United States: California Fair Plan Association v. Garnes

In California Fair Plan Association v. Garnes, 11 Cal.App.5th 1276 (May 26, 2017), the Court of Appeal reversed the trial court's judgment finding that California FAIR Plan Association ("FAIR") was only obligated to pay for the fair market value of the insured Michelle Garnes' house in connection with a fire which destroyed the kitchen in her home. The fair market value of the house at the time of the fire was $75,000 while the cost of repairing the kitchen, minus depreciation, was $320,549.00. In reaching its decision, the Court of Appeal interpreted Insurance Code sections 2051, 2070 and 2071.

Section 2051 of the Insurance Code provides that under an open fire insurance policy that pays "actual cash value," the measure of such 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":

  • 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 (see Section 2051, subd. (b)(2)).
  • In the case of a total loss to the structure, recovery is limited to the lesser of the policy limit or a property's fair market value (see Section 2051, subd. (b)(1)).

The parties' dispute arose out of a fire which took place in 2011 and seriously damaged a portion of plaintiff's house. FAIR took the position that it was only obligated to pay for the fair market value of the house, i.e., $75,000 under Section 2051, as opposed to the cost of repair for the home in the amount of $320,549. Garnes had purchased an open policy, meaning one in which the value of the subject matter is not agreed upon, but is left to be ascertained in case of loss. Further, such policy was an "actual cash value" or ACV policy. In that regard, the policy contained a paragraph entitled "loss settlement" which states in relevant part that FAIR will pay the following amounts for losses to Garnes' dwelling: (1) Total loss: If the greater of the cost either to reconstruct or replace the damaged part of the property exceeds the actual cash value before the loss of all covered property . . ., we will pay such actual cash value. (2) Partial loss: In cases of losses that are not described in (1) above, we pay the least of the following amounts: (a) the lower of the cost either to reconstruct or replace the damaged part of the property, less a reasonable amount for depreciation or (b) the actual cash value before the loss of the damaged property. The policy defined "actual cash value" of property to mean its fair market value.

In response to the language in the policy, Garnes argued that section 2051, when interpreted in conjunction with sections 2070 and 2071, required FAIR to pay for the cost of repairing the damaged home, notwithstanding that the cost of such repair exceeded the fair market value of the house.

The Court of Appeal characterized the parties' dispute as follows:

In their dispute over what the Insurance Code requires, Garnes and FAIR principally debate two questions of statutory construction. First, does "total loss" in section 2051, mean, as FAIR contends, damage to a dwelling so extensive that the cost to repair or replace it exceeds its fair market value, or, as Garnes contends, the total physical destruction of a dwelling? Second, does "actual cash value" as used in section 2071 mean, as FAIR contends, the fair market value of the dwelling, exclusive of the land, or, as Garnes contends, the "actual cash value" that is set forth in section 2051, which for a loss that is partial is the lesser of the cost to repair the dwelling minus depreciation and the policy limit?

We construe insurance statutes "to ascertain and effectuate legislative intent," looking first to the statutes' words. (CalFarm Ins. Co. v. Wolf (2001) 86 CalApp.4th 811, 815.) "If those words are clear, there is no need for construction. "When the language is susceptible of more than one reasonable interpretation, however, we look to a variety of extrinsic aids," including the object to be achieved, the evil to be remedied, public policy, the statutory scheme of which the statute is a part, and legislative history." (Ibid., fn. omitted.) Applying these principles, we have examined the statutes' plain meaning, the relevant legislative history and the Insurance Commissioner's interpretation of the statutes, and conclude that Garnes's interpretation of the statutes is correct.

The Court of Appeal then held that Section 2051 refers to physical, rather than economic loss as referred to the FAIR policy. The Court of Appeal stated as follows:

Section 2051 sets forth the "measure of indemnity in fire insurance" for an open ACV policy. Section 2051, subdivision (a) states that an insurer's indemnity obligation under an open ACV policy is generally based on the expense of replacing lost or injured property. This obligation is further explicated by subdivisions (b) (1) and (2), which prescribe mandatory measures of "actual cash value recovery" for each of two distinct situations: one that applies "in case of total loss to the structure" and another that applies "in case of a partial loss to the structure" or to loss of the contents.

In the case of a "total loss to the structure," recovery is limited to the lesser of the policy limit or a property's "fair market value." (§ 2051, subd. (b) (1).) In the case of "partial loss to the structure," however, recovery is not limited to fair market value; instead, it is the lesser of the policy limit or "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 conditions at the time of the injury." (§ 2051, subd. (b) (1).) Under subdivision (b) (2), it is clear that in the case of "partial loss to the structure," the insured is entitled to repair, rebuild or replace that which was lost or injured. While such recovery is reduced by a deduction for physical depreciation and may not exceed the policy limit, nothing in subdivision (b) (2) or the remainder of section 2051 indicates that the policyholder is limited to the fair market value of the property or any part of it.

The language of section 2051 not only specifies the meaning of "actual cash value" for total and partial losses, it provides strong indication of what constitutes a total or partial loss of a residential property—specifically, that the determination depends on what happens "to the structure." 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."

Notwithstanding the Court of Appeal's interpretation of Section 2051, FAIR argued that section 2071 contains an indemnity cap, i.e., "the actual cash value" cap in that section is synonymous with the fair market value of the property and that section 2051 was not intended to repeal this cap. FAIR argued as follows in connection with the indemnity cap:

The standard form as set forth in section 2071 provides, in relevant part, that in consideration for the premium, the insurer "does insure [the insured] and legal representatives, to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss...." (§ 2071, subd. (a) .) FAIR argues this language "clearly 'caps' the limit of liability at the 'actual cash value of the property' at the time of loss." Next, FAIR relies primarily on Jefferson Ins. Co. v. Superior Court (1970) 3 Ca1.3d 398, 402 (Jefferson) for the proposition that "'actual cash value of the property' as used in section 2071, is synonymous with 'fair market value.' " 'Thus," FAIR continues, "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 Court of Appeal rejected FAIR's argument and interpreted section 2071 as follows:

As so construed, section 2071 retains outer limits on insurers' liability under an open fire insurance policy. Those outer limits are the "actual cash value" as defined in section 2051. In the case of a total loss to a structure, the outer limits are set by the lesser of fair market value or the policy limit, and in the case of a partial loss to a structure (or loss to the contents), the outer limits are defined by the lesser of the cost to repair minus depreciation or the policy limit. FAIR fails to explain why, thus reconciled with section 2051, section 2071 does not continue to serve its function of specifying the minimum requirements for fire insurance policies in California. We conclude that it does so.

The Court of Appeal also held that legislative history of Section 2051 supported its interpretation of the provision in conjunction with Section 2071. In addition, the Court of Appeal held that where the FAIR policy language conflicted with these code sections, the code sections controlled the coverage afforded by the policy as such sections were mandatory.

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