Church Mutual hired J.S. Held Construction Consulting to prepare a scope of repair and cost estimate. J.S. Held estimated the cost to replicate the church building as it existed before the fire to be $729,106.42 (the “Replacement Cost Valuation” or “RCV”). J.S. Held also estimated that the actual cash value (“ACV”) of the church was $593,361.66, which Church Mutual paid to Mount Zion.

The insurance policy allowed Church Mutual to withhold the difference between the RCV and ACV, approximately $135,744, until Mount Zion completed the repairs.

The church apparently spent a total of $750,682.30 in repair and replacement costs. It elected to refurbish, rather than replace, the arched glulam beams in the sanctuary. Believing it was entitled to the funds to install new glulam beams, Mount Zion chose to make “substitute expenditures” with funds otherwise allocated for the beam replacement.

For example, Mount Zion chose to replace the old kitchenette with a full-size kitchen, redesigning it to make it more functional for the church's current needs. Church Mutual contended that the full-size kitchen had upgraded kitchen cabinets, an upgraded sink and faucets, new self-closing drawers, and upgraded appliances.

Church Mutual asserted that Mount Zion also upgraded the hardware on the front entry doors, upgraded the flooring and base trim in the sanctuary and foyer, upgraded wall and ceiling insulation, reframed the mezzanine for use as storage, installed underground conduits for phone and internet cables, added custom built shelving to a meeting room and classroom, refurbished a street sign not damaged in the fire, and upgraded lighting in the foyer, fellowship building, and sanctuary.

Church Mutual refused to reimburse the church's “substitute expenditures” as “unnecessary” under the policy.

Mount Zion sued Church Mutual. The trial court held that Mount Zion was not entitled to replacement cost coverage for any substituted costs it incurred that were unnecessary to repair or replace the lost or damaged portions of the church building.

Mount Zion appealed.

The Appellate Court's Decision

The appellate court affirmed.

The appellate court explained that the policy required Church Mutual to reimburse for costs incurred to repair or replace “the lost or damaged property” – it did not require payment to repair or replace the “Covered Property.” The appellate court added that although the ACV explicitly covered the entire building and all of its component parts as one unit, the RCV explicitly covered only lost or damaged property within the Covered Property.

The appellate court ruled that the policy did not impose on Church Mutual the obligation to pay for Mount Zion's remodeling choices just because the remodeled space served the same function as the old. Church Mutual had the contractual right “to evaluate each line item of Mount Zion's insurance claim” and to determine whether there was lost or damaged property and whether the amount spent by Mount Zion was necessary to repair or replace that lost or damaged property, the appellate court concluded.

The case is Mount Zion Lutheran Church v. Church Mutual Ins. Co., No. 78107-3-I (Wash. Ct. App. March 18, 2019). Attorneys involved include: For Appellant: Bruce Winchell, Gretchen Graham Salazar, Mills Meyers Swartling, Seattle, WA; Geoffrey M Grindeland, Seamark Law Group PLLC, Bainbridge Island, WA. For Respondent: Jeffrey Stuart Tindal, Betts Patterson & Mines, Seattle, WA.