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Court of Appeals Rules Against FAIR Plan

SAN FRANCISCO, CA, June 1, 2017 — The First District Court of Appeals has ruled that the California FAIR Plan must pay a policyholder far in excess of its actual-cash-value policy requirements, finding that recent amendments to the California Insurance Code trumped policy provisions. 

The case, California Fair Plan Association v. Garnes, arose out of a kitchen fire in Marlene Garnes’ Richmond home, on Jan. 1, 2011.  She had purchased an actual cash value (ACV) policy providing coverage up to $425,000 on the dwelling and $50,000 on contents.  The cost to repair the fire damage, including lead and asbestos abatement, was over $320,000, after subtracting for depreciation. 

The FAIR Plan refused to pay the full claim, citing express policy provisions that provide, in cases of partial loss, that the insurer’s obligation was capped at the lesser of the cost to repair or replace the damage (less depreciation), or the fair market value of the property—which was determined at the time of the fire, in undamaged condition, to be only $75,000. 

The FAIR Plan’s claims decision was based on its reading not only of its own policy, but also of California Insurance Code Section 2051, which distinguishes “total losses” from “partial losses” in ACV policies.  In total losses, an insurer much pay either “the policy limit or the fair market value of the structure, whichever is less.”  The FAIR Plan took the position that because the fire damage ($320,000) so exceeded the total value of the home ($75,000), that the loss should be treated as a “total loss.” 

The court of appeals disagreed, and overruled a trial court judge who had sided with the FAIR Plan. 

In a unanimous 3-0 ruling, the appellate court ruled that “the Insurance Code requires payment of the costs to repair her home, less depreciation, even if this amount exceeds the fair market value of her home, and it governs over any conflicting terms of the policy.” 

Reaction to the court’s decision, issued May 26, was decidedly mixed. 

In a press release praising the decisions, the California Department of Insurance said, “Limiting payments for repairs to the fair market value of the home reduces payments for homeowners in lower income neighborhoods where home values are low – in effect discriminating against homeowners in lower income neighborhoods.”  The press release also quoted Dylan Shaffer, the attorney who represented the Garnes family in the litigation:  “Since the passage of the Homeowners Bill of Rights in 2004, California insurers have used a variety of methods to cut back on paying claims.  With the court's decision, the rule is now unmistakable: when a fire partially damages a home, insurers must pay the actual cost of repair.” 

Reaction by the FAIR Plan was decidedly less favorable, but no less pointed. 

“The FAIR Plan is outraged that the Department of Insurance would issue a press release suggesting that the FAIR Plan discriminates against its inner city customers,” it said in a press release. 

“Ms. Garnes owns a tenant-occupied property, which was insured under an actual cash value policy. The property was grossly overinsured. The property suffered a kitchen fire and, due to the age and condition of the property, the cost to repair the damage far exceeded the actual cash value (fair market value) of the property. The policy made clear that the most the FAIR Plan would pay if there was a partial or total loss was the fair market value of the property. 

“The policy issued to Ms. Garnes has definitions of total and partial loss that were approved by the Department of Insurance. Thus, contrary to the Department of Insurance press release, the Department had agreed that the FAIR Plan could use the same policy form involved in the Garnes case. […]  The definition of “total loss” in the policy includes the concept of constructive total loss, which utilizes an economic test for the valuation of total loss where the repair costs exceed the property’s fair market value. 

“Accordingly,” the FAIR Plan statement continued, “when Ms. Garnes suffered her loss, the FAIR Plan appropriately determined the fair market value of her rental property, considering its age and condition, pursuant to the policy it issued her as approved by the Department of Insurance, and paid that amount to her. 

“The FAIR Plan interprets its policy in the same manner no matter where the insured lives, and the FAIR Plan flatly rejects any claim that its policy would be applied differently if the loss occurred in a wealthy neighborhood than in a lower income neighborhood.” 

Last year, the Department of Insurance asked the FAIR Plan to change the definition of “total loss” in its insurance policy form, and, working closely and cooperatively with the Department of Insurance, the FAIR Plan made that and other significant changes to its policy form. The new form will be used on all new and renewal policies starting July 1, 2017.” 

To read the appellate court decision, click here. 

To read the Commissioner’s press release, click here. 


Denise Porter says: Friday, June 2, 2017 11:54 AM
aI understood the definition of Actual Cash Value as "replacement cost, less depreciation", not fair market value. Is this not correct?
Craig says: Friday, June 2, 2017 12:31 PM
There's home in California with a fair market value of only $75,000?
James Teeters says: Friday, June 2, 2017 6:16 PM
So the FAIR plan accepted a policy that "grossly over insured" the property, then based the settlement on fair market value? I understand its an ACV policy, but I thought underwriters where supposed to evaluate the limits of a policy based on rebuild cost, not the real estate market value.

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