The U.S. Court of Appeals for the Eighth Circuit, reversing a district court's decision in favor of an insurer, has ruled that calculation of an insurance policy's coinsurance provision depended on the type of claim filed and that where the insured filed a claim for the actual cash value of stolen property, the coinsurance provision should be calculated using actual cash values.
The Case
After thieves stole electrical wiring from the saw and planing mills in Buddy Bean Lumber Company's lumberyard, the company filed a claim with its insurer, Axis Surplus Insurance Company, seeking to recover the actual cash value of the stolen wire. Axis determined that the loss was covered under the policy and tendered Buddy Bean an interim payment of $100,000 while it investigated the matter. After some negotiation the two parties agreed that the stolen wire had an actual cash value of $725,000, but Axis declined to pay that amount because it considered the claim to be subject to the policy's coinsurance provision, which provided that the saw and planing mills were insured on a 90 percent coinsurance basis.
Axis stated that the value of the mills for purposes of the coinsurance provision in the policy it had issued should not be measured by their actual cash value, which the parties agreed was $4,050,000. Instead, Axis argued, the mills should be valued by their replacement cost, which it claimed was $21,024,000. Since Buddy Bean's policy limit for the mills was $3,837,500, Axis contended that it had failed to insure them adequately and therefore it could not recover more on its claim than the interim payment it had tendered.
Buddy Bean sued, arguing that the term "value" in the coinsurance provision of its policy meant the actual cash value of the saw and planing mills because it had filed that kind of claim, stressing that although it paid for optional replacement cost coverage, it did not file a replacement cost claim. In its view, its policy limit therefore was sufficient to avoid any coinsurance penalty.
Axis countered that Buddy Bean's decision to purchase optional replacement cost coverage changed the definition of "value" in the coinsurance provision from "actual cash value" to "Replacement Cost (without deduction for depreciation)." Both parties moved for judgment on the pleadings.
The district court agreed with Axis' interpretation of the policy. It concluded that the policy language was unambiguous and that the value of the mills should be measured by their replacement cost because Buddy Bean had purchased replacement cost coverage, thereby changing the definition of "value" in the coinsurance provision.
After Buddy Bean stipulated to the replacement cost of the mills and its deductible under the policy, the district court calculated the applicable coinsurance penalty and determined that Buddy Bean could only recover approximately $98,000 of its loss. Since it had already been tendered $100,000, the district court continued, Buddy Bean was not entitled to any further payment and judgment was entered for Axis.
Buddy Bean appealed.
The Policy
The coinsurance provision in Buddy Bean's policy, Section F.1, stated:
[Axis] will not pay the full amount of any loss if the value of Covered Property at the time of loss times the Coinsurance percentage shown for it in the Declarations is greater than the Limit of Insurance for the property.
(Emphasis added.)
Under Section E.7 of the policy, the term "value of Covered Property" was defined as the property's
actual cash value as of the time of loss or damage.
Section G, titled Optional Coverages, detailed Buddy Bean's replacement cost coverage and stated:
3. Replacement Cost
a. Replacement Cost (without deduction for depreciation) replaces Actual Cash Value in [section E.7] of this Coverage Form….
c. You may make a claim for loss or damage covered by this insurance on an actual cash value basis instead of on a replacement cost basis. In the event you elect to have loss or damage settled on an actual cash value basis, you may still make a claim for the additional coverage this Optional Coverage provides [under certain conditions].
The Circuit Court's Decision
The circuit court reversed.
In its view, the proper interpretation of the coinsurance provision depended on whether Buddy Bean had filed an actual cash value claim or a replacement cost claim. Here, the circuit court explained, Buddy Bean had filed a claim with Axis for the actual cash value of its stolen wire. Thus, to calculate whether Buddy Bean was subject to a coinsurance penalty on that claim, the term "value" in the coinsurance provision should be read as the actual cash value of Buddy Bean's saw and planing mills, it ruled.
In the Eighth Circuit's view, Buddy Bean's choice to purchase a type of expanded coverage was not intended to vitiate its basic coverage. Instead, as the Replacement Cost Section G.3.c of the policy explained, optional replacement cost coverage provided Buddy Bean with the ability to file claims "on an actual cash value basis" in addition to claims "on a replacement cost basis." If Buddy Bean's decision to buy replacement cost coverage automatically changed how to calculate the coinsurance provision, it "would always suffer a substantial coinsurance penalty even on actual cash value claims," rendering Section G.3.c "irrelevant," according to the circuit court.
Given that all of the relevant property values were undisputed, the circuit court then found that Buddy Bean was not subject to a coinsurance penalty on its claim for the actual cash value of the stolen wire and was entitled to receive its claim of $725,000 less the $100,000 interim payment made by Axis and two undisputed $25,000 deductibles. It concluded that Buddy Bean thus was entitled to judgment in the amount of $575,000.
The case is Buddy Bean Lumber Co. v. Axis Surplus Ins. Co., No. 12–3232 (8th Cir. May 23, 2013). Attorneys involved include: Matthew Tancred Horan, argued, Fort Smith, A.R., (Don A. Smith, on the brief), for appellant; Carol M. Rooney, argued, Tampa, FL, (William R. Wellis, on the brief), for appellee.
FC&S Legal Comment
A Washington appellate court, in Wetmore v. Unigard Ins. Co., 107 P.3d 123 (Wash.Ct.App. 2005), interpreted the same industry standard insurance policy that Buddy Bean had purchased. The Washington court concluded that the proper interpretation of the coinsurance provision varied depending on whether the insured filed an actual cash value claim or a replacement cost claim. If the insured's claim was for actual cash value, the actual cash value of the relevant property should be used. If the insured filed a replacement cost claim, then the coinsurance provision should be calculated using the relevant property's replacement cost. Since a replacement cost claim was at issue in Wetmore, the court determined that the coinsurance provision should be calculated using the property's replacement cost.