A Washington appeals court ruled that a coinsurance provision should be applied to the replacement cost of damaged property in Wetmore v. Unigard Ins. Co., No. 53061-5-I, 2005 WL 407366 (Wash. App. Feb. 22, 2005).
The Majestic Inn was insured under a commercial multiline policy issued by Unigard Insurance. The policy contained a 90 percent coinsurance provision. A fire damaged the inn, and the owners, the Wetmores, made a claim on an actual cash value basis for $949,000. The Wetmores later made a claim for additional replacement cost coverage for $776,000—the difference between the policy limits and the actual cash payment they had already received. Unigard disagreed with the amount of the additional claim.
The Wetmores argued that the coinsurance provision did not apply to the replacement cost claim, but that it should be determined based on the property's actual cash value. The coinsurance provision did not apply to the actual cash value claim because the policy limit exceeded the actual cash value. Unigard, however, argued that since the replacement cost bid for the inn was over $3 million and the insurance limit was $1,725,000, the 90 percent coinsurance requirement was not met.
The court concluded that replacement cost valuation applied to the claim, stating, “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 Wetmores stated that the policy provisions were susceptible to two reasonable interpretations. They claimed that because the word “value” was not defined in the coinsurance provision and based on the confusing nature of the policy's structure, an ambiguity existed and that the “general rule” is to base coinsurance provisions “upon the actual cash value of insured property.” Quoting Couch on Insurance, the court said that “[i]nsurers commonly offer insureds the option of insuring improvements for replacement costs, in recognition of the fact that the cost of repairing or replacing an older structure will be greater than its value.”
The insureds next said that the policy's provision leads to violation of a Washington statute that prohibits “insurance in excess of the 'fair value' (defined as cost of replacement less depreciation).” The court countered that the statute authorizes replacement insurance in situations like the insured's, noting that replacement cost coverages are designed to insure against the risk of deterioration. The court said that “the over-insurance statute cannot be read to prohibit insuring a property close to or at its replacement cost value as required by the coinsurance provision in this case.”
The court affirmed summary judgment in favor of Unigard.