Westmoreland v. Fire Ins. Exchange ( 2021 )

Filed 12/28/21
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION THREE
ROBERT WESTMORELAND et al.,
Plaintiffs and Respondents,
A160387
v.
FIRE INSURANCE EXCHANGE, (Lake County Super. Ct.
No. CV418827)
Defendant and Appellant.
This case requires an analysis of the indemnity owed under an
extended replacement cost insurance policy after the plaintiff insureds
suffered a total loss of their insured dwelling. The defendant insurer had
paid the plaintiffs an amount equivalent to the actual cash value of the lost
dwelling, and they built a replacement dwelling at a different location for no
more than that amount. After the defendant refused to make additional
indemnification payments, the plaintiffs filed the instant action to recover
the difference between the amount they already received and the estimated
amount of what it would have cost to rebuild their dwelling at the insured
location.
Section 2051.5 of the Insurance Code 1 addresses the measure of
indemnity for a policy of insurance “that requires payment of the replacement
cost for a loss.” (§ 2051.5, subd. (a)(1).) During the policy period at issue
(2015–2016), the applicable version of this statute was section 2051.5, as
1 All statutory references are to this code unless otherwise indicated.
amended by Statutes 2005, chapter 448, section 2 (Sen. Bill. No. 518)
(hereafter former section 2051.5). The principal question is whether former
section 2051.5 requires the defendant to indemnify the plaintiffs for the
amount of claimed replacement costs over and above the actual cash value
amount they received, even though they did not actually incur such costs.
Applying settled principles of statutory construction, we conclude the answer
is no. Because the defendant is neither statutorily nor contractually required
to pay for the claimed costs, we conclude the trial court erred in overruling
the defendant’s demurrer to the complaint.
FACTUAL AND PROCEDURAL BACKGROUND
The following background facts are taken from the complaint and
stipulations of the parties.
In 2015, plaintiffs Robert and Dolores Westmoreland owned a dwelling
in Cobb, California (the insured premises) that was covered under a
“Landlords Protector” package issued by defendant Fire Insurance Exchange,
also known as Farmers Insurance (Insurer).
Insurer’s policy provided coverage for fire loss, with a coverage limit of
$372,000 under “Coverage A—Dwelling” (Coverage A). This “open policy” 2
provided up to 125 percent of the Coverage A limit for “Extended
Replacement Cost” coverage, i.e., $465,000 (1.25 x $372,000). Thus, the
policy contemplated a total of $465,000—or $93,000 over the Coverage A
limit—that would be available to plaintiffs as indemnity for repairing,
rebuilding, or replacing their dwelling after a fire, provided all valid
conditions of the policy were met.
2 An open policy of insurance is “one in which the value of the subject
matter is not agreed upon, but is left to be ascertained in case of loss.”
(§ 411.)
2
The policy included a term requiring the insureds to rebuild or replace
the lost dwelling in order to collect the full replacement cost: “When the cost
to repair or replace is more than $1000 . . . , [Insurer] shall pay no more than
the actual cash value of the damage until repair or replacement is
completed. . . .” Another policy term stipulated that “covered loss to buildings
under Coverage A . . . will be settled at replacement cost without deduction
for depreciation subject to the following: [¶] (1) Settlement under
replacement cost will not be more than the smallest of the following:
[¶] (a) the limit of insurance under this policy applying to the building;
[¶] (b) the replacement cost of that part of the building damaged for
equivalent construction and use on the same premises; [¶] (c) The amount
actually and necessarily spent to repair or replace the building intended for
the same occupancy and use.” This opinion will refer to this latter policy
term as the “Loss Settlement provision.”
In 2015, plaintiffs suffered a total loss of their rental home in Cobb
when a wildfire (the Valley Fire) swept through Lake County. The estimated
cost to rebuild or replace that dwelling at the Cobb location was
approximately $422,676.
Insurer paid plaintiffs $372,000, a sum equivalent to the actual cash
value of the lost dwelling. 3 Plaintiffs opted to build a replacement home at a
different location, and they were able to do so for no more than $372,000.
Plaintiffs then demanded that Insurer pay the additional sum of $50,676,
which represented the difference between the actual cash value amount
3 At oral argument, plaintiffs’ counsel suggested the record on appeal
contains no evidence of the actual cash value of the lost dwelling. But the
insurance policy, the trial court’s order on the demurrer, and parties’
appellate briefing all indicate Insured’s payment of $372,000 represented a
payment of the actual cash value of the lost dwelling.
3
($372,000) and the estimated cost to rebuild the dwelling at the Cobb location
($422,676). Insurer refused, relying on the policy’s Loss Settlement
provision.
Plaintiffs filed a complaint against Insurer, alleging causes of action for
breach of insurance contract and breach of the implied covenant of good faith
and fair dealing. The complaint seeks economic damages of not less than
$50,676 and punitive damages. The complaint also alleges a cause of action
for declaratory relief and seeks a determination of the parties’ legal duties
and obligations under subdivision (c) of former section 2051.5 (hereafter
former section 2051.5(c) or former subdivision (c)), which at all relevant times
provided that, where a “total loss” of an insured structure occurs, the insurer
cannot limit or deny payment of the replacement costs if the insured “decides
to rebuild or replace the property at a location other than the insured
premises,” and in such cases, “the measure of indemnity shall be based upon
the replacement cost of the insured property and shall not be based upon the
cost to repair, rebuild, or replace” at the other selected location.
Insurer demurred to the complaint, contending that neither former
section 2051.5 nor the insurance policy requires payment for replacement
costs plaintiffs never actually incurred. The trial court overruled the
demurrer, contending it could “not find, as a matter of law,” that plaintiffs
were “only entitled under the terms of the policy and the application of
section 2051.5, on the circumstances presented here, to the actual amount of
money spent in rebuilding the residence at the new location.”
After the court issued its ruling, the parties entered a “Settlement
Agreement and Agreement to Entry of a Stipulated Judgment” in the amount
of $90,000 for plaintiffs “without prejudice to the parties’ right to be heard on
appeal,” as well as a covenant not to execute on the judgment. The notice of
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entry of the stipulated judgment was filed on May 29, 2020, and Insurer
timely appealed.
DISCUSSION
As indicated, the Loss Settlement provision of the subject replacement
cost insurance policy limits Insurer’s indemnification obligation to payment
of the amount that plaintiffs “actually and necessarily spent to repair or
replace” their lost dwelling. We must decide whether that policy provision
aligns with former section 2051.5, or whether the statute requires Insurer to
indemnify plaintiffs the full amount of the estimated replacement cost of
rebuilding the dwelling at the insured premises. This is a matter of statutory
construction.
The Insurance Code governs all insurance policies issued in California.
(California Fair Plan Assn. v. Garnes (2017) 11 Cal.App.5th 1276, 1305
(Garnes).) As Garnes recognized, “ ‘the business of insurance is a matter of
the public interest, and insurance contracts are subject to the reasonable
exercise of the state’s police power.’ [Citation.]” (Ibid.) Thus, an insurer’s
“limitation of coverage must conform to the law and public policy” (Carson v.
Mercury Ins. Co. (2012) 210 Cal.App.4th 409, 426), and any policy term that
fails to conform to the Insurance Code is unenforceable. (Garnes, at p. 1305;
see § 2071 [standard form of fire insurance policy for California]; e.g.,
Century-National Ins. Co. v. Garcia (2011) 51 Cal.4th 564 [intentional loss
policy exclusions were invalid insofar as they impermissibly reduced
statutorily mandated coverage].)
As with any other statute, our fundamental task in construing an
insurance statute “is to determine the Legislature’s intent to effectuate the
law’s purpose, giving the statutory language its plain and commonsense
meaning. We examine that language, not in isolation, but in the context of
5
the statutory framework as a whole to discern its scope and purpose and to
harmonize the various parts of the enactment. [Citation.] ‘If the language is
clear, courts must generally follow its plain meaning unless a literal
interpretation would result in absurd consequences the Legislature did not
intend. If the statutory language permits more than one reasonable
interpretation, courts may consider other aids, such as the statute’s purpose,
legislative history, and public policy.’ [Citation.]” (Busker v. Wabtec Corp.
(2021) 11 Cal.5th 1147, 1157 (Busker); see Garnes, supra, 11 Cal.App.5th at
p. 1287.) Our review of this issue is de novo. (In re E.F. (2021) 11 Cal.5th
320, 326.)
There is no dispute plaintiffs have an open policy of insurance that
provides for extended replacement cost coverage and requires they rebuild or
replace their lost dwelling in order to collect the full replacement cost.
According to the policy, the Coverage A limit was $372,000 and the limit of
the extended replacement cost coverage was $93,000.
Here, plaintiffs’ decision not to rebuild their dwelling at the insured
premises—and instead, building a replacement dwelling elsewhere—
triggered application of former section 2051.5, a statute that specifically
addressed the measure of indemnity for open policies providing replacement
cost coverage. While agreeing that the statute governs their respective rights
and obligations, the parties dispute how two of its provisions—subdivision (a)
and subdivision (c)—were intended to operate in these circumstances and
whether the statute required reimbursement of replacement costs that were
not actually incurred. We start by examining the statutory language.
Subdivision (a) of former section 2051.5 (hereafter former section
2051.5(a) or former subdivision (a)) consists of the following two unnumbered
paragraphs: “[¶] Under an open policy that requires payment of the
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replacement cost for a loss, the measure of indemnity is the amount that it
would cost the insured to repair, rebuild, or replace the thing lost or injured,
without a deduction for physical depreciation, or the policy limit, whichever is
less.” [¶] If the policy requires the insured to repair, rebuild, or replace the
damaged property in order to collect the full replacement cost, the insurer
shall pay the actual cash value of the damaged property, as defined in
Section 2051,[4] until the damaged property is repaired, rebuilt, or replaced.
Once the property is repaired, rebuilt, or replaced, the insurer shall pay the
difference between the actual cash value payment made and the full
replacement cost reasonably paid to replace the damaged property, up to the
limits stated in the policy.” (Italics added.) 5 Thus, the first paragraph of
former subdivision (a) specifies what “the measure of indemnity is” for a
replacement cost insurance policy, while the second paragraph applies when
such a policy requires the insured to rebuild or replace the lost property and
sets forth an indemnification procedure that requires payment of the actual
cash value of the loss and thereafter limits the insurer’s indemnity obligation
to “the full replacement cost reasonably paid,” up to the applicable policy
limits. (Former § 2051.5(a).)
In turn, former section 2051.5(c) provides in full: “In the event of a total
loss of the insured structure, no policy issued or delivered in this state may
4 Since 2004, the relevant portion of section 2051 has provided:
“(b) Under an open policy that requires payment of actual cash value, the
measure of the actual cash value recovery, in whole or partial settlement of
the claim, shall be determined as follows: [¶] (1) In case of total loss to the
structure, the policy limit or the fair market value of the structure, whichever
is less.” (Stats. 2004, ch. 605, § 2 (Assem. Bill No. 2962).)
5 The two paragraphs of former subdivision (a) appear in the current
version of section 2051.5 as subdivisions (a)(1) and (a)(2). (Stats. 2020,
ch. 261, § 1 (Sen. Bill No. 872).)
7
contain a provision that limits or denies payment of the replacement cost in
the event the insured decides to rebuild or replace the property at a location
other than the insured premises. However, the measure of indemnity shall be
based upon the replacement cost of the insured property and shall not be based
upon the cost to repair, rebuild, or replace at a location other than the insured
premises.” (Italics added.) 6
Insurer argues that subdivisions (a) and (c) of former section 2051.5
must be read together and that considered as a whole, the statute does not
conflict with the subject policy’s Settlement Loss provision that limits
Insurer’s payment of replacement cost to the “smallest” of three specified
amounts, including the “amount actually and necessarily spent to repair or
replace” the lost dwelling. Conversely, plaintiffs contend that former section
2051.5(c)—which itself contains no language limiting indemnity to
replacement costs actually or reasonably incurred—is the only relevant
statutory provision where, as here, insureds suffer a total loss and decide to
build at a location other than the insured premises. Applying settled
principles of statutory construction, we conclude that former subdivision (c)
cannot be read in isolation and that the statute must be read as a whole.
(Busker, supra, 11 Cal.5th at p. 1157.)
Examining former section 2051.5 as a whole, we see that the first
paragraph of former subdivision (a) articulates a general rule that when an
insured claims a loss under a replacement cost policy such as the one here,
the measure of indemnity is the lesser of the following two amounts: (1) the
amount it would cost the insured to rebuild or replace the property lost
without a deduction for physical depreciation; and (2) the amount of the
6 Subdivision (c) of section 2051.5 has been amended twice since the
version that was operative in this case. (Stats. 2018, ch. 628, §§ 1, 1.3, 1.5,
1.7 (Assem. Bill No. 1800); Stats. 2020, ch. 261, § 1 (Sen. Bill No. 872).)
8
stated policy coverage limits. Meanwhile, former subdivision (c) specifies
that in cases of total loss of an insured structure, insurers are prohibited
from limiting or denying payment of replacement costs if the insured rebuilds
at a location other than the insured premises. Former subdivision (c) also
clarifies that for purposes of the general rule stated in former subdivision (a),
“the measure of indemnity shall be based upon the replacement cost of the
insured property and shall not be based upon the cost to repair, rebuild, or
replace at a location other than the insured premises.” (Italics added.)
Reading former subdivisions (a) and (c) together, former section 2051.5
makes reasonably clear that the measure of indemnity for any given
replacement cost policy is the same no matter where the insured decided to
rebuild or replace in cases of total loss. That is, for the insured who decided
to build or replace elsewhere, the measure of indemnity is the lesser of the
following: (1) the amount it would cost to rebuild or replace the structure at
the insured premises; and (2) the amount of the coverage limit stated in the
policy. Thus, whether the cost to replace a dwelling at a different location
turns out to be significantly higher or significantly lower than the estimated
replacement cost at the insured premises, former section 2051.5 provides
certainty to both the insurer and the insured that the full scope of a policy’s
extended replacement cost coverage would be available to the insured no
matter where the lost dwelling is replaced.
Contrary to plaintiffs’ suggestion, former section 2051.5(c) cannot
logically be read as standing on its own or requiring a different alternative
amount of replacement cost indemnity in total loss cases where the insured
decided to build at a new location. Pursuant to the first paragraph of former
section 2051.5(a), indemnity for the amount it would cost to rebuild a lost
dwelling is available to the insured only if it is less than the amount of the
9
applicable policy limit. But former subdivision (c) makes no reference
whatsoever to the policy limit as a measure of indemnity. Consequently, if
former subdivision (c) were construed as setting forth an alternative and
independent measure of indemnity, then by its terms the sole measure of
indemnity for replacing a dwelling at a different location is the amount it
would cost to rebuild at the insured premises, without regard to the coverage
limits listed in the policy if the cost to replace were to exceed such limits.
Such a construction would be absurd, as it would effectively convert all basic
replacement cost policies into guaranteed replacement cost policies. 7
We now consider the language of former subdivision (a)’s second
paragraph. To reiterate, that paragraph provides: “If the policy requires the
insured to repair, rebuild, or replace the damaged property in order to collect
the full replacement cost, the insurer shall pay the actual cash value of the
damaged property, as defined in Section 2051, until the damaged property is
repaired, rebuilt, or replaced. Once the property is repaired, rebuilt, or
replaced, the insurer shall pay the difference between the actual cash value
payment made and the full replacement cost reasonably paid to replace the
damaged property, up to the limits stated in the policy.” (Italics added.)
Does former subdivision (a)’s second paragraph apply when a total loss
has occurred and the insured builds a replacement dwelling at a different
location? We conclude the answer is yes. As discussed, reading former
7 A policy offering replacement cost coverage “only pays for replacement
costs up to the limits specified in [the] policy,” while a policy offering
extended replacement cost coverage provides “additional coverage above the
dwelling limits up to a stated percentage or specific dollar amount.” (Ins.
Code, § 10102, subd. (a) [specifying language of required policy disclosures].)
A policy offering guaranteed replacement cost coverage, however, provides
more generous benefits and covers “the full cost to repair or replace the
damaged or destroyed dwelling regardless of the dwelling limits shown on the
policy declarations page.” (Ibid., italics added.)
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subdivision (c) without reference to former subdivision (a) would
impermissibly convert basic replacement cost policies into guaranteed
replacement cost policies. Moreover, there is no language in former
subdivision (a) that restricts application of its second paragraph to situations
where an insured rebuilds a lost dwelling at the insured location. Nor does
former subdivision (c) contain any language purporting to exempt its subject
matter from all or part of former subdivision (a)’s operation. 8 Finally, we
have consulted the relevant legislative history and found nothing indicating a
legislative desire to ensure that insureds who replace a lost dwelling at a
different location recover replacement costs that have not been incurred.
Properly construed, former section 2051.5 applies to the facts here as
follows. The first paragraph of former subdivision (a) sets the maximum
amount of indemnity available to plaintiffs at $422,676 (the estimated cost of
repair at the insured premises, as required by former subdivision (c)),
because that amount is less than $465,000 (the sum of the $372,000 Coverage
A limit and $93,000 extended replacement cost coverage limit). As required
by the second paragraph of former subdivision (a), Insurer paid plaintiffs
$372,000 (the actual cash value of the lost premises). Although a maximum
of $422,676 was available to plaintiffs no matter where they decided to
replace their lost dwelling, plaintiffs in fact incurred no more than $372,000
in replacement costs. Because the second paragraph of former subdivision (a)
limits Insurer’s indemnification obligation to payment of “the full
8 The trial court appears to have discerned significance in the difference
between former subdivision (a)’s references to “damaged property” and former
subdivision (c)’s reference to “in the event of a total loss of the insured
structure.” We conclude this language difference casts no doubt on our
construction of former 2051.5. We have been directed to no authority
suggesting that, in this context, the term “damaged property” excludes
property that has been destroyed or otherwise declared a total loss.
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replacement cost reasonably paid to replace” the lost dwelling, plaintiffs have
already received all the indemnity to which they are entitled, i.e., $372,000.
Construing former section 2051.5 in this manner does not lead to
absurd results in its operation. So construed, former subdivisions (a) and (c)
together operate to place all insureds with replacement cost coverage policies
on the same footing, whether they replace their lost dwellings at the insured
location or elsewhere. No matter where a lost dwelling is replaced, the
amount of indemnification available under a replacement cost policy is either
the amount it costs to replace the dwelling at the insured premises without a
deduction for physical depreciation or the amount of the policy’s coverage
limits, whichever is less. Likewise, no matter where a lost dwelling is
replaced, policies that require the insured to rebuild or replace in order to
collect the full replacement cost are governed by the same indemnification
procedure and limitation on replacement cost recovery. That is, the insured
is entitled to an advance payment of the actual cash value of the lost dwelling
and thereafter to the balance of reasonably incurred replacement costs, up to
the policy limits.
Plaintiffs suggest this construction of former section 2051.5(c) renders
its terms “completely meaningless.” Such hyperbole is without force.
Prior to former 2051.5’s enactment, some insurance companies refused
to compensate insureds who replaced their lost dwellings at locations other
than at the original insured premises. (See Assem. Com. on Insurance, Rep.
on Assem. Bill No. 2199 (2003–2004 Reg. Sess.) as amended Apr. 29, 2004,
p. 2.) Not only did the adoption of former subdivision (c) serve to prohibit
such refusals, but it ensured that if a policy provided coverage for extended
replacement cost or guaranteed replacement cost, the full scope of such
coverage would be available to the insured whether the lost dwelling was
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replaced at the insured location or elsewhere. Contrary to plaintiffs’
suggestion, the terms of former subdivision (c) provide significant protections
for homeowners with replacement cost insurance policies.
Our construction of former section 2051.5 aligns with an April 3, 2008
legal opinion written by General Counsel for the California Department of
Insurance in response to a San Diego City council member’s inquiry
regarding application of former section 2051.5(c). In that opinion, General
Counsel wrote that the council member had requested a legal opinion on the
following question: “If a homeowner purchases a home at a new location for
less than the cost to rebuild at the original location, is the homeowner
entitled to recover the full amount it would cost to rebuild at the original
location?” General Counsel first observed that former subdivisions (a) and (c)
“must be read together,” and that so read, the statute’s plain language
furnished the answer to the question.
In responding “No” to the council member’s inquiry, General Counsel
posed a hypothetical in which (1) a homeowner has a basic replacement cost
policy with a $500,000 Coverage A limit; (2) the home is destroyed by fire and
the cost to replace the home at the original location is $500,000; and (3) the
homeowner builds a replacement home at a new location for $400,000. In
concluding the homeowner could not recover both the $400,000 it cost to build
the new home plus another $100,000 representing the additional amount the
homeowner would have received if the home were rebuilt at the original
location, General Counsel reasoned: “Allowing the homeowner building at a
new location to recover cash unrelated to the actual cost of building
effectively would read the phrase ‘replacement cost reasonably paid to replace
the damaged property’ out of Section 2051.5(a). Such a reading is
impermissible. Whether replacing at an original or a new location, the
13
homeowner may not recover amounts above actual cash value not actually
and reasonably spent to rebuild.” While General Counsel’s legal opinion has
no value as precedent or as an agency guideline, standard, or rule (see
§ 12921.9) 9, we take it as an indication that our construction of section 2051.5
raises no red flags for the agency responsible for regulating insurance.
Moreover, our conclusion is largely consistent with two federal
decisions that have addressed the issue: Tyler v. Travelers Commercial Ins.
Co. (N.D.Cal. 2020) 499 F.Supp.3d 693 and Galusha v. Unigard Insurance
Company (N.D.Cal., Jun. 28, 2019, No. C 18-06905 SBA) 2019 U.S.Dist. Lexis
228527, affd. (9th Cir. 2020) 816 Fed.Appx. 46 (Mem). Although these federal
decisions are not binding on us, we independently agree with their
determination that former section 2051.5 and its subdivisions must be read
as a whole.
In closing, we do not suggest that plaintiffs’ alternative construction of
the statute necessarily implicates an illogical or unreasonable public policy.
However, we are bound to respect the intent and policy choices of the
Legislature, and established principles of statutory construction require that
we construe the terms of former section 2051.5 as they were written.
(Busker, supra, 11 Cal.5th at p. 1157.) Here, plaintiffs have already received
the full measure of indemnity to which they are entitled because they were
paid the actual cash value of the insured dwelling ($372,000) and built a
replacement dwelling at a different location without incurring additional
replacement costs over and above that amount. Because Insurer has paid all
9 Section 12921.9 provides in relevant part: “(b) A letter or legal opinion
made public pursuant to this section shall not be construed as establishing an
agency guideline, criterion, bulletin, manual, instruction, order, standard of
general application, rule, or regulation, as those terms are described in
Sections 11340.5 and 11342.600 of the Government Code.”
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benefits due under former section 2051.5 and the policy, the trial court
should have sustained defendants’ demurrer to each of plaintiffs’ causes of
action without leave to amend. 10
DISPOSITION
The judgment of the trial court is reversed. The matter is remanded
with directions to vacate the order overruling Insurer’s demurrer and for
further proceedings consistent with this opinion. The parties shall bear their
own costs on appeal.
10 Plaintiffs contend the judgment must be affirmed if the demurrer
ruling is correct for any reason, but they fail to offer any cogent basis for
doing so.
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_________________________
Fujisaki, J.
WE CONCUR:
_________________________
Tucher, P. J.
_________________________
Rodríguez, J.
A160387/Westmoreland et al. v. Fire Insurance Exchange
16
Robert Westmoreland et al. v. Fire Insurance Exchange
(A160387)
Trial Court: Lake County
Trial Judge: Hon. Michael S. Lunas
Attorneys:
Demler, Armstrong & Rowland, John R. Brydon, David A.
Ring; Hansen, Kohls, Sommer & Jacob and Bret N. Batchman for Defendant
and Appellant.
The O’Connor Law Firm and Timothy J. O’Connor for
Plaintiffs and Respondents.
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