Insurance Law

California Court of Appeals: no guaranteed replacement cost means homeowner is solely responsible for adequate insurance

By David Rossmiller

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.

Full post as published by Insurance Coverage Law Blog on May 08, 2008 (boomark / email).