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Insurance Law News - June 2017

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Where Building Was Not "Total" Physical Loss, Insurer Was Obligated to Pay Cost of Repair Less Depreciation, Which Was More Than Pre-Loss Fair Market Value

Where a building sustained fire damage but was not a "total" physical loss, the insurer was obligated to pay the cost of repair less depreciation, even though this amount was far in excess of the building's pre-loss fair market value. (California FAIR Plan Association v. Garnes (2017) 218 Cal.Rptr.3d 246)

Facts

Marlene Garnes (Garnes) purchased from California FAIR Plan Association (CFPA) a property insurance policy covering a dwelling. The policy had a limit of $425,000 for the dwelling, but provided coverage on an actual cash value basis, not on a replacement cost basis.

A fire caused extensive damage to the dwelling, but did not physically destroy it. Before the fire, the fair market value of the dwelling (excluding the land) was only $75,000. However, the estimated cost to repair the fire damage, less depreciation, was more than $320,000.

The CFPA policy defined a property's "actual cash value" to mean its "fair market value" before a loss. The policy also provided that, if a covered peril caused a "total" loss, CFPA would pay the actual cash value (i.e., fair market value) of the property, but if a covered peril caused a "partial" loss, CFPA would pay the lower of (1) the actual cash value (i.e., fair market value) or (2) the cost of repair less depreciation.

Even though the fire did not completely destroy the dwelling, CFPA asserted the dwelling was a total loss, because the pre-fire fair market value of the dwelling was only $75,000, while the post-fire cost to repair (less depreciation) was approximately $320,000. Based on CFPA's position that the dwelling was a total loss, CFPA asserted it owed Garnes only the pre-loss fair market value, not the post-loss cost to repair (less depreciation).

CFPA paid the pre-fire $75,000 fair market value of the dwelling, plus some expenses for loss of rental income, as well as some expenses for abatement of asbestos and lead. CFPA then filed a declaratory relief action to obtain a judicial determination of each party's rights and obligations under the policy. The trial court ruled in favor of CFPA, and held that CFPA did not owe more than the pre-fire fair market value of the dwelling. Garnes appealed.

Holding

The Court of Appeal reversed, holding the amount CFPA owed depended on the terms of Insurance Code section 2051, not on the terms of the policy. Insurance Code section 2051 provides in part that, "[u]nder an open policy that requires payment of actual cash value, the measure of the actual cash value recovery, in whole or partial settlement of the claim, shall be determined as follows: ¶(1) In case of total loss to the structure, the policy limit or the fair market value of the structure, whichever is less. ¶(2) In case of a partial loss to the structure, or loss to its contents, the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less."

The Court held that, under Insurance Code section 2051, a "total" loss occurs only when the property is rendered a total physical loss, not simply when the property is rendered a total economic loss. Here, even though the dwelling's pre-loss fair market value was only $75,000 and its post-loss cost of repair (less depreciation) was more than $320,000, the dwelling was not a "total" loss for purposes of Insurance Code section 2051. Because the dwelling was not a "total" physical loss, the amount that CFPA owed was the cost of repair (less depreciation).

Comment

Insurance Code section 2051 provides a statutory definition of "actual cash value" that applies to any "open" fire policy. Per Insurance Code section 411, an "open" policy is one in which "the value of the subject matter is not agreed upon, but is left to be ascertained in case of loss." In contrast, per Insurance Code section 412, a "valued" policy is one that "expresses on its face an agreement that the thing insured shall be valued at a specified sum."

Insurance Code sections 2070 and 2071 set forth minimum requirements for any policy that provides coverage against the peril of fire. To the extent a policy does not provide the minimum coverage required by these statutes, the terms of the statutes will be deemed to be part of the policy, and the terms of the statutes will supersede any contrary policy terms.

Given the somewhat anomalous result in this case, it is possible the Legislature will consider revising Insurance Code section 2051 to make clear what is – and is not – a "total" loss.

 

 

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