In the case of Chauvin v. State Farm Fire & Casualty Company, 2007 WL 2230724 ( C.A.5 La. ) , Louisiana homeowners, whose homes were destroyed in hurricanes, sued their insurers, alleging that they were entitled to the agreed face value of their policies under Louisiana's Valued Policy Law (VPL). The District Court for the Eastern District of Louisiana dismissed the suits and the homeowners appealed.

The homeowners argued that the VPL applies to non-fire perils and that the VPL requires an insurer to pay the agreed face value when (1) the property is rendered a “total loss,” even if the “total loss” is due to an excluded peril; so long as (2) a covered peril causes some damage, no matter how small, to the property.

The court of appeals agreed with the trial court that the language of the VPL is not clear and unambiguous. In particular, the critical language in the statute providing that “in the case of a total loss the insurer shall compute and indemnify or compensate any covered loss of, or damage to, such property” is susceptible of two possible meanings: (1) in the event of a total loss, an insurer is required to pay the homeowner the agreed full value of a policy as long as a covered loss causes some damage to the property, even if a non-covered peril renders the property a total loss; or (2) an insurer is only required to pay the homeowner the agreed face value of a policy when the property is rendered a total loss by a covered loss.

The court found that the VPL was adopted for two main purposes: (1) to keep insurers from writing insurance on property for more than it was actually worth, collecting premiums based on that overvaluation, and later arguing that the property was worth less than the face value when the property was destroyed; and (2) to discourage intentional destruction of property by insureds when they are permitted to over insure their property. And after considering the purposes of the VPL, the appeals court was convinced that the insurers' construction of the VPL best conforms to the legislative purpose and thus, the VPL only requires an insurer to pay the agreed face value of the insured property if the property is rendered a total loss from a covered peril.

As the district court observed, the homeowners' interpretation does nothing to further the purpose of the VPL. In particular, a finding that the statute requires insurers to pay the agreed face value of the property, even if an excluded peril (flooding) causes the total loss, runs counter to the VPL's effort to link insurance recoveries to premiums paid. Such an interpretation of the statute would force the insurer to pay for damage resulting from a non-covered peril for which it did not charge a premium. Also, because the focus of the VPL is on valuation (to set the amount payable when there is a total loss), not on coverage, the statute signals no intent to expand coverage to excluded perils.

If the VPL were to have the meaning the homeowners ascribe to it, an insured holding a valued homeowner's policy that covered wind damage but specifically excluded flood losses could recover the full value of his policy if he lost 20 shingles in a windstorm and was simultaneously flooded under 10 feet of water. The insurer would thus have to compensate the covered loss of a few shingles at the value of the entire house. In effect, the insurer would be required to pay for damage not covered by the policy and for which it did not charge a premium. Such a result would be well outside the boundaries of any party's reasonable expectation of the operation of an insurance contract.

The court of appeals, held that homeowners were not entitled to the agreed face value of their policy where their homes sustained some damage from covered peril, but total loss resulted from non-covered peril. The ruling of the lower court was affirmed.