Sometimes when researching one issue, a case will pop up that isn’t what we were looking for, but nonetheless is worthy of note. While I was trying to help a public adjuster with some case law research the other day, I came across this gem out of Pennsylvania. Back in 1991 the Superior Court of Pennsylvania held that an insurer’s “policy provision which limited the insurer’s liability to actual case values of property unless replacement has been made was void as unconscionable.”1
The underlying facts of the case are fairly simple, the Plaintiff’s filed a homeowner’s insurance claim after lightning struck a Lowry C-500 organ inside their mobile home. Following a jury trial, the Plaintiffs were awarded $23,317.40 for the organ. After the trial, the insurance carrier filed this appeal which dealt with a jury instruction in which:
[T]he lower court instructed the jury to disregard a provision in the policy which required appellees to either repair or purchase a replacement for the organ prior to receiving the replacement value of the item. In particular, the court found the provision oppressive and unfair since it required appellees to expend a large sum of money prior to a liability determination. [Defendant], however, objected to this instruction, arguing that the policy provision was binding and that appellees were only eligible to collect the actual cash value of the organ as provided by the policy. This objection was denied by the lower court.
Defendant’s appeal of the jury’s award to the Plaintiff’s focused on three issues:
1. Is a clause in a property insurance policy void as against public policy or void as unconscionable when the clause limits the insurer’s liability to actual cash value of the property unless replacement has been made?
2. Can a court modify a limitation on recovery contained in an insurance contract when the limitation is clear and unambiguous?
3. When an insurance contract contains clear and unambiguous language limiting recovery for property loss to actual cash value unless replacement has been made, can an insured recover full replacement costs when she has neither replaced the property, pleaded that she intends to replace the property, nor testified that she intends to replace the property?
The court rejected each of the Defendant’s three issues in turn. The court stated:
In this case, the parties stipulated to estimate the actual cash value of the organ at five thousand seven hundred dollars ($5,700). [Plaintiffs], however, sought a judgment in excess of twenty thousand dollars ($20,000). Since this amount exceeded twice the actual cash value of the organ, [Defendant] argued that the jury could only award [Plaintiffs] the actual cash value of the organ since the insured failed to repair or replace the item prior to receiving the replacement value as required by paragraph 4 of the policy. As noted , the court rejected this contention, finding the requirement unconscionable. We agree.
In Standard Venetian Blind,  our supreme court declared that “where … the language of the contract is clear and unambiguous, a court is required to give effect to that language.”  Unfortunately for [Defendant], however, the court also stated in that seminal case that “in light of the manifest inequality of bargaining power between an insurance company and a purchaser of insurance, a court may on occasion be justified in deviating from the plain language of a contract of insurance.
Citing 13 Pa.C.S. § 2302, our supreme court explained in Standard Venetian Blind that a “court may refuse to enforce a contract or any clause of contract if [the] court as a matter of law deems the contract or any clause of the contract to have been unconscionable at the time it was made.”  Inquiries concerning whether a contract or clause is unconscionable are properly a question of law for the court.
The court cited the two-fold test of unconscionability from Koval v. Liberty Mutual Insurance Company,2 which states, “[f]irst, one of the parties to the contract must have lacked a meaningful choice about whether to accept the provision in question. Second, the challenged provision must unreasonably favor the other party to the contract.” The court ultimately found that Plaintiffs met the first prong of the test as, “insurance contracts are generally contracts of adhesion … the parties are usually not of equal bargaining power and the buyer must adhere to the terms of a form contract which are not negotiable.”
Concerning the second prong, the court stated:
[W]e find that the second prong of the Koval test is also met: the challenged provision unreasonably favors [Defendant]. Since [Defendant] denied liability, [Plaintiffs] were faced with the unsavory choice of either accepting the lower actual cash value of the organ or expending a large sum of money in replacement costs without a guarantee of reimbursement. In fact, under the terms of the contract, [Plaintiffs] could have only received replacement value in this instance after expending the replacement or repair funds and obtaining a judicial determination concerning liability. Thus, applying the teachings of Standard Venetian Blind and Koval to the instant case, we find the replacement requirement unconscionable despite the clear and unambiguous language of the policy.
The court upheld the jury’s award and denied the Defendant’s appeal.
As always, I’ll leave you with a (mildly) related tune, here’s Procol Harum with their organ heavy hit, A Whiter Shade of Pale: