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Property Damage Recovery for Partial Loss Can Exceed the Fair Market Value

California has codified how to calculate what an insurance company must pay as policy benefits in the event of fire damage to a house under a homeowner’s insurance policy. But what happens when two provisions of the insurance code seem to conflict?

In California Fair Plan Association v. Marlene Garnes, (2017) 11 Cal.App.5th 1276, the California Court of Appeal recently addressed an apparent conflict in the Insurance Code regarding calculating damages for a partial loss.

Marlene Garnes’ house suffered extensive fire damage as a result of a kitchen fire. Her home was covered by fire insurance with a $425,000 policy limit. Ms. Garnes made a claim that she had suffered a partial loss to the structure. According to California Insurance Code section 2051(b)(2), the measure of the cash recovery for partial structure loss is the amount it will cost to repair the house, less depreciation, or the policy limit—whichever is less. (See Ins. Code § 2051(b)(2).) Both sides agreed that under this calculation, the amount due to Garnes would be $320,549. (Garnes at 1282.)

However, the insurer took the position that Ms. Garnes had suffered a total loss to the structure, and therefore, the calculation of the recovery was the fair market value or the policy limit, whichever is less. (See Ins. Code § 2051(b)(1).) The fair market value at the time of the fire was only $75,000.

Thus, the value of the claim depended on whether Ms. Garnes had suffered a total or partial loss to the structure within the meaning of Insurance Code section 2051. The insurer argued that the loss was total because the amount to repair the property exceeded the fair market value of the home at the time of the fire. (Id. at 1283.)

The California Court of Appeal found in favor of Garnes based on its interpretation of the language and the intent of the Insurance Code section 2051 coupled with sections 2070 and 2071. The Court of Appeal held that where the Insurance Code and policy conflict, as they did in this case regarding the definition of “total loss,” it is the Insurance Code’s definition that prevails. (Id. at 1309.)

The insurer argued that even in the event of a partial loss to the structure, the fair market value of the property serves as a cap as to the total recovery. (Id. at 1284.) That is to say it was the insurer that argued that an insured could not recover more than the fair market value of the property, even if the costs of repair would be greater than the fair market value.

The Court of Appeal rejected that position. The court pointed out that if the legislature had intended to cap or limit the recovery for a partial loss to the structure, it would have included fair market value as an express limitation in subsection 2051(b)(2), just as it did for subsection pertaining to total loss to the structure (Id. at 1294; see Ins. Code §2051(b)(1).)

Furthermore, the insurer’s interpretation of the partial loss subsection would render it redundant to the total loss subsection, and statutes are to be interpreted in a way to produce harmony and avoid redundancy. (Id. citing Pacific Legal Foundation v. Unemployment Ins. Appeals Bd. (1981) 29 Cal.3d 101, 114.)

Under this recent decision, if your home has suffered a partial loss to the structure due to fire damage, you are entitled to the full repair costs, less depreciation, up to the policy limit, even if that amount would be more than the fair market value of the home.

(This is an attorney advertisement by Joshua Haffner)

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