California Court of Appeals: no guaranteed replacement cost means homeowner is solely responsible for adequate insurance
California wildfires have provided some interesting battles between policyholders and insurers, chiefly over whether the insurer or the homeowner is responsible for the home being underinsured when it was destroyed. I wrote about a Bloomberg piece on that subject in this post last year.
The California Court of Appeals, Fourth District, recently decided a case, Everett v. State Farm, involving the destruction of a home during the October 2003 wildfires near Los Angeles. Here's a copy of the opinion.
In the case, homeowner Agnes Everett had a State Farm policy that, when she purchased insurance from the company in 1991, had guaranteed replacement cost. However, in 1997 State Farm stopped including guaranteed replacement cost with its policies -- a number of other insurers did the same thing, also some still offer the coverage. It appears State Farm sent a notice to Everett with the renewal of her policy that year and every year after that the coverage was not available and she was responsible for obtaining sufficient insurance to cover increased value of her home. This did not happen, and the home was underinsured when it burned down. If the opinion said how much the home was actually worth, I missed it, but it was more than the $138,000 in structural loss and $76,000 in contents loss that the insurer paid. (Everett had purchased the home in 1991 for $99,000).
Everett sued State Farm and her insurance agent, alleging breach of contract, bad faith, negligence, reformation and fraud, based on two theories -- the policy actually did provide guaranteed replacement cost because it was ambiguous about the level of coverage, and State Farm failed to provide her with sufficient notice of changes in her policy.
The Court of Appeals upheld the trial court's grant of summary judgment in favor of the insurer, and said there was nothing ambiguous about the policy. Everett's ambiguity argument had focused on the word "replace." The presence of this word is not consistent with any result except actual replacement of what was destroyed, which means replacement of its entire value, Everett argued. The court disagreed. Policies must be read as a whole, and ambiguity does not grow out of one word taken in isolation. The court said the policy made it clear that no matter what was replaced, it would only be up to the limits stated on the declarations page.
The court also said the State Farm notices were consistent were what the Legislature required, and that they clearly said that, while State Farm included an estimate based on general home value information what a theoretical level of insurance might be, the homeowner must be the one to check this out with an appraiser or otherwise and make sure enough insurance was available. The court also said the claims involving the agent could not stand -- the policy contained an integration clause that said the policy contained the entire agreement between the parties, meaning no oral agreement, even if an agent had made one, could supersede the written terms.
An interesting case, sent to me by a reader. If you have a case you'd like me to look at, feel free to let me know about it. Can't promise I'll write about it, of course, but odds are pretty good I will eventually.
Feels a little odd to be writing about non-Katrina cases again. For those who only know me from Katrina, Scruggs, Hood, Trailer Lawyer coverage, this is what I used to do all the time on this blog, and I kind of like it. Not as fun as writing about the Trailer Lawyers, of course, but we can't dance all the time.
It pays to pony up the extra premium for replacement cost coverage.
To the extent people think the move toward making replacement cost coverage optional is a bad thing, the only solution I can see for the problem is to mandate (via legislation) that all homeowners policies need to contain rcc. I think that having rcc in the standard policies is the wisest course - but it will obviously cost more. Premiums (for those who don't presently have rcc) would rise, and no doubt there would be much wailing and gnashing of teeth.
But not as much wailing and gnashing of teeth as there would be come claim time!
Great summary, David. It is weird to read something other than Katrina, but being an insurance nerd I love all your posts.
What if you the policyholder don't want RCC or even insure your risk to 100% Basically you're self-insured up to a certain point? I wouldn't be fair to be forced to insure a house to 100% with RC if you didn't need it or want it.
Also, many homes from the California wildfires were properly insured, it's just that some policyholders wanted to build a bigger house then what they had before. Plus when everyone tries to rebuild at the same time contractors raise their prices and the policyholder doesn't get as much bang for their buck.
The price of housing in CA has skyrocketed and policyholders were/are reluctant to pay the additional premium to insure their property 100%. In the event of a total fire loss, the policyholder simply does not have the funds to rebuild...unless, of course they read the yearly bulletins sent to them at renewal and paid additional premium to adequately insure their home.
It is preposterous to suggest State Farm or an agent would intentionally not insure a home to value...the agent's commission is based on premium dollars received.
Isn't there some laws against price gouging in the times of catastrophe? I didn't think contractors could gouge you in those times. Maybe I just made that up, but I think I saw it somewhere. Oh well...
"What if you the policyholder don't want RCC or even insure your risk to 100% Basically you're self-insured up to a certain point? I wouldn't be fair to be forced to insure a house to 100% with RC if you didn't need it or want it."
True, such legislation would curtail the ability of homeowners to self-insure (which seems insane to me, btw).
Hows about this: the coverage is standard, but you can sign a waiver rejecting it. Basically, make it a clear concious choice that someone can't stupid their way into.
Dustin, price gouging is not necessarily the problem. Labor and material shortages following a disaster naturally drives up the cost. Following Katrina, there were so many people rebuilding at once, the building industry couldn't keep up. And carpenters were making twice ther normal wages performing hurricane debris removal and cleanup. Not to mention all the folks in the industry that lost their own places, had to move, rebuild, etc. Wages went up. Sheetrock had to be ordered months in advance. Kitchen cabinet makers had a six month waiting list. I spent almost as much time as my contractor trying to get materials, and yes, I probably paid 30-40% more for my house than I would have pre-storm, and now it's probably worth less since the area is overbuilt.
I had a two man crew frame my entire house (two story with lots of angles). Is it any wonder it took three times as long. Funny thing, I had twenty hispanics shingle the house and it took half a day.
David: did the world miss something? It is in my recall that the Judge in the Scruggs' scandal was giving 31-45 days to "sentence" the plead-outs, and, there's no date but the one that is long gone now. So have you any information as to why, if that's the case, the delay in sentences is happening?
David: I understand that the answer is what is the answer is and is not non-concurrent with non-sequitors, and it is what it is, and so I'll have to answer it myself in terms I understand, and, to the best of the past, it all fades down to a little bit of interest, and no answers. It's a good thing, Martha. Bad things disappear - even Ellliot Spitzer. Let's eat.
Price gouging a law? Not in Mississippi. The AG prosecuted one Indian hotel gas station owner for jacking up the rates after Katrina, but that was it. Don't know of any other prosecutions in the gulf states.