Because an extended replacement cost provision did not actually alter the policy limit, but instead merely provided for a potential payment in excess of the limit, the insureds were still required to repair, rebuild or replace in order to recover replacement cost benefits. ( Minich v. Allstate Insurance Company (2011) WL 834071)
Facts
Allstate Insurance Company issued a homeowner’s insurance policy to Kelly and Debbie Minich. The policy provided that, if Mr. and Mrs. Minich’s house were damaged or destroyed, Allstate would pay the “actual cash value” of the damaged property, in an amount not to exceed the “limit of liability shown on the Policy Declarations.” The limit of liability for the dwelling, as stated on the policy declarations, was $129,840.
The policy declarations showed that the dwelling coverage was subject to an extended replacement cost endorsement that provided that, if the insureds were to “repair, rebuild or replace” their house, Allstate would pay an amount not to exceed “150% of the limit of liability . . . as shown on the Policy Declarations . . . .” Thus, the maximum amount potentially due under the policy was $194,760 (i.e., the stated limit of $129,840 multiplied by the 150% factor stated in the endorsement).
A wildfire destroyed Mr. and Mrs. Minich’s house. Within two weeks after the fire, Allstate paid Mr. and Mrs. Minich $129,590 (i.e., $129,840 less the policy’s $250 deductible).
Mr. and Mrs. Minich argued that, because of the extended replacement cost endorsement, the policy “limit” for the dwelling was $194,760. Thus, even though they had not completed (or even started) to replace the house, Mr. and Mrs. Minich demanded that Allstate immediately pay an additional $64,920 (i.e., the difference between the prior payment of $129,590 and the extended amount of $194,760). Allstate declined Mr. and Mrs. Minich’s demand, but offered to pay the additional amount if and when Mr. and Mrs. Minich demonstrated they actually were rebuilding or replacing the house.
Eventually, Mr. and Mrs. Minich provided Allstate with a copy of the plans and permit for a new house. About 15 months after the fire, Mr. and Mrs. Minich invited Allstate to inspect the foundation of the house. Allstate promptly inspected the work and, within a few weeks, issued the additional payment of $64,920. At the time Allstate paid this additional amount, the construction of the new house was less than 50% complete.
Mr. and Mrs. Minich ultimately filed suit against Allstate, claiming that Allstate had been contractually obligated to pay the additional $64,920 immediately after the fire, and that Allstate had acted in bad faith by not immediately paying the additional amount. The trial court entered summary judgment in favor of Allstate, finding that Allstate had not breached its contract and had not acted in bad faith.
Holding
The Court of Appeal affirmed the ruling in favor of Allstate.
The maximum amount that Allstate initially owed was the “limit of liability shown on the Policy Declarations.” The “limit of liability shown on the Policy Declarations” was $129,840. The extended replacement cost endorsement did not actually alter the policy limit but, instead, merely provided for a potential payment in excess of the policy limit.
Neither the terms of the policy nor the terms of the California Insurance Code required Allstate to pay any additional amount to Mr. and Mrs. Minich unless they actually repaired, rebuilt or replaced within the time allowed. Allstate paid the additional amount almost immediately after the insureds demonstrated that they had completed the foundation for the new house (and even though they had not completed the rest of the new house).
Comment
When a covered peril renders a structure a total loss and the policy provides coverage on an “actual cash value basis,” the insurer initially is required to pay the “fair market value” of the structure or the policy’s stated limit (whichever is less). When a covered peril renders a structure a partial loss and the policy provides coverage on an “actual cash value basis,” the insurer initially is required to pay the replacement cost less a fair and reasonable deduction for depreciation based on the condition of the property at the time of loss. (Insurance Code section 2051.)
If the insured has purchased some form of replacement cost coverage, and if the insured actually repairs, rebuilds or replaces the property, then the insured is entitled to collect the difference between the insurer’s initial payment and the amount specified in the policy. (Insurance Code section 2051.5, subd. (a).) The amount specified in the policy might be an “extended” amount (e.g., 125% or 150% of the amount listed on the declarations) or might be a “guaranteed” amount (i.e., limited only by the amount the insured reasonably and necessarily spent to repair, rebuild or replace).
After the insurer makes the initial payment, the insurer must allow the insured at least 12 months to repair, rebuild or replace (and must allow 24 months if the loss arises from a government-declared disaster). Further, if the insured demonstrates “good cause,” the insurer must grant the insured extensions of up to 6 months to repair, rebuild or replace. (Insurance Code section 2051, subd. (b).) Currently, there is no case law interpreting the “good cause” requirement in the replacement cost statutes.