Down To Cases

Replacement-cost value applies to calculation of coinsurance amount
A fire damaged an inn that was insured for $1,750,000. The property policy had a 90% coinsurance provision. According to an appraisal made after the fire, the damaged part of the inn had a market value of $950,000. The insureds submitted a claim on an actual cash basis for that amount, less their $1,000 deductible. Then the insureds submitted another claim, for replacement cost, amounting to $776,000, the difference between their policy's limit and the insurer'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 a determination that the coinsurance provision did not apply to the replacement-cost claim. Noting that the building's replacement cost was $3,577,700 and that the coverage on it amounted to far less than 90% of that amount, the carrier claimed the coinsurance provision did apply, and that the size of the replacement-cost payment must be reduced in accordance with it. A trial court granted the carrier's summary judgment motion, and the insureds appealed.

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

The appeals court examined the policy's replacement-cost and coinsurance provisions. “Reading these provisions together and giving full effect to each, we conclude that replacement-cost valuation applies to the (the insureds') second claim,” the court said. “Neither the policy language nor logic supports the view that this replacement-cost claim is to be determined on an actual-cash-value basis.”

“The underlying purpose of coinsurance is to encourage an insured to insure at least to a minimum percentage of a property's value,” the court said. “With this purpose in mind, there simply is no logical reason to limit valuation to actual cash value (generally a much lower value than replacement cost value) when a replacement cost claim is made.”

The insureds also alleged that the undefined term “value” in the coinsurance provision was ambiguous. However, they cited no authority for the proposition that replacement cost cannot be the basis of coinsurance provisions, the appeals court noted, while the carrier cited several cases demonstrating that it could.

The insureds also argued that the interpretation of the coinsurance clause favored by the carrier would force them to violate a state law prohibiting the purchase of insurance in excess of “fair value,” which was defined as replacement cost, less depreciation. However, the appeals court noted that a provision of the same law specifically states that, in connection with a property policy's special provision or endorsement, an insurer may “insure the cost of repair or replacement of such property, if damaged or destroyed by a hazard insured against, and without deduction of depreciation.'”

The appeals court affirmed the trial court's finding that the coinsurance provision applied to the replacement-value claim and that 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 given named-insured status

This Virginia case involved a dozen limited partnerships, each of which owned its own multifamily housing project. The projects were financed by proceeds realized from selling tax credits authorized by various state housing authorities. Because of the financing arrangement, each project was required to provide a “cost certification” to the respective state housing authorities, which included the costs of builders risk insurance.

A housing corporation performed administrative tasks for the limited partnerships. Among other things, it procured their insurance. The housing corporation contracted with a broker to buy a builders risk policy covering the 12 limited partnerships and their respective housing projects. The housing corporation itself did not own any of the housing projects but, as acknowledged by the parties, acted as the limited partnerships' agent for the purpose of obtaining insurance.

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

The housing corporation paid for the policy. Each limited partnership was supposed to reimburse it for its proportionate share of the premium, which was based on the estimated value of each limited partnership's housing project at the time of completion.

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

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

The partnership filed an action against the broker for its failure to include it as an insured on the builders risk insurance policy and recovered damages for the broker's negligent performance of its contractual obligations. When the other limited partnerships learned that none of them was a named insured, they filed suit against the broker for return of their premiums.

The insurance broker could not explain why the limited partnerships were not included as named insureds and admitted that it therefore had failed to comply with the applicable standard of care, or was negligent or in breach of its contract. Furthermore, an adjuster working for the carrier that issued the builders risk insurance policy stated that the owners of the property had no insurable interest under the policy. When asked whether a claim at least would have been paid to the housing corporation, the adjuster responded, “Only in a mistake.”

After hearing evidence, a circuit court concluded that the limited partnerships were not entitled to a return of their premiums. The court maintained that when one of the limited partnerships pursued and received recompense for its previously denied claim, it foreclosed the housing corporation's option of recovering the premium it had paid.

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

In analyzing the case, the appellate court cited another case in which it was decided that if, through no fault or fraud of an insured, the risk never attaches to a policy, then the insurer must return the premium. “Clearly, a risk never attached as to each of the 12 limited partnerships,” the appellate court said, “because they were not included as named insureds on the builders risk policy.”

The appellate court held that when an “intended insured” suffers a loss, the measure of damages is the amount that normally would have been paid under the policy. “However, when no loss has occurred,” the court said, “the measure of damages is the amount paid by the intended insured as the premium.”

The appellate court noted that the circuit court, in determining that the losses paid to some of the limited partnerships precluded the return of the premium, apparently had characterized them as subsidiaries of the housing corporation. “The limited partnerships, however, were not subsidiaries of NHC (the housing corporation); instead they were separate, independent entities, each owning a different housing project,” the appellate court said. The court also noted that even had the limited partnerships been subsidiaries, that status alone would not have justified the circuit court's position.

The broker argued that at least it should not have to return premiums to the two limited partnership for which it had paid claims, since they accepted the benefit they would have been afforded had they been named insureds on the builders risk policy. The appellate court disagreed. “There was no contract of insurance as to any of these limited partnerships. Thus (the two limited partnerships) cannot be deemed to have accepted the benefit of insurance or to have waived the failure of the broker to include them as named insureds.” The two partnerships, however, did acknowledge that the amount they were paid for their losses should be deducted from the returned premium.

The appeals court reversed the judgment of the trial court and remanded the case for a determination of the amount of damages that may be due the limited partnerships.

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

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

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

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

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

The officer was awarded a default judgment against the uninsured defendant for $250,000 in compensatory damages and $100,000 in punitive damages. The defendant neither appeared nor appealed. Following the final judgment, the plaintiff appealed the trial court's decision to grant summary judgment to his personal-auto insurer. The issue on appeal was whether the carrier's use of the “regular use” exclusion deprived the police officer of the protection required by the Tennessee Uninsured Motorists Statute.

The appellate court reviewed a number of cases, including Moore vs. State Farm Mutual Automobile Ins. Co., 121 So.2d 125, 126-27 (Miss. 1960). The court in that case said the question “narrows to this: Does the term 'regular use' in the exclusionary clause refer to one specific automobile?” The court noted the obvious purpose of the exclusion was to extend the policy's benefits only to casual or infrequent use of vehicles other than those listed in the policy. “It is regular use of other automobiles that brings the exclusionary clause into operation,” the court in Moore said, “and if insured's employer assigns him one specific automobile for regular use or a number of automobiles, any one of which may be assigned for a particular trip, the result is the same. An automobile is furnished to the insured 'for regular use' in either event. 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 patrolman riding a motorcycle provided for his regular use was injured in a collision with an uninsured driver. Like Nashville, Indianapolis was self-insured and was not required to carry uninsured or underinsured 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 is against public policy to exclude public safety officers from coverage under their personal insurance policies, even while on duty, when the government entity that owns and insurers the vehicles the officers drive is not required to provide uninsured or underinsured motorist coverage. The court in that case ruled against the police officer, saying it was up the legislature to require governmental authorities to provide uninsured or underinsured motorists coverage for their employees, or to compel insurers selling personal auto policies in the state to make an exception in their “regular use” exclusions for those working for self-insured governmental entities.

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

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

The judgment of the trial court was affirmed with costs of appeal 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).