In the wake of the horrific damages suffered by folks in Garland and all around the Dallas/Fort Worth area, we have been asked whether the Texas “total loss” rule applies to losses other than fire losses.
The Texas “total loss” rule is found in Texas Insurance Code Section 862.053. As pointed out in an earlier Merlin Law Group blog, “[i]n plain English, Section 862.053 states that if an insured property suffers a total loss as a result of fire, the value of the loss will be the full amount of the policy. However, this does not apply to the contents inside the property.” The reason for this rule is to penalize the insurer for over-insuring property and then paying less than the policy limit if the structure is totaled. Since tornadoes tend to cause total losses, the question is whether the total loss rule, as set out in §862.053, applies to total losses caused by perils other than fire. Unfortunately, §862.053 only applies to fire losses. Therefore, if a building suffers a total loss by tornado the carrier will not automatically have to pay the policy limit. It seems very silly to me that the law is set up to keep insurance carriers in check when a fire causes a total loss, but not so when the total loss is caused by any other peril. A total loss is a total loss no matter what. If the carrier deems the total value to be a certain amount of money, it should live by that value no matter what caused the total loss.
Even in the tornado scenario, policyholders will find themselves in fights with carriers as to whether their home or business is a total loss. Whether the building is a total loss will be a fact issue and the test will be whether “a reasonably prudent uninsured owner, desiring to restore the property to its pre-incident condition, would not utilize that property for such restoration.”1 The question will come down to whether anything is left of the building to which a reasonable person would make a repair. Would a reasonable person repair it or would he tear it down and replace it? Also of importance is whether the local government orders the property owner to demolish the property, which creates the “constructive total loss” mentioned in the Glens Falls case. Policyholders and public insurance adjusters should pay attention to what the cities in and around DFW say about homes and businesses partially demolished by the tornadoes.
The photos I have seen over the past few days from DFW are horrifying. Besides bare slabs and caved-in buildings, the photos depict automobiles and personal belongings strewn all over the place. Another issue, which may come up in these claims, is how to determine if a vehicle or personal property item is a total loss. Is the property a total loss, which must be replaced or can the item be repaired?
The case of Canal Insurance Company v. Hopkins,2 sheds light on this issue. In Hopkins a tractor trailer was damaged when it veered off the road into a ditch. The issue was whether the tractor trailer was a total loss. Evidence in the record showed that the cost to repair the tractor trailer was equal to or more than the market value of the tractor trailer just before the wreck. Citing McIntyre and Glens Falls, the court held that, “Property is a total loss if a reasonably prudent uninsured owner, desiring to restore the property to its pre-incident condition, would not utilize that property for such restoration.” In other words, is there any remnant left of the property that a reasonable and prudent owner would repair as opposed to replacing? Pointing out the evidence that to repair the property would cost as much or more than the value of the property just prior to the damage, “logic dictates” that the owner should not repair the vehicle and, therefore, it was a total loss. What is important in this case is that the two numbers the court compared were the pre-incident value and the post-incident cost to repair. The court was not looking at the cost to repair versus replacement cost. There can be a big difference, and the method set out in Hopkins is much more realistic, if not to the advantage of the policyholder. I would much rather the standard be value of my property the day before the tornado as opposed to what it will cost to replace it.
1 Royal Ins. Co. v. McIntyre, 90 Tex. 170, 37 S.W. 1068, 1074 (Tex. 1896); Glens Falls Ins. Co. v. Peters, 386 S.W. 2d 529, 531 (Tex. 1965). Also see https://www.propertyinsurancecoveragelaw.com/2012/08/articles/insurance/what-is-the-meaning-of-total-loss-in-texas/.
2 Canal Ins. Co. v. Hopkins, 238 S.W.3d 549 (Tex. App. – – Tyler 2007 review denied).