California has a code requirement that insurance companies must pay the actual cash value of a loss under a replacement cost policy if the replacement cost benefit payment is dependent on the policyholder first repairing, rebuilding, or replacing the damaged structure. Here is the Code provision:
§ 2051.5. Measure of indemnity based on cost of repair, rebuilding or replacement; Minimum time limit; Limitation or denial based on change in location prohibited; Exception for suspected fraud; Time for modification of policy forms
(1) Under an open policy that requires payment of the replacement cost for a loss, the measure of indemnity is the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without a deduction for physical depreciation, or the policy limit, whichever is less.
(2) If the policy requires the insured to repair, rebuild, or replace the damaged property in order to collect the full replacement cost, the insurer shall pay the actual cash value of the damaged property, as defined in Section 2051, until the damaged property is repaired, rebuilt, or replaced. Once the property is repaired, rebuilt, or replaced, the insurer shall pay the difference between the actual cash value payment made and the full replacement cost reasonably paid to replace the damaged property, up to the limits stated in the policy.
(A) A time limit of less than 12 months from the date that the first payment toward the actual cash value is made shall not be placed upon an insured in order to collect the full replacement cost of the loss, subject to the policy limit.
(B) In the event of a loss relating to a “state of emergency,” as defined in Section 8558 of the Government Code, a time limit of less than 36 months from the date that the first payment toward the actual cash value is made shall not be placed upon the insured in order to collect the full replacement cost of the loss, subject to the policy limit.
(C) This section does not prohibit an insurer from allowing the insured additional time to collect the full replacement cost.
(2) An insurer shall provide to a policyholder one or more additional extensions of six months for good cause pursuant to subparagraph (A) or (B) of paragraph (1) if the insured, acting in good faith and with reasonable diligence, encounters a delay or delays in approval for, or reconstruction of, the home or residence that are beyond the control of the insured. Circumstances beyond the control of the insured include, but are not limited to, unavoidable construction permit delays, the lack of necessary construction materials, or the unavailability of contractors to perform the necessary work.
(1) In the event of a total loss of the insured structure, a policy issued or delivered in this state shall not contain a provision that limits or denies, on the basis that the insured has decided to rebuild at a new location or to purchase an already built home at a new location, payment of the building code upgrade cost or the replacement cost, including any extended replacement cost coverage, to the extent those costs are otherwise covered by the terms of the policy or any policy endorsement. However, the measure of indemnity shall not exceed the replacement cost, including the building code upgrade cost and any extended replacement cost coverage, if applicable, to repair, rebuild, or replace the insured structure at its original location.
(2) Notwithstanding any other law, for a residential property insurance policy, the measure of damages available to a policyholder to use to rebuild or replace the insured home at another location shall be the amount that would have been recoverable had the insured dwelling been rebuilt at its original location, and a deduction for the value of land at the new location shall not be permitted from that measure of damages. However, the measure of indemnity shall not exceed the cost, including the building code upgrade cost and any extended replacement cost coverage, if applicable, to rebuild the insured structure at its original location.
This Code was part of my discussion with California-based Merlin Law Group attorneys as a result of yesterday’s post, The Devil Is in the Details When Making a Claim with Church Mutual Insurance Company. That post discussed whether the policyholder must make an election for actual cash value payments or potentially receive nothing if the property is not repaired, rebuilt, or replaced.
The California Code was discussed in a 2021 California case, Westmoreland v Fire Insurance Exchange,1 where the court held:
Insurer argues that subdivisions (a) and (c) of former section 2051.5 must be read together and that considered as a whole, the statute does not conflict with the subject policy’s Settlement Loss provision that limits Insurer’s payment of replacement cost to the ‘smallest’ of three specified amounts, including the ‘amount actually and necessarily spent to repair or replace’ the lost dwelling. Conversely, plaintiffs contend that former section 2051.5(c)—which itself contains no language limiting indemnity to replacement costs actually or reasonably incurred—is the only relevant statutory provision where, as here, insureds suffer a total loss and decide to build at a location other than the insured premises. Applying settled principles of statutory construction, we conclude that former subdivision (c) cannot be read in isolation and that the statute must be read as a whole.
Reading former subdivisions (a) and (c) together, former section 2051.5 makes reasonably clear that the measure of indemnity for any given replacement cost policy is the same no matter where the insured decided to rebuild or replace in cases of total loss. That is, for the insured who decided to build or replace elsewhere, the measure of indemnity is the lesser of the following: (1) the amount it would cost to rebuild or replace the structure at the insured premises; and (2) the amount of the coverage limit stated in the policy. Thus, whether the cost to replace a dwelling at a different location turns out to be significantly higher or significantly lower than the estimated replacement cost at the insured premises, former section 2051.5 provides certainty to both the insurer and the insured that the full scope of a policy’s extended replacement cost coverage would be available to the insured no matter where the
lost dwelling is replaced.
plaintiffs have already received the full measure of indemnity to which they are entitled because they were paid the actual cash value of the insured dwelling ($372,000) and built a replacement dwelling at a different location without incurring additional replacement costs over and above that amount.
This result is nothing new and follows longstanding property insurance adjustment guidelines, with the lone exception being the case discussed in the post, The Devil Is in the Details When Making a Claim with Church Mutual Insurance Company.
When determining the amount of actual cash value, California is different and has code provisions discussed in Applying Depreciation in California – Understanding the Guidelines.
Thought For The Day
When the Okies left Oklahoma and moved to California, they raised the average intelligence level in both states.
1 Westmoreland v. Fire Ins. Exchange, 73 Cal.App.5th 269 (Call. App. 2021).