| Q&A of the Week |
Depreciation and ACV
A Kentucky subscriber recently asked the following question:
A homeowner has a replacement cost policy for the dwelling but has an ACV endorsement for the roof. The roofing material that is currently installed is not allowed per local building code to be installed. A synthetic material is available and allowed and meets like kind and quality specifications. How do you calculate the depreciation but then properly account for the increased cost of construction costs?
ANSWER: We specialize in policy interpretation, and the policy does not give depreciation calculations. However, actual cash value of the existing roof includes the depreciation; that is why the ACV is automatically less than replacement cost, so the ACV is what is owed. If the insured has ordinance or law coverage then that will account for the increased costs between replacement with the old roofing material and the new material that meets the code. Couch on Insurance 178:5 states that "the amount of damage or depreciation, if any, to the actual and reasonable market value of the goods not destroyed or rendered worthless, as considered in relation to the purpose for which such goods are owned or kept, should be considered, as such depreciation is a factor which enters into the mode of ascertainment of damages."(emphasis added). The depreciation is how the ACV is determined; once that is established, then you know what amount can be paid towards the repair of the roof. |
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| Litigation Watch |
FAIR Plan Coverage Limited by Statute
In 1968, the legislature enacted the California FAIR Plan to provide property insurance to the otherwise uninsurable. Appellants, who lived in high fire risk areas, were insured under the FAIR Plan. Following wildfires, appellants were paid the full amount of their policy limits because their loss was equal to or exceeded the policy limits. Appellants contended, however, that they were entitled to additional payments and should have coverage provided to them under a standard homeowners policy rather than the fire policies issued by the FAIR Plan. The trial court disagreed, determining that the FAIR Plan had met its contractual and statutory obligations to them. The California Court of Appeal, in Gaeton St. Cyr v. California Fair Plan Association, 223 Cal.App.4th 786, 167 Cal.Rptr.3d 507 (2014) resolved whether the policy issued by the FAIR Plan to the plaintiffs should have provided broader coverage.
Beginning in September 2009, appellants filed several complaints against FAIR Plan. In their first amended complaints, appellants admitted that FAIR Plan paid them the actual cash value (ACV) of their respective policies within weeks of their losses. Specifically, they contended that FAIR Plan was required to issue a policy in accordance with the standard form fire insurance policy set forth in section 2071 and the Basic Property Insurance written in the normal market. One appellant asserted that the "Basic Property Insurance written in the normal market is the standard form policy known as the 'HO-3,'" a homeowners policy that provides property, liability, and workers compensation coverages.
The Court of Appeal noted that it is not clear how the FAIR Plan could issue an HO-3 form since it was not submitted as part of its rate plan nor is the FAIR Plan authorized by the statutory scheme to issue some of the coverages offered under that form, like third-party liability and workers compensation.
The FAIR Plan filed a demurrer to the complaints. The demurrer asserted that appellants had failed to state a cause of action for bad faith breach of contract, for breach of contract, or for unfair business practice, because (1) the commissioner had approved all of the challenged features of the FAIR Plan, (2) the FAIR Plan satisfied the statutory requirements for basic property insurance, and (3) under the statutory scheme, the commissioner, not the court, must determine whether the FAIR Plan should have expanded coverage beyond that presently provided in the plan.
The trial court sustained FAIR Plan's demurrer without leave to amend. The trial court found that FAIR Plan "performed the contract as written and that the insurance contract form did in fact comply with the applicable requirements of the Insurance Code."
"Basic property insurance" is defined by statute as insurance against direct loss to real or tangible personal property at a fixed location in those geographic or urban areas designated by the commissioner, from perils insured under the standard fire policy and extended coverage endorsement and vandalism and malicious mischief and such other insurance coverages as may be added with respect to such property by the industry placement facility with the approval of the commissioner or by the commissioner, but shall not include insurance on automobile or farm risks.
Under the statutory scheme, FAIR Plan is an involuntary joint reinsurance association of all insurers authorized to "write and engage [in writing in California], on a direct basis, basic property insurance or any component thereof in multiperil policies." (California Insurance Code (CIC) §§10094, 10098.) FAIR Plan is the insurer of last resort, that is, FAIR Plan is statutorily mandated to make available basic property insurance to any "persons having an interest in real or tangible personal property who, after diligent effort..., are unable to procure such insurance through normal channels from an admitted insurer." (CIC §10094.)
CIC Section 10100.2, subdivision (a)(1) provides that rates for the California FAIR Plan must not be excessive, inadequate, or unfairly discriminatory and must be actuarially sound. Under the rate filing instructions for the department, insurers must submit a rate filing for any new rates or forms with rate impact. A "rate impact" includes "any contract[ual] language change(s) that affect the rate or cost of coverage due to broadening or restricting of coverage." Appellants assert—and FAIR Plan does not dispute—that in its 1997 rate filing, FAIR Plan submitted a fire policy form to the commissioner identical to the standard form fire policy set forth in section 2071.
CIC Section 10100.2 and the department's rate filing instructions do not mandate the use of any specific form. Here, the commissioner was asked to opine on the fire policy forms FAIR Plan had issued to appellants. The commissioner's response was that there is no information presented to show that any changes to the forms resulted in a change to their rate impact.
CIC Section 2070 provides:
All fire policies on subject matter in California shall be on the standard form...No part of the standard form shall be omitted therefrom except that any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy...; provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.
A policy need not comply with the provisions of the standard form of fire insurance policy if that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.
FAIR Plan falls within both exceptions. As an unincorporated association, it may substitute words referring to itself, and as the FAIR Plan policy covers both fire and other perils, such as vandalism and malicious mischief, the policy form need not comply with the provisions of the standard form of fire insurance policy set forth in section 2071, so long as it provides coverage substantially equivalent, or more favorable, to the insured.
CIC Section 2071 provides that the statutory form set forth in subdivision (a) of that section is the standard form of fire insurance policy for this state. The form is bare bones. It provides spaces for "insertion of name of company or companies issuing the policy" and for "listing amounts of insurance, rates and premiums for the basic coverages insured under the standard form of policy and for additional coverages or perils insured under endorsements attached."
By its plain language, CIC section 2051 provides that under an open policy that pays ACV, the amount an insurer must indemnify a policyholder for a total loss is the lesser of the policy limit or the fair market value of the structure. For a partial loss, the amount is the lesser of the policy limit or the cost to repair and replace the structure and its contents. Here, according to appellants, the fair market value of the insured property or the costs to repair and/or replace the property exceeded the policy limits. As appellants were paid the full amount of their policy limits, they were paid the amount due.
Editor's Note: This case is an example of the failure of an insured to read the FAIR Plan policy and obtain the full protection provided by their insurance agents and brokers. The FAIR Plan, by statute, provides minimum fire insurance for people who chose to build and live in high fire risk areas. Most insurers refuse to write that type of insurance and the insureds choose the FAIR Plan as a last resort. Insureds should not, however, stop there. Once the risk of loss by fire is provided by the FAIR Plan the insured can find in the market place a "wrap around" policy that excludes the perils covered by the FAIR Plan and provides all of the other coverages available under an HO-3 homeowners policy.
By Barry Zalma, Esq.
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