A Wisconsin appeals court rejected a homeowner's argument that repair costs exceeding the property's pre-fire value were enough to trigger payment of the policy's full face value. The case is Behrndt v. Austin Mut. Ins. Co., 855 N.W.2d 493 (Wis. Ct. App. 2014).
Background
Cole and Ashley Behrndt bought their home after a foreclosure in July 2008 for $132,000, believing they had gotten it below market value. They wanted more coverage than the purchase price reflected and sought a homeowners policy from Austin Mutual Insurance Company valued at $150,000 to $175,000.
Later in the year, Austin Mutual determined the home's replacement cost exceeded the couple's existing coverage and raised the policy's value. The couple accepted the increase and paid the higher premiums.
When a fire damaged the home on November 25, 2011, the policy's face value was $263,500. On November 30, 2011, the town's building inspector ordered the home to be razed, stating that repair costs would exceed fifty percent of the home's assessed value.
The Behrndts filed a claim with Austin Mutual for a total loss, along with a $168,120 repair estimate from Insight Construction. Austin Mutual retained its own adjuster, structural engineer, and contractor to assess the loss.
The group agreed that from the outside, there was little sign that a fire had occurred beyond some window smoke staining and breakage. The foundation, roof, and outer walls were undamaged, and the fire and smoke damage were concentrated inside the home.
The structural engineer stated that the house was structurally sound and repairable. The contractor estimated the actual cash value of repairs at $120,275.11 and the replacement value at $147,579.55.
Austin Mutual appealed the town's raze order, and the town board overturned the order. Austin Mutual paid the Behrndts $120,257.11, but the Behrndts argued they were owed the full policy limit. Austin Mutual invoked the policy's appraisal provision, and the appraisal panel found the property repairable, setting the actual cash value of repairs at $100,476.35 and the replacement cost value at $154,579.
The Behrndts sued Austin Mutual for the policy's full $263,500 face value, arguing their home was a total loss because repair costs exceeded its pre-fire value. Austin Mutual denied the loss claim and moved for summary judgment, arguing that Wisconsin law measures total loss by whether a home is "wholly destroyed" and not by comparing repair costs to value. A circuit court granted summary judgment for Austin Mutual. The Behrndts appealed to a Wisconsin Court of Appeals.
Wholly Destroyed
The Behrndts argued that they were owed the full policy limit of their homeowners policy because the property was a total loss, and under the Wisconsin valued policy law, insurers are required to pay the policy limits if the property has been wholly destroyed.
Wis. Stat. § 632.05(2) says that "whenever any policy insures real property that is owned and occupied by the insured primarily as a dwelling and the property is wholly destroyed, without criminal fault on the part of the insured or the insured's assigns, the amount of the loss shall be taken conclusively to be the policy limits of the policy insuring the property."
The court first stated that the application of the law would come down to whether the house was "wholly destroyed." In prior decisions by the Wisconsin Supreme Court, the court did not require a building to be reduced to rubble or to nothing more than the foundation to be considered "wholly destroyed".
To be considered as such, the structure would have had to lose its identity and specific character as a building. A test to determine whether there has been a total loss is whether a reasonably prudent, uninsured owner would use what remains of the building as the basis for restoring it.
Court of Appeals
The Behrndts contended that their house was wholly destroyed because "the cost to repair is more than the pre-fire value of the damaged property." The court ruled that the cost of repair compared to the pre-fire value is irrelevant under the valued policy law. The law only specifies the physical condition of the remnants of a loss and does not consider the value of the property or the cost to repair. Since the home was determined to be structurally sound, it was not wholly destroyed.
The Behrndts also argued that the "reasonable person" test supports the finding of a total loss since "nobody would ever spend $154,000 to fix something worth $72,500." However, again, that test asks only whether an existing remnant of a structure is suitable as a basis for restoration and does not apply an economic analysis.
The Behrndts then pointed to automobile insurance policies where insurers will generally deem a vehicle a total loss if the cost to repair is greater than the vehicle's value. The court, however, found the comparison irrelevant since the valued policy law states that it applies only to real property occupied as a dwelling.
Editor's Note
The court found that the structure, identity, and character of the house remained intact after the fire and, as such, the property was not a total loss under the valued policy law. The Behrndts tried to apply an economic analysis to determine that there was a total loss, when the statute only specifies physical consideration of the remaining structure.
The Behrndts would have likely had a case for a constructive total loss if the raze order had stood and the town had forced them to demolish the house due to safety codes. However, since the raze order was overturned and the town did not prevent the Behrndts from repairing the home, the property was not a constructive total loss.
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