Replacement-cost value applies to calculation ofcoinsurance amount
A fire damaged an inn that was insured for $1,750,000. The propertypolicy had a 90% coinsurance provision. According to an appraisalmade after the fire, the damaged part of the inn had a market valueof $950,000. The insureds submitted a claim on an actual cash basisfor that amount, less their $1,000 deductible. Then the insuredssubmitted another claim, for replacement cost, amounting to$776,000, the difference between their policy's limit and theinsurer's $949,000 actual-cash-value payment.

After the insurer disputed the amount of this additional claim,the insureds filed a declaratory judgment action, seeking adetermination that the coinsurance provision did not apply to thereplacement-cost claim. Noting that the building's replacement costwas $3,577,700 and that the coverage on it amounted to far lessthan 90% of that amount, the carrier claimed the coinsuranceprovision did apply, and that the size of the replacement-costpayment must be reduced in accordance with it. A trial courtgranted the carrier's summary judgment motion, and the insuredsappealed.

The appeals court noted that the insureds' policy expresslyallowed them to make an actual-cash-value claim and then follow itwith a replacement-cost claim. But the court disagreed with theinsureds' argument that in adjusting the replacement cost claim,the insurer should use actual cash value, rather than replacementvalue, to determine whether the coinsurance provision wassatisfied.

The appeals court examined the policy's replacement-cost andcoinsurance provisions. “Reading these provisions together andgiving full effect to each, we conclude that replacement-costvaluation applies to the (the insureds') second claim,” the courtsaid. “Neither the policy language nor logic supports the view thatthis replacement-cost claim is to be determined on anactual-cash-value basis.”

“The underlying purpose of coinsurance is to encourage aninsured to insure at least to a minimum percentage of a property'svalue,” the court said. “With this purpose in mind, there simply isno logical reason to limit valuation to actual cash value(generally a much lower value than replacement cost value) when areplacement cost claim is made.”

The insureds also alleged that the undefined term “value” in thecoinsurance provision was ambiguous. However, they cited noauthority for the proposition that replacement cost cannot be thebasis of coinsurance provisions, the appeals court noted, while thecarrier cited several cases demonstrating that it could.

The insureds also argued that the interpretation of thecoinsurance clause favored by the carrier would force them toviolate a state law prohibiting the purchase of insurance in excessof “fair value,” which was defined as replacement cost, lessdepreciation. However, the appeals court noted that a provision ofthe same law specifically states that, in connection with aproperty policy's special provision or endorsement, an insurer may“insure the cost of repair or replacement of such property, ifdamaged or destroyed by a hazard insured against, and withoutdeduction of depreciation.'”

The appeals court affirmed the trial court's finding that thecoinsurance provision applied to the replacement-value claim andthat the policy was not ambiguous.

Wetmore vs. Unigard Insurance Co., No. 53061-5-I (Wash.App.Div.1 02/ 22/2005) 2005.WA.0000275(www.versuslaw.com).

Broker must return premiums to property owners not givennamed-insured status

This Virginia case involved a dozen limited partnerships, eachof which owned its own multifamily housing project. The projectswere financed by proceeds realized from selling tax creditsauthorized by various state housing authorities. Because of thefinancing arrangement, each project was required to provide a “costcertification” to the respective state housing authorities, whichincluded the costs of builders risk insurance.

A housing corporation performed administrative tasks for thelimited partnerships. Among other things, it procured theirinsurance. The housing corporation contracted with a broker to buya builders risk policy covering the 12 limited partnerships andtheir respective housing projects. The housing corporation itselfdid not own any of the housing projects but, as acknowledged by theparties, acted as the limited partnerships' agent for the purposeof obtaining insurance.

The broker procured a builders risk policy that named thehousing corporation as the “insured” and listed the limitedpartnerships' housing projects as “covered properties.” The policy,however, did not list the limited partnerships as “namedinsureds.”

The housing corporation paid for the policy. Each limitedpartnership was supposed to reimburse it for its proportionateshare of the premium, which was based on the estimated value ofeach limited partnership's housing project at the time ofcompletion.

Two of the housing properties subsequently sustained losses. Thecarrier paid the losses by issuing checks payable to the housingcorporation, which was listed on those checks as the “assured.” (Asenior vice president for the broker later admitted that thecarrier paid the corporation because it did not know at the timethat the limited partnerships even existed or that they–not thehousing corporation–owned the damaged housing projects.)

But when a third limited partnership made a claim for damage toits housing project, the insurer denied it because the partnershipwas not a named insured under the policy.

The partnership filed an action against the broker for itsfailure to include it as an insured on the builders risk insurancepolicy and recovered damages for the broker's negligent performanceof its contractual obligations. When the other limited partnershipslearned that none of them was a named insured, they filed suitagainst the broker for return of their premiums.

The insurance broker could not explain why the limitedpartnerships were not included as named insureds and admitted thatit therefore had failed to comply with the applicable standard ofcare, or was negligent or in breach of its contract. Furthermore,an adjuster working for the carrier that issued the builders riskinsurance policy stated that the owners of the property had noinsurable interest under the policy. When asked whether a claim atleast would have been paid to the housing corporation, the adjusterresponded, “Only in a mistake.”

After hearing evidence, a circuit court concluded that thelimited partnerships were not entitled to a return of theirpremiums. The court maintained that when one of the limitedpartnerships pursued and received recompense for its previouslydenied claim, it foreclosed the housing corporation's option ofrecovering the premium it had paid.

The court also said the measure of damages for a breach ofcontract to procure insurance was the amount the loss sustainedthat would have been subject to insurance, not the return of thepremium. The limited partnerships appealed.

In analyzing the case, the appellate court cited another case inwhich it was decided that if, through no fault or fraud of aninsured, the risk never attaches to a policy, then the insurer mustreturn the premium. “Clearly, a risk never attached as to each ofthe 12 limited partnerships,” the appellate court said, “becausethey were not included as named insureds on the builders riskpolicy.”

The appellate court held that when an “intended insured” suffersa loss, the measure of damages is the amount that normally wouldhave been paid under the policy. “However, when no loss hasoccurred,” the court said, “the measure of damages is the amountpaid by the intended insured as the premium.”

The appellate court noted that the circuit court, in determiningthat the losses paid to some of the limited partnerships precludedthe return of the premium, apparently had characterized them assubsidiaries of the housing corporation. “The limited partnerships,however, were not subsidiaries of NHC (the housing corporation);instead they were separate, independent entities, each owning adifferent housing project,” the appellate court said. The courtalso noted that even had the limited partnerships beensubsidiaries, that status alone would not have justified thecircuit court's position.

The broker argued that at least it should not have to returnpremiums to the two limited partnership for which it had paidclaims, since they accepted the benefit they would have beenafforded had they been named insureds on the builders risk policy.The appellate court disagreed. “There was no contract of insuranceas to any of these limited partnerships. Thus (the two limitedpartnerships) cannot be deemed to have accepted the benefit ofinsurance or to have waived the failure of the broker to includethem as named insureds.” The two partnerships, however, didacknowledge that the amount they were paid for their losses shouldbe deducted from the returned premium.

The appeals court reversed the judgment of the trial court andremanded the case for a determination of the amount of damages thatmay be due the limited partnerships.

Autumn Ridge LP et al vs. Acordia of Virginia InsuranceAgency Inc., No. 041934 (Va. 06/09/2005) 2005. VA.0000321(www.versuslaw.com).

Uninsured motorist coverage for officer in self-insuredcity falls into 'black hole'

A Nashville, Tenn., police officer was seriously injured in anon-duty automobile accident when the defendant's vehicle crashedinto the rear of his patrol car. The defendant was uninsured.Nashville was self-insured and did not provide uninsured motoristcoverage for its patrol officers.

The officer named his own personal auto insurer as a defendantin the action in an attempt to obtain coverage under his personalauto policy's uninsured motorist coverage. The carrier defended onthe basis of a policy exclusion barring claims involvingnon-insured vehicles that are made available for the insured'sregular use. The insurer asked the trial court for summary judgmentin its favor, which was granted.

The patrol car the officer was driving at the time of theaccident was one of a fleet of 12 vehicles maintained by the policesubstation for use by patrolmen. The vehicles were assigned atrandom to various patrolmen, and records for the 33 days prior tothe accident indicated the officer had used eight of these patrolcars.

The officer was awarded a default judgment against the uninsureddefendant for $250,000 in compensatory damages and $100,000 inpunitive damages. The defendant neither appeared nor appealed.Following the final judgment, the plaintiff appealed the trialcourt's decision to grant summary judgment to his personal-autoinsurer. The issue on appeal was whether the carrier's use of the“regular use” exclusion deprived the police officer of theprotection required by the Tennessee Uninsured MotoristsStatute.

The appellate court reviewed a number of cases, including Moorevs. State Farm Mutual Automobile Ins. Co., 121 So.2d 125, 126-27(Miss. 1960). The court in that case said the question “narrows tothis: Does the term 'regular use' in the exclusionary clause referto one specific automobile?” The court noted the obvious purpose ofthe exclusion was to extend the policy's benefits only to casual orinfrequent use of vehicles other than those listed in the policy.“It is regular use of other automobiles that brings theexclusionary clause into operation,” the court in Moore said, “andif insured's employer assigns him one specific automobile forregular use or a number of automobiles, any one of which may beassigned for a particular trip, the result is the same. Anautomobile is furnished to the insured 'for regular use' in eitherevent. We know of no authority holding to the contrary.”

The court also considered Jackson vs. Jones, 408 N.E.2nd 155(Ind.App. 2004), a case in which an Indianapolis patrolmanriding a motorcycle provided for his regular use was injured in acollision with an uninsured driver. Like Nashville, Indianapoliswas self-insured and was not required to carry uninsured orunderinsured motorists coverage for its employees.

The injured policeman in this case said the “regular use”exclusion in his personal auto policy was void because it isagainst public policy to exclude public safety officers fromcoverage under their personal insurance policies, even while onduty, when the government entity that owns and insurers thevehicles the officers drive is not required to provide uninsured orunderinsured motorist coverage. The court in that case ruledagainst the police officer, saying it was up the legislature torequire governmental authorities to provide uninsured orunderinsured motorists coverage for their employees, or to compelinsurers selling personal auto policies in the state to make anexception in their “regular use” exclusions for those working forself-insured governmental entities.

In the case at hand, the appellate court found itself in muchthe same position as the court in Jackson vs. Jones:

“The plaintiff's employer did not provide uninsured orunderinsured motorist coverage for patrolmen operating its fleet ofpatrol vehicles. He cannot prevail upon his personal vehicleinsurer to extend to him uninsured motorist protection while he isdriving an assigned patrol vehicle. He is, thus, trapped in what hecorrectly refers to as a 'black hole.' Like Jackson, however, hisdilemma is legislative, not judicial.”

The judgment of the trial court was affirmed with costs ofappeal assessed against the police officer.

Shepherd vs. Fregozo, No. M2004-00245-COA-R3-CV (Tenn.App.06/ 13/2005) 2005.TN.0000939(www.versuslaw.com).