Source: https://www.proadjuster.com/resources/case-studies/fair-plan-vs-garnes/
Timestamp: 2019-04-24 09:04:08+00:00

Document:
FAIR PLAN OF CALIFORNIA, Plaintiff/Cross-Defendant/Respondent, v. MARLENE GARNES, Defendant/Cross-Complainant/Appellant.
Pursuant to rule 8.200(c)(1) of the California Rules of Court, Dave Jones, Insurance Commissioner of the State of California (Commissioner) respectfully requests permission to file the attached brief as amicus curiae in support of Appellant Marlene Garnes on the issue of whether the loss settlement provisions in her FAIR Plan actual cash value (ACV) homeowner’s policy conflict with the measure of indemnity for actual cash value fire policies required by Insurance Code section 2051.
The Commissioner has a vital interest in ensuring the proper interpretation and enforcement of the provisions in the Insurance Code. Moreover, he has an important role in overseeing aspects of the Basic Property Insurance Inspection and Placement Plan (ch. 9 (commencing with section 10090) of Part 1 of Division 2 of the Insurance Code) that provides for the creation of the California FAIR Plan. FAIR Plan is a last-resort association of insurers licensed to write and engaged in writing basic property insurance to help people get basic property insurance when it cannot be obtained through the normal insurance market.
The Commissioner’s amicus brief explains his view of the law’s requirements for the proper measure of actual cash value recovery in an open ACV policy. His brief clarifies that the loss settlement provisions in Garnes’ FAIR Plan ACV policy conflict with section 2051 and thus are invalid and unenforceable. As the Commissioner explains, FAIR Plan’s ACV policy does not afford homeowners basic property insurance coverage that is substantially equivalent to the Standard Form Fire Insurance Policy as required by law, thus undermining the very purpose for FAIR Plan’s creation.
The Commissioner is strongly committed to ensuring the accurate interpretation and application of the Insurance Code, and to providing protection to the California insureds he is meant to protect. Because the Commissioner’s knowledge of the relevant statutes and their legislative history and his expertise regarding the insurance market and the FAIR Plan will assist the Court , he asks permission to file this amicus curiae brief in support of appellant Garnes.
Dave Jones, Insurance Commissioner of the State of California (Commissioner) respectfully submits his brief as amicus curiae in support of appellant Marlene Garnes (Garnes).
The Commissioner is vested with the authority to require insurers to fully comply with the provisions of the Insurance Code, and to enforce the execution of the Code and other laws regulating the business of insurance. (§ 12921.) The Commissioner’s office has regulated the business of insurance, including interpreting and implementing insurance related laws, since the Department of Insurance was founded in 1866. Based on historical knowledge, as well as the cumulative experience of the office, the Commissioner is uniquely positioned to assist the Court in interpreting the insurance laws.
The Commissioner also is committed to ensuring the widespread availability of insurance protection to consumers in California. The Department is mandated to protect the public in the regulation of insurance and to ensure a fair marketplace for both insurance consumers and insurers. (§ 790, et seq.) The Commissioner submits that his knowledge and unique perspective can help the Court accurately and consistently interpret insurance statutes to effectuate the Legislature’s intent and to protect the economically disadvantaged homeowners whose only insurance option is FAIR Plan, a legislatively-created insurer of last resort.
For these reasons, the Commissioner seeks to clarify the meaning of section 2051 and to explain how it and other related statutes should be harmonized. The Commissioner submits that the trial court erred in granting summary judgment in favor of FAIR Plan. The loss settlement provisions in FAIR Plan’s open, actual cash value homeowner’s policy directly conflict with section 2051, and therefore are invalid and unenforceable.
Appellant Marlene Garnes bought a homeowner’s insurance policy from respondent FAIR Plan, often an insurer of last resort for homeowners in disadvantaged communities who are otherwise unable to obtain insurance. Garnes’ policy was an actual cash value policy that she believed would pay for losses up to the policy limit of $425,000. Garnes’ home was damaged by a fire that caused about $363,000 in damage to her home, but did not make the home uninhabitable or incapable of repair. The parties agree that Garnes’ home suffered partial damage. Yet, FAIR Plan contends that its policy only requires payment of $75,000, the fair market value of Garnes’ home at the time of the fire and an amount far too small to allow Garnes to pay for the needed repairs to her home.
FAIR Plan mistakenly argues that Garnes’ home suffered a total loss simply because the stipulated cost of repairs exceeds the home’s fair market value. In other words, FAIR Plan contends that a total loss is determined merely by comparison of dollar amounts – the cost of repairs versus fair market value. But the plain language of applicable statutes, which define “total loss to the structure” and “partial loss to the structure,” makes a total versus partial loss determination dependent upon the extent of damage to the structure – the insured house. That interpretation also accords with common sense.
Under the Insurance Code, when a home suffers a “partial loss to the structure,” an actual cash value policy is required to pay the lesser of the cost of repairs (minus reasonable deduction for depreciation) or the policy limit. Because Garnes’ home suffered only a partial loss to its structure, her insurance policy should pay for the cost of repairs under the partial loss payment provision. The superior court erred in ruling that FAIR Plan should only pay Garnes the fair market value of her home, an amount insufficient to accomplish the needed repairs.
Section 2051 sets forth the measure of indemnity in an open fire policy. An “open” policy” 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.) “A loss is either total or partial.” (§ 1960.) “Under an open policy, the measure of indemnity in fire insurance is the expense to the insured of replacing the thing lost or injured in its condition at the time of the injury, the expense being computed as of the time of the commencement of the fire.” (§ 2051, subd. (a).) The “measure of indemnity” means the amount of insurance paid to the policyholder.
The word “shall” as used in the Insurance Code “is mandatory unless otherwise apparent from the context.” (§ 16.) Because the context of section 2051 does not contain an alternative interpretation of the word “shall,” the measure of the actual cash value recovery in settlement of a claim in an open ACV policy must be determined as prescribed by section 2051, subdivision (b). That measure is expressly tied to the extent of damage to the insured structure.
In 2010, the Legislature enacted section 10101 of the Code, making it operative on July 1, 2011. Because Garnes purchased her FAIR Plan ACV policy just before the current California Residential Property Insurance Disclosure Statement was enacted, FAIR Plan was not required to deliver this disclosure statement to Garnes when it issued her policy. Still, the mandatory Disclosure Statement further confirms the legislative understanding that, for residential property insurance in California, “actual cash value coverage” means the actual cash value recovery for the partial loss to the insured structure, or total loss to the insured structure, set forth in section 2051.
This disclosure is required by Section 10102 of the California Insurance Code. This form provides general information related to residential property insurance and is not part of your residential property insurance policy. Only the specific provisions of your policy will determine whether a particular loss is covered and the amount payable. The information provided does not preempt existing California law.
You have purchased the coverage(s) checked below. NOTE: Actual Cash Value Coverage is the most limited level of coverage listed. Guaranteed Replacement Cost is the broadest level of coverage.
___ ACTUAL CASH VALUE COVERAGE pays the costs to repair the damaged dwelling minus a deduction for physical depreciation. If the dwelling is completely destroyed, this coverage pays the fair market value of the dwelling at time of loss. In either case, coverage only pays for costs up to the limits specified in your policy.
This statutory description of “actual cash value coverage” is stated in simple, consumer-friendly language and conforms in substance to the measure of actual cash value recovery under an open ACV fire insurance policy set forth in section 2051. Under section 2051, subdivision (b)(2), the measure of actual cash value for partial loss to the structure is the cost to repair the damage less a fair and reasonable deduction for physical depreciation or the policy limit, whichever is less. Where there is total loss to the structure (or, as the section 10102 disclosure statement describes it, “the dwelling is completely destroyed”), the measure of actual cash value is the policy limit or the fair market value of the structure, whichever is less. (§ 2051, subd. (b)(1).) The section 10102 disclosure statement thus confirms the correctness of the Commissioner’s interpretation of section 2051, subdivision (b).
FAIR Plan issued Garnes a homeowner’s insurance policy for a one-year period beginning December 23, 2010 and ending December 23, 2011. (I AA 1-3.) The FAIR Plan policy sets forth the measure of indemnity used to calculate the amount of insurance money paid for a covered loss which is based upon FAIR Plan’s own definition of the terms “partial loss” and “total loss.” FAIR Plan’s definitions of these terms are not tied to the amount of damage that has occurred to the insured structure.
(1) Total Loss: If the greater of the cost either to reconstruct or replace the damaged part of the property exceeds the actual cash value before the loss of all covered property described in Coverages A and B, we will pay such actual cash value.
c. Definitions for Coverages A, B and C Losses . . . the “actual cash value” of property means its fair market value.
Under FAIR Plan’s policy, regardless of the extent of physical damage to the insured property, there is a “total loss” if the cost to reconstruct or replace the damaged part of the property exceeds the fair market value of the home before the loss. Any loss other than a “total loss” is a “partial loss.” So, even though the parties here agree that Garnes’ home suffered only partial damage to its structure, FAIR Plan deems her loss a “total loss” and refuses to pay Garnes the cost to repair her home (about “$363,000). Instead, FAIR Plan says it only must pay Garnes the fair market value of her home before the fire, or $75,000.
In its motion for summary judgment, FAIR Plan maintained that the terms “total loss” and “partial loss” are not defined by statute, leaving Fair Plan free to define those terms as it sees fit. Having defined “total loss” and “partial loss” in the policy in economic terms (where the cost to repair exceeds fair market value) rather than in terms of the extent of damage to the structure of the insured property, FAIR Plan successfully argued that this case should be resolved based on contract and statutory interpretation. (I AA 25.) But FAIR Plan’s argument forced the trial court to decide the wrong issue, or at best the issue in the wrong context. FAIR Plan’s policy used invalid and unenforceable terms.
The complete destruction of insured property so that nothing of value remains and the subject matter no longer exists in its original form. Generally, a loss is total if, after the damage occurs, no substantial remnant remains standing that a reasonably prudent uninsured owner, desiring to rebuild would use as a basis to restore property to its original condition.
(Black’s Law Dict. (10th ed. 2014) p. 1088.) “Partial loss” is defined as “[a] loss of part of the insured property; damage not amounting to a total loss.” (Ibid.) Even the California Residential Property Insurance Disclosure Statement describes what actual cash value coverage is “[i]f the dwelling is completely destroyed.” (§ 10102.) This reference echoes the reference to “total loss to the structure” in section 2051.
That argument misconstrues section 2071 and ignores the necessary interplay between that statute and section 2051. The terms “actual cash value” and “fair market value” are no longer synonymous under all circumstances, because the Legislature’s 2004 amendment of section 2051 supersedes Jefferson and Cheeks, in part. Section 2051 did not repeal section 2071 – rather, it provided a clear and consistent measure of actual cash value that informs the reference to the term “actual cash value” in 2071. Thus, sections 2051 and 2071 do not conflict and must be read together to effectuate the intent of the Legislature.
FAIR Plan states that “the language ‘to the extent of the actual cash value of the property’ in section 2071 governs this appeal” and argues that Garnes is only entitled to recover the fair market value of her home prior to the fire. (RB, p. 11.) But FAIR Plan’s interpretation of section 2071 rests primarily on Jefferson and Cheeks, which were decided long before the Legislature amended section 2051 in 2004 to prescribe the measure of actual cash value recovery in the case of either total or partial loss to the insured structure. These decisions therefore have been superseded to the extent they conflict with section 2051.
Further, courts “do not construe statutes in isolation, but rather read every statute ‘with reference to the entire scheme of law of which it is part so that the whole may be harmonized and retain effectiveness.’ (Clean Air Constituency v. California State Air Resources Board (1974) 11 Cal.3d 801, 814.) To understand the necessary interplay between sections 2051 and 2071 which are part of chapter 2 (“The Fire Insurance Contract”) of Part 1 of Division 2 of the Insurance Code, the following italicized language of the Standard Form, quoted below, must be closely scrutinized and explained.
At 12:01 a.m., standard time, at location of property involved, to an amount not exceeding __________ dollars [policy limit], does insure __________ and legal representatives, to an amount not exceeding __________ dollars [policy limit], does insure __________ and legal representatives, to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, . . .
(Italics added.) The phrase “to an amount not exceeding _____dollars” in the Standard Form refers to the policy limit. The phrase “to the extent of the actual cash value of the property at the time of loss” must be interpreted in conformity with section 2051, subdivision (b).
The language of the Standard Form prescribed by section 2071 sets forth the insurer’s limit of liability. That language requires the insurer to pay the lesser of (1) the policy limit or (2) the actual cash value of the property at the time of loss.
The qualifying language in section 2071, that is – “but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or construction by reason of any ordinance or law regulating construction or repair” – does not conflict with section 2051. This language simply clarifies that in the case of a partial loss to the structure, the insurer is only obligated to pay the amount of the cost to repair or replace the property with material of like kind and quality and not any increased cost due to an ordinance or law regulating construction or repair.
Under a policy, subject to California Insurance Code Section 2071, where the insurer is required to pay the expense of repairing, rebuilding or replacing the property destroyed or damaged with other of like kind and quality, the measure of recovery is determined by the actual cash value of the damaged and destroyed property, as set forth in California Insurance Code Section 2051.
Under Regulation 2695.9, subdivision (f)(1) , neither section 2051 nor section 2071 limits Garnes’ maximum recovery to the fair market value of her home prior to loss. Because it is undisputed that Garnes suffered partial loss to the structure of her home due to a fire, FAIR Plan is required to pay her the amount it would cost to repair or rebuild her home, less a fair and reasonable deduction for physical depreciation based on its condition at the time of the fire damage, or the policy limit, whichever is less. (§§ 2051, subd. (b)(2), 2071; Reg., 2695(f)(1).) The stipulated cost to repair Garnes’ home, less fair and reasonable deduction for physical depreciation, is $362,670.23. (I AA 8-9). Since that amount is less than her $425,000 policy limit, FAIR Plan is obligated to pay her $362,670.23 – not merely the home’s fair market value of $75,000.
If, however, this Court determines section 2051 is ambiguous, it may resort to extrinsic evidence, including the legislative history of the statute, to ascertain the intent of the Legislature and construe it so as to effectuate the purpose of the law. (State Farm Mut. Auto. Ins. Co. v. Garamendi (2004) 32 Cal.4th 1029, 1043.) When statutory “language is susceptible of multiple interpretations, ‘the court looks “to a variety of extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a part.” [Citations.] (Lopez v. Superior Court (2010) 50 Cal.4th 1055, 1063.) “After considering these extrinsic aids, [the court] ‘must select the construction that comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general purpose of the statute, and avoid an interpretation that would lead to absurd consequences. (Citations omitted.)’” (Ibid.) Garnes has filed a request for judicial notice of the legislative history of section 2051 as amended by AB 2962. Assuming that the Court grants Garnes’ request, the Court will find that key documents in that legislative history support the Commissioner’s and Garnes’ interpretation of section 2051.
In October of 2003, Southern California suffered the most devastating wildfires seen in over a decade. The firestorm tragically took the lives of 22 people and destroyed more than 3,500 homes from Simi Valley into San Diego County. It will take homeowners years to fully recover from the unprecedented destruction caused by the wildfires. There will also be an enormous demand from affected homeowners making claims on their homeowner insurance policies.
Many homeowners policies do not clearly define how “actual cash value” will be determined. In addition, when calculating the actual cash value, most insurance companies deduct the cost of the labor. This results in the consumer having to pay out-of-pocket costs for a portion of the repairs. Some insurance companies have ignored the Department of Insurance’s position that labor necessary to repair or replace the property should not be deducted from settlements.
This bill will explain and provide consistency for how claims will be adjusted and prohibit insurance companies from deducting the cost in labor in settlements.
In amending section 2051, AB 2962 retained the original provisions of the statute and designated them subdivision (a).
(a) Under an open policy, the measure of indemnity in fire insurance is the expense to the insured of replacing the thing lost or injured in its condition at the time of the injury, such expense being computed as of the time of the commencement of the fire.
(See Stats. 1935, c. 145, p. 595.) AB 2962 added subdivision (b), which sets forth the mandatory measure of actual cash value recovery under an open ACV fire policy depending upon the extent of physical damage or loss to the insured structure (“total loss to the structure” (§ 2051, subd. (b)(1)) or “partial loss to the structure” (§ 2051, subd. (b)(2).) (Stats. 2004, c. 605, § 2.) (Garnes’ RJN, Exh. A, pp. 20-22.) AB 2962 also added section 675.1 which provides, among other things, that “[i]n the case of a total loss to the primary insured structure under a residential policy,” the insurer is prohibited from canceling coverage while the primary insured structure is being rebuilt, except for specified reasons.” (Stats. 2004, c. 605, § 1, italics added.) (Garnes’ RJN, Exh. A, pp. 20-21.) Thus, in adding subsection (b) to section 2051, and in enacting section 675.1, the Legislature intended these statutory provisions to apply depending upon the extent of physical damage to the insured structure.
The author of the bill believed that consistency in the calculation of “actual cash value” would protect consumers.
According to the author’s office, many homeowners’ policies do not clearly define how “actual cash value” will be determined. The bill is needed to provide consistency in the calculation of “actual cash value”. Consistency will further protect consumers.
COMMENTS: The purpose of the bill, according to the author, is to explain and provide consistency for how claims will be adjusted and prohibit insurance companies from deducting the cost of labor in settlements. The author states that many homeowners’ policies do not clearly define how “actual cash value” is to be determined, and additionally, when calculating this value, most insurance companies deduct the cost of labor. Thus supporters believe that consumers are forced to pay out-of-pocket costs for a portion of the repairs. The author believes that this bill would clarify the measurement of “actual cash value” in relation to a homeowner’s insurance policy.
Furthermore, the author of the bill highlights the California Residential Property Insurance Disclosure [§ 10102] provides coverage definitions; however, the valuation of property is unclear and continues to be an issue between insurance companies and consumers.
The Commissioner’s interpretation and application of section 2051 effectuates the Legislature’s intent to provide clarity and consistency in calculating actual case value recovery in an open ACV policy. FAIR Plan’s approach would create the uncertainty the Legislature intended to eliminate and would provide inadequate protection to insureds seeking to repair their partially damaged homes.
Pursuant to section 10095, FAIR Plan submitted its Plan of Operation to the Commissioner. (Commissioner’s RJN, Exhibit C.) Section 10090 sets out the purposes of the Basic Property Insurance Plan as follows.
insurance against direct loss to real or tangible personal property at a fixed location in those geographic or urban areas designated by the commissioner, from perils insured under the standard fire policy and extended coverage endorsement and vandalism and malicious mischief and such other insurance coverages as may be added by the insurance placement facility with the approval of the commissioner or by the commissioner, but shall not include insurance on automobile or farm risks.
Section 10098 provides that acceptance of risks assigned under the Basic Property Insurance Plan and performance of any act required by that Plan is a condition of the right to continue to hold a certificate of authority to transact insurance business in California. (§ 10098.) As a result, participation in the program is compulsory for all licensed carriers transacting basic property insurance within the state.
FAIR Plan is wrong in contending that “the benefits Garnes seeks in this litigation would have been available had she purchased a replacement cost policy rather than an actual cash value policy” and section 2071 should not be construed to permit her to “transform” her ACV policy into a replacement cost policy. (RB at p. 19.) FAIR Plan’s arguments and misinterpretation of section 2071 are based upon its incorrect assumption that “actual cash value” is synonymous with “fair market value.” If Garnes had purchased a replacement cost policy she would have been covered for the cost to repair her partially damaged home, without a deduction for physical depreciation. (§ 2051.5, subd. (a).) What she seeks here is the actual cash value recovery afforded her under sections 2051 and 2071, that is, the cost to repair, less a deduction for fair and reasonable depreciation.
All policies issued shall be for Basic Property Insurance on standard policy forms, except as modified with permission of the Commissioner, and shall be issued for a term of one year.
The term “basic property insurance” means: insurance against direct loss to real or tangible personal property at a fixed location in those geographic or urban areas designated by the commissioner, from perils insured under the standard fire policy and extended coverage endorsement and vandalism and malicious mischief and such other insurance coverages as may be added by the insurance placement facility with the approval of the commissioner or by the commissioner, but shall not include insurance on automobile or farm risks.
On April 8, 2015, for the first time, FAIR Plan submitted its policy form filing for review through the Department’s rate and form filing system. The Department acknowledged FAIR Plan’s policy form filing on May 4, 2015.
After review, the Department rejected FAIR Plan’s policy form filing because it conflicts with section 2051. (See Commissioner’s RJN, Exhibit D, June 18, 2015 letter from Risa Salat-Kolm, attorney for the Department, to Anneliese Jivan of FAIR Plan).
In addition, Fair Plan’s definition of “depreciation” (also under its Loss Settlement provision) is not in compliance with CIC Section 2051(b)(2). This statute only permits “physical” depreciation or depreciation caused by wear and tear. Therefore, the inclusion of “exhaustion” and “obsolescence” is not permissible.
To the extent that FAIR Plan takes the position that it has been using the subject policy form (at issue here) for many years without objection from the Department, this is of no legal moment. No matter how long FAIR Plan has been using the improper and unapproved policy form, it lacked authority to use the policy form since, prior to April of 2015, FAIR Plan never formally submitted the policy form to the Department for permission to use it. As of June 18, 2015, FAIR Plan’s policy form filing has been rejected by the Department.

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