Most people understand that insurance policies are drafted by insurance companies. There is little to no negotiation of terms between a potential policyholder and the insurance company, so if language is ambiguous it is construed against the drafter—the insurance company. Below you will find details about a recent case out of the Western District of Missouri written by an esteemed panel of Judges. It is also a good refresher from elementary school –when a teacher asks you to define a word, you should not then use that word in the definition. American Family forgot this and it is an expensive lesson to learn.

In Wilson v. American Family Mutual Insurance Company,1 plaintiffs purchased a unique farm house built in the late 1800’s. After meeting with a friend who was an insurance agent, plaintiffs obtained a “Gold Star” 100% Replacement Cost policy from American Family. The friend/agent input information into the Xactware program and found the cost to replace the home with ‘like materials and built with like quality’ was $419,000. The policy was issued and premium was collected for eight years. However, a fire then destroyed plaintiffs’ home and all of its contents. Prior to receiving any bids, the insurance company tendered payments. The friend/agent asked a local builder to meet with plaintiffs. The builder found that the cost to replace the home was over $650,000, excluding demolition. Plaintiffs sent back the initial checks to the adjuster because they were insufficient to rebuild the home. The adjuster noted in his file he wanted to get a second estimate and continued to negotiate with plaintiffs. Two months later, he reissued the checks with an “unable-to-reform-policy letter.”

A year after the fire, the insurance company sent a letter to plaintiffs informing them they had not complied with the policy condition of rebuilding the home within one year of the occurrence date, that they were not longer going to get ALE and that they would not receive the additional coverage of 20% if the RCV was higher than the policy limit. Plaintiffs filed suit. A jury found for the insurance company on negligent misrepresentation and for the plaintiffs on breach of contract. An appeal followed.

Plaintiffs claim that the insurance policy was ambiguous whether the replacement cost due was the “limit” on the declarations page, the insurance company’s estimate after the fire, 120% of the two figures, or the actual replacement cost of the home.

The court looked to the definitions of “limit” and “replacement cost.” In the policy, “limit” was defined as “the limit of liability or amount of insurance that applies for the coverage.” Since the policy used the word in the definition, the court found it very unhelpful. Replacement cost was not defined so the court consulted the dictionary and found it to mean “the current cost of replacing a fixed asset with a new one of equal effectiveness.”2

The court found that the insurance company used “limit” and “replacement cost” as synonyms creating two constructions and found the language to be ambiguous. The court found that the policy granted coverage in one section and took it away in another. The court construed the ambiguous policy language against the insurance company and instructed the jury they were to pay the total current cost to replace plaintiffs home with like kind and quality materials. The jury then could have determined the actual replacement cost and the appropriate amount of actual living expenses to be paid during the construction. The case was remanded.

1 Wilson v. American Family Mut. Ins. Co., 2015 WL2405299 (Mo. Ct. App. WD May 19, 2015).
2 Webster’s New Third Int’l Dictionary of the English Language Unabridged 1925 n.(1993).