The California Court of Appeal has held that, where two separate insureds have two separate policies covering the same property, each insurer must pay for only a part of a loss to the property. ( Burns v. California Fair Plan Association (2007) 61 Cal.Rptr.3d 809)
Facts
Ann Burns (Burns) held a life estate in a residence. The Kent Burns Trust (the Trust) held the remainder interest in the property. Burns insured her life estate interest in the property through California Fair Plan (Fair Plan). The Trust separately insured its remainder interest through Clarendon National Insurance Company (Clarendon).
Fair Plan’s policy provided coverage on an actual cash value basis, and had a limit of $477,000. Clarendon’s policy provided coverage on a replacement cost basis, and had a limit of $330,000. Thus, the combined limit of both policies was $807,000.
After a fire destroyed the residence, Burns submitted a claim to Fair Plan and the Trust submitted a claim to Clarendon. The actual cash value of the damaged property was $474,000, and the replacement cost was $486,080. Both Fair Plan’s policy and Clarendon’s included “other insurance” provisions. Fair Plan’s policy had an “excess” clause and Clarendon’s policy had a “pro rata” clause.
The insurers asserted that Burns and the Trust were not both entitled to the full insured value of the property. Instead, the insurers asserted that Burns and the Trust should recover on a pro rata basis. As such, Fair Plan divided its policy limit of $477,000 by $807,000, and calculated its pro rata liability at $279,410 (i.e., 59 percent of the actual cash value of $474,000, less a deductible of $250). Similarly, Clarendon divided its policy limit of $330,000 by $807,000, and calculated its pro rata liability at $198,792 (i.e., 41 percent of the replacement cost of $486,080, less a deductible of $500). Thus, Fair Plan paid $279,410 to Burns, and Clarendon paid $198,792 to the Trust.
Burns and the Trust filed an action alleging causes of action for breach of contract and bad faith. They each sought full recovery on their respective insurance policies, rather than the pro rata payment the insurers made. The trial court granted summary judgments in favor of the insurers, and Burn and the Trust appealed.
Holding
The Court of Appeal noted that both Burns and the Trust had separate insurable interests in the property, but noted that neither Burns’ interest nor the Trust’s interest was equal to the whole value of the property. Instead, the value of Burns’s life estate by definition was of limited duration, and the value of the Trust’s remainder interest was dependent on how long Burns survived.
Insurance Code section 590 provides as follows: “Double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest.” Insurance Code section 591 provides as follows: “In case of double insurance, the several insurers are liable to pay losses thereon as follows: (a) In fire insurance, each insurer shall contribute ratably, without regard to the dates of the several policies.” The Court of Appeal noted that this case did not involve “double insurance,” because Fair Plan and Clarendon did not both insure “the same person.”
Insurance Code 2071 provide as follows: “This company shall not be liable for a greater proportion of any loss than the amount hereby insured shall bear to the whole insurance covering the property against the peril involved, whether collectible or not.” According to the Court of Appeal, this provision evidences a legislative intent to allow pro rata payment of claims even where there is no “double insurance” and even where there are different insureds.
Together, the insurers paid $478,202. This amount was more than the estimated actual cash value of the destroyed property of $474,000. Thus, the Court of Appeal ruled that the insurers had fully paid their obligations under the policies, and that summary judgment in favor of the insurers was proper.
Comment
This case illustrates that property insurance is not intended to provide for recovery in excess of the value of the property destroyed where there is only one loss. It also illustrates that, where different persons or entities have separate interests in the same property, the value of each interest must be determined separately. Here, allowing each insurer to pay its own insured for only a portion of the total loss prevented either insured from gaining a windfall.