The California Court of Appeal has held that a property insurer did not assume a duty to establish adequate coverage limits, and that the insurer did properly notify the insured that a renewal policy would no longer provide guaranteed replacement cost coverage. ( Everett v. State Farm General Ins. Co. (2008) 162 Cal.App.4th 649)
Facts
Agnes Everett purchased a residence and, at the same time, she purchased a homeowner’s policy from State Farm General Insurance Company through agent Bryan Hendry. The policy included an endorsement for guaranteed replacement cost coverage, which provided that State Farm would pay the full amount needed to repair the damaged or destroyed dwelling with like or equivalent construction, without regard to the policy limits.
Later, service of Everett’s policy was transferred to agent Desiree Sarnowski. However, Sarnowski did not inspect the property, nor did Everett request Sarnowski to inspect the property. Everett also never asked Sarnowski to review her policy or increase the limits.
Eventually, State Farm eliminated the guaranteed replacement cost coverage in its homeowner policies. To provide its insureds with warning, State Farm sent each policyholder a notice of the change in coverage. In the notice, State Farm informed its insureds that if they chose to renew their homeowners policies with State Farm, guaranteed replacement cost coverage no longer would be available. Portions of the notice contained red or bold-faced, large capital letters. The notice further specified the changes to the policy in a second boldfaced, capitalized heading entitled “REDUCTIONS OR ELIMINATIONS OF COVERAGE.” The notice explained that guaranteed replacement cost coverage had been eliminated, that the policy “now has a stated limit of liability under Coverage A that reflects the maximum that will be paid in case of loss” and that the “policy no longer provides a guarantee to replace your home regardless of the cost.”
Everett accepted the renewal policy with State Farm when her premium for the renewal policy was paid via a check from a lender’s impound account. In several subsequent years, State Farm sent a renewal certificate which stated the following: “The State Farm replacement cost is an estimated replacement cost based on general information about your home. It is developed from models that use cost of construction materials and labor rates for like homes in the area. The actual cost to replace your home may be significantly different. State Farm does not guarantee that this figure will represent the actual cost to replace your home. You are responsible for selecting the appropriate amount of coverage and you may obtain an appraisal or contractor estimate which State Farm will consider and accept, if reasonable. Higher coverage amounts may be selected and will result in higher premiums.”
In addition to the annual renewal certificate, every two years State Farm mailed to its California insureds, including Everett, a “California Residential Property Insurance Disclosure.” The disclosure was provided in compliance with Insurance Code section 10102. It explained the terms “replacement cost” and “extended replacement cost,” as written by the Legislature.
After her house was destroyed by fire, Everett submitted a claim to State Farm. State Farm paid the stated policy limit, which amount was insufficient to cover the cost of replacing the house. Everett initiated an action against State Farm and its agent, Sarnowski. Among other things, Everett alleged that State Farm had a duty to provide Everett with limits sufficient to pay for replacement of the dwelling. In addition, Everett alleged that State Farm failed to provide her with sufficient notice that State Farm had eliminated guaranteed replacement cost coverage and that, therefore, the guaranteed replacement cost coverage remained in effect at the time of the fire.
Holding
The Court of Appeal rejected all of Everett’s contentions. With regard to Everett’s contention that State Farm had a duty to provide Everett with limits sufficient to pay for replacement of the dwelling, the Court noted that each year that Everett had her insurance with State Farm, State Farm sent renewal certificates. These certificates reminded Everett that the replacement cost figure identified by State Farm was merely an estimate, and that it was her responsibility to determine whether her property was adequately insured. Thus, the Court held that “contrary to Everett’s contention that it was State Farm’s duty to maintain policy limits equal to replacement cost, Everett bore such duty.”
With regard to Everett’s contention that State Farm failed to provide adequate notice of the elimination of the guaranteed replacement cost coverage, the Court held that State Farm’s notice of the policy changes (portions of which contained red or bold-faced, large capital letters) was “more than sufficient.”
Comment
This appears to be the first reported decision in which a California appellate court has addressed the issue of whether a property insurer has a duty to establish adequate coverage limits. Based on the clearly-worded renewal certificates that State Farm sent to Everett, the Court concluded that Everett—not State Farm—had the duty to set appropriate limits for her property.
With regard to changes in coverage in renewal policies, Insurance Code section 678 provides that, when an insurer offers to renew a policy, the insurer must notify the insured of any “reduction of limits” or “elimination of coverage.” If the insurer’s offer to renew does not explain the coverage changes in plain, clear and conspicuous terms, then the broader coverage provided by the prior policy remains in force until the insurer satisfies the notice requirements. Here, State Farm satisfied the statutory requirements by issuing a notice that highlighted the changes red or bold-faced, large capital letters.