In California FAIR Plan Assn. v. Garnes (No. A143190, filed 5/26/17), a California appeals court ruled that “total loss” under Insurance Code section 2051 refers to physical damage or loss, not the economic fact that the cost of repair exceeds the actual cash value of a home. Thus, where the home is not physically destroyed, the insured is entitled to the actual cost of repair, minus depreciation, even if that amount exceeds the fair market value of the home.
In Garnes, the insured had a fire policy issued by the California FAIR Plan with limits of $425,000. It was agreed that the assessed value of the insured home was only $75,000. The insured suffered a kitchen fire with estimated repair costs of $320,000. The FAIR Plan declared the home a total loss because the cost of repair exceeded the home’s value, and offered to pay the actual cash value as provided by Insurance Code section 2051(b)(1).
Section 2051 of the Insurance Code provides that under an open fire insurance policy (where the ultimate value of the property is not agreed in advance but left “open”) that pays “actual cash value,” as did the FAIR Plan policy, the “measure of the actual cash value recovery . . . shall be determined” in one of two ways, depending on whether there has been a “total loss to the structure” or a “partial loss to the structure.” In case of total loss to the structure, the amount payable is the “policy limit or the fair market value of the structure, whichever is less.” For a “partial loss to the structure,” the measure prescribed is “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” or “the policy limit, whichever is less.” (Ins. Code, §§ 2051(b)(1); (b)(2).)
The Garnes policyholder argued that she had only suffered a partial loss and was therefore entitled under section 2051(b)(2) to the lesser of the policy limit, or the cost to repair or replace less depreciation. The appeals court agreed: “Construed in accord with its plain meaning, this provision, coupled with sections 2070 and 2071, sets a minimum standard of coverage that requires FAIR to indemnify Garnes for the actual cost of the repair to her home, minus depreciation, even if this amount exceeds the fair market value of her home.”
The court said that the insurance statutes should be construed “to ascertain and effectuate legislative intent,” looking first to the statutes’ words. According to the court, section 2051 “plainly refers to physical, rather than economic loss.” “Contrary to FAIR’s policy definition, which defines ‘total loss’ and ‘partial loss’ by reference to economic considerations (whether the cost to repair exceeds the property’s fair market value), section 2051 differentiates between the degree of loss ‘to the structure,’ and it prescribes two different measures of actual cash value depending on whether the loss to the structure is ‘total’ or ‘partial.’”
The court pointed out that the FAIR policy actually (and impermissibly) provided for situations where the economic loss exceeded the actual cash value, when the Legislature had included no such language in the statute. The Garnes court rejected the FAIR Plan’s reliance on Insurance Code section 2071 and Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, for the proposition that “if the cost to repair or replace the damaged property is more than its fair market value, then, according to the plain language of section 2071, there is no coverage for the repair or replacement cost to the extent it exceeds the actual cash value of the property.” The Garnes court stated:
“FAIR’s reliance on Jefferson overlooks one thing: the case involved a standard form policy that was part of an earlier statutory regime. In 2004, 34 years after Jefferson was decided, the Legislature adopted the current version of section 2051, which prescribes the method for determining (and therefore the meaning of) ‘actual cash value’ for purposes of determining the insurer’s indemnity obligation under an open fire insurance policy. Thus, while in 1970, the Jefferson court interpreted ‘actual cash value’ as used in section 2071 to mean ‘fair market value,’ in 2004 the Legislature adopted a more specific and mandatory measure of ‘actual cash value’ in a closely related section of the Insurance Code, section 2051…. To continue to interpret the language ‘actual cash value’ in section 2071 to mean fair market value in the face of section 2051’s specific definitions of that phrase would run contrary to the general presumption that a word or phrase used in a particular sense in one part of a statute is intended to have the same meaning if it appears in another part of the same statute.”
The Garnes court then engaged in a detailed analysis to conclude that both the Legislative history and the Insurance Commissioner’s own interpretations supported the policyholder’s arguments.
The court also addressed the perceived conflict with Insurance Code section 2051.5, granting insurers authority to withhold a portion of replacement cost coverage until completion of repair. FAIR Plan argued that “Had Garnes purchased a replacement cost policy … she would have been entitled to the amount needed to rebuild, repair or replace the damaged property only upon showing that she had made those repairs.” But under Garnes’ interpretation of the statute, “she would be entitled to replacement cost recovery without having to first repair the property or to otherwise comply with section 2051.5(a).”
The Garnes court saw no problem: “[U]nder a replacement policy that requires repair, rebuilding or replacement, the owner is entitled to actual cash value in the same amount as an ACV policyholder, at the outset, but in addition, is entitled to the difference between actual cash value and full indemnity (replacement costs without depreciation) at the conclusion of repair or rebuilding. There is no anomaly in this result.”
The Garnes court then went on to conclude that to the extent the FAIR Plan policy could be interpreted as affording less coverage than provided by Insurance Code section 2051, it was unenforceable as a matter of public policy.
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