• California FAIR Plan Association v. Garnes (1st Dist. Ct. App. 2017) ___ Cal. App. 5th ___, Case No. A143190
  • July 10, 2017
  • UNDERLYING CLAIM

    Garnes's home was damaged by a fire and she submitted a claim to her insurer, California FAIR Plan Association ("FAIR"), seeking to recover the cost of repair of the home, less depreciation. FAIR refused the amount requested and instead agreed to pay only the fair market value of the home before the fire. Since the parties could not agree, FAIR filed an action for declaratory relief arguing that the cost to repair the home would exceed $350,000 while the fair market value of the home prior to the fire was only $75,000. FAIR contended that the loss was "total" under Insurance Code section 2051 because the cost to repair exceeded the fair market value of the home before the fire and that, as a total loss, it was only required to pay the fair market value. Garnes contended that the loss was "partial" under section 2051 and, therefore, FAIR owed the full cost to repair, less depreciation. FAIR filed a motion for summary judgment which motion was granted by the trial court and Garnes appealed.

    APPELLATE COURT RULING

    The Court of Appeal first set forth the undisputed facts including the fact that Garnes purchased an "open" (value of subject matter is not agreed upon but is to be ascertained upon loss) actual cash value fire insurance policy from FAIR with a limit of $425,000; that a fire occurred causing substantial damage to Garnes's home; that the cost to repair, less depreciation, was $320,549; and that the fair market value of the home prior to the fire was $75,000. In addition, the policy provided that if a loss was "total" and the cost to reconstruct or replace exceeded actual cash value before the loss, FAIR would only owe the actual cash value. In the case of a "partial loss", FAIR would pay only the lesser of (1) the cost to reconstruct or replace, minus depreciation, or (2) the actual cash value before the loss.

    The Court of Appeal first addressed the contention of FAIR that the phrase "total loss" under section 2051 refers to damage so extensive that the cost to repair exceeds the fair market value before the loss. The Court of Appeal noted that section 2051 provides that under open fire insurance policies that pay "actual cash value", such value is to be determined in one of two ways, depending on whether there is a "total loss to the structure" or a "partial loss to the structure." Where there is a "partial loss to the structure", the insurer is to pay the cost to repair, rebuild or replace, less depreciation, or the policy limit, whichever is less. The Court of Appeal concluded that the phrase "loss to the structure" does not imply merely economic considerations as argued by FAIR but instead contemplates physical damage, either partial or complete. The Court of Appeal determined that the Legislature could have easily said so if it intended an economic definition and that, in fact, FAIR had done so in its policy. The Legislature did not do so. Instead, it employed the phrase "loss to the structure" which the Court of Appeal concluded referred to physical damage. Therefore, Garnes home suffered a partial as opposed to a total loss under section 2051.

    FAIR next contended that under Insurance Code section 2071, the insurer's liability is limited to the actual cash value of the property at the time of the loss. The court disagreed, instead choosing to harmonize the meaning of "actual cash value" within both code sections. Therefore, "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 next argued that such an interpretation leads to absurd results because, had Garnes suffered a total loss, she would be limited to recovery of the fair market value. The Court of Appeal disagreed, noting that the Legislature may have intended that homeowners who suffered only a partial loss be able to repair their homes since homes have values distinct from economic value such as memories, comfort and familiarity.

    Finally, FAIR contended that Garnes is bound by the terms of the policy rather than the Insurance Code sections. The Court of Appeal disagreed, holding that the policy "must be applied in accordance with the Insurance Code rather than by its own terms." Based on the above holdings, the Court of Appeal reversed the judgment and remanded the case.

    EFFECTS OF THE COURT'S RULING

    This decision is significant in establishing the rule that in deciding whether a loss is total or partial under an open, actual cash value fire insurance policy, courts must consider the physical damage to the structure as opposed to economic considerations such as whether the cost of repair would be greater than the fair market value of the structure before the loss. Therefore, as with the facts in this case, an insurer will be responsible for the cost of repair of a structure in the case of a partial loss even if the cost is several times greater than the pre-loss fair market value. This is true even if the policy language itself only requires payment of the fair market value because the policy must be interpreted in a manner that complies with the Insurance Code. Therefore, if the insured establishes that the property is physically repairable, as opposed to a total loss, the insurer is liable for the cost of repair, less depreciation, even if that amount is significantly greater than the property's fair market value, up to the policy limit.