Court Holds That Policyholders Are Entitled to Actual Cash Value Of Damages After Sale Of The Property
In a recent case, a Louisiana Court of Appeal decided, among other issues, what damages policyholders were entitled to in a Hurricane Katrina claim. That sounds like a typical scenario, however to add some spice to the mix, the policyholders had sold the property following the loss. The case is Jouve v. State Farm Fire & Cas. Co., 2011 WL 3611800 (La. App. 4th Cir.).
The policyholders’ home sustained “catastrophic” damages during Hurricane Katrina on August 29, 2005. At the time of the loss, they had a flood policy issued through the National Flood Insurance Program (“NFIP”) and a homeowners policy with State Farm. The insureds filed a flood claim with the NFIP, and were paid $145,000. They also filed a claim with State Farm, and received about $41,000 for wind damages.
In 2006, the policyholders sold the property to a buyer in an “as-is” condition without making any repairs. Later in 2006, the policyholders filed a lawsuit against State Farm, asserting that State Farm’s payment of about $41,000 was insufficient to pay for all of their damages. They provided State Farm with their own contractor’s estimate of $111,000 for replacement costs associated with the wind damage. After a re-inspection, State Farm paid the policyholders some additional funds. The policyholders then filed suit, seeking replacement cost benefits for their dwelling.
State Farm filed a motion for summary judgment, arguing that the policyholders were not entitled to replacement cost under the terms of the policy since they sold the property in “as-is” condition in 2006 and they had never performed any repairs or replacement of the property before the sale. State Farm argued that the policyholders were only entitled to the actual cash value as of August 28, 2005.
The trial court granted State Farm’s motion and the appellate court affirmed the ruling. The appellate court analyzed the language of the policy and held that the following language supported the decision limiting the policyholders to actual cash value because of the sale:
SECTION I – LOSS SETTLEMENT
We will settle covered property losses according to the following:
COVERAGE A – DWELLING
1. Replacement Cost Loss Settlement – Similar Construction
a. We will pay the cost to repair or replace with similar construction and for the same use on the premises shown in the Declarations, the damaged part of the property covered in Section I – Coverages, subject to the following:
(1) until actual repair or replacement is completed, we will pay only the actual cash value at the time of the loss of the damaged part of the property, up to the applicable limit of liability shown in the Declarations, not to exceed the cost to repair or replace the damaged part of the property;
(2) when the repair or replacement is actually completed, we will pay the covered additional amount you actually and necessarily spend to repair or replace the damaged part of the property, or an amount up to the applicable limit of liability shown in the Declarations, whichever is less;
The court held that the policy clearly states that the policyholders were limited to the actual cash value of the damaged property because they did not repair or replace the damaged property before the sale. This case does however stand for the proposition that a policyholder may still claim damages sustained from a loss despite a later sale of the insured property. The policyholder has an insurable interest if there was no assignment of the claim negotiated as part of the sale transaction. Keep in mind that this court applied Louisiana law in reaching its decision, and the law may differ in other jurisdictions.
Interesting case but facts are unclear unless I have missed some thing. First, was the RCV amount of the State Farm estimate greater than the RCV amount of the estimate prepared by the insured's contractor. Secondly, if the insureds contractor's estimate had been depreciated correctly, would that ACV amount been greater than the $41,000 ACV payment made by State Farm. Without these fact considered, I do not see how anyone could decided if the insured had been reimbursed the correct ACV payment.
If the policyholders purchased another dwelling, I would assume they could recover the RC up to the amount available on the former dwelling. This is not stated in the above facts, but I believe it would qualify as "replacement."
A twist to the facts in this case could make for an interesting argument. What if the amount of the claim exceeds the policy limits in states where there is some form of a Valued Policy Statute. In this situation if there was a "Total Loss" or "Constructive Total Loss" and the claim exceeded the policy limits the insured may never be able to receive the witheld depreciation if local ordinance prohibits reconstruction of the dwelling on the property. If the Insurer witholds depreciation from the claim and a total loss is declared under the Valued Policy Law would there be a requirement for the Insurer to repay the depreciation? Another point which would further confuse the issues is in the case where the insured had purchased a Replacement Cost coverage endorsement with an additional policy premium. Many policies have conflicting language respecting the Loss Settlement provisions and the Replacment Cost provisions of the endorsement page. So I can see where the insured would once again be unable to be made whole under the terms of the policy and may not be able to recover the depreciaiton even though they possibly paid for and fully expected the Replacement Cost to be tendered.