanding of the rights of the parties under the contract. II Farnsworth § 8.21, at 536-37. Generally, a good faith dispute by a party will not prevent a statement from becoming a repudiation. Id. at 537. Thus, a party typically acts at its peril if that party, insisting on what it mistakenly believes to be its rights, refuses to perform its duty. Id. However, when two parties differ as to the interpretation of a contract, the mere demand by one party that the contract be performed according to its interpretation does not in and of itself constitute repudiation. 4 Arthur Linton Corbin, Corbin on Contracts § 973, at 911 (1951). Instead, a demand must be accompanied by a clear expression of intent not to perform under any other interpretation. See id.; P & L Contractors, Inc. v. Am. Norit Co., 5 F.3d 133, 139 (5th Cir.1993). Thus, a demand for performance on terms that go beyond the contract does not constitute repudiation, unless coupled with an intent not to perform if those terms are not accepted. II Farnsworth § 8.21, at 537-38. In this case, John Deere denied any coverage on the claim by Conrad Bros. This denial of coverage, even though based upon a mistaken interpretation, was a clear intent not to perform. Thus, John Deere repudiated the contract. This conclusion is consistent with the general view that an insured is excused under the doctrine of repudiation from compliance with preliminary conditions of an insurance policy when an insurance company indicates that it will not pay an insurance loss in any event. 13 Williston § 39:39, at 678; see Larsen & Son v. Retail Merchants Mut. Ins. Co., 212 Iowa 943, 946, 237 N.W. 468, 470 (1931) (insurance company waives proof of loss when it denies liability despite knowledge of property destruction from fire). The result in this case may seem somewhat harsh considering there was no evidence that John Deere denied coverage in bad faith. However, there are three factors which mitigate any harshness of the result. First, insurers may resolve coverage disputes without repudiating the insurance contract by utilizing such procedural devices as declaratory judgments. See Restatement (Second) of Contracts § 250 cmt. d. Second, even though an insurer denies coverage in good faith, the result to the insured, or an assignee of the insured's claim, is the same. The insured or assignee will not obtain coverage by performing the condition precedent. Third, the insured is unable to use the insurer's repudiation as a windfall, because the insured must prove the repudiation materially contributed to its nonperformance. See Restatement (Second) of Contracts § 255. Under the applicable governing principles, Conrad Bros. was entitled to rely on John Deere's statements that it would not pay a replacement cost loss to an assignee. As a result, we conclude John Deere repudiated its obligation under the contract. The only remaining issue to determine is whether that repudiation also contributed materially to the occurrence of Conrad Bros.'s failure to repair or that such failure to repair would have occurred in any event. See id. & cmt. a. The district court made the following finding of fact on this point: Conrad showed through the testimony of Gail Conrad and John Conrad and through its exhibits, including Plaintiff's Exhibit 3, that it had incurred or was ready, willing, and able to incur amounts in excess of $60,037.50 by way of acquisition of a replacement building to the building destroyed on the R.L. Schott premises on June 28, 1998. There is substantial evidence from which the court could have concluded Conrad Bros. would have repaired but for John Deere's repudiation. Consequently, that condition is excused, and Conrad Bros. is entitled to damages based on the full replacement costs. We affirm the judgment of the district court. DECISION OF COURT OF APPEALS AND JUDGMENT OF DISTRICT COURT AFFIRMED. All justices concur except STREIT, J., who takes no part.