Opinion ID: 1659494
Heading Depth: 1
Heading Rank: 3

Heading: Policy Fraud

Text: Ballard next argues that, through the policy it issued to him, the Syndicate suppressed material facts that it had a duty to disclose, concerning the amount of benefits that the Syndicate would pay in the event of a total loss on the property. The alleged fraud arises from subparagraph (b) of the Replacement Cost Endorsement, which states, in pertinent part: Until replacement has been effected the amount of liability under this policy in respect of loss shall be limited to the actual cash value at the time of loss (emphasis added). With this provision, the Syndicate limited the benefits Ballard could receive, before the property was replaced, to the actual cash value as it was assessed by the Syndicate's own calculations. The record shows that the definition of actual cash value was replacement cost, or $85,000, minus depreciation on the building. Under its own method of calculating the amount of this depreciation, the Syndicate devalued the building by 37.8% and its contents by 55.2% after only four months. Ballard argues that the Syndicate's insurance policy is fraudulent upon its face, because it does not disclose that the definition of actual cash value is the replacement cost less depreciation, and does not disclose the method by which the company would calculate the actual cash value of the property in the event of a total loss. The Syndicate points out that this Court has consistently upheld the validity and enforceability of replacement policy provisions that allow the insurer to pay only the actual cash value of property, and to withhold full replacement cost, until the replacement is completed to the insurer's specification. See Hilley v. Allstate Insurance Co., 562 So.2d 184 (Ala.1990) (breach of contract and bad faith claims rejected where replacement cost provisions were found valid and enforceable); Huggins v. Hanover Insurance Co., 423 So.2d 147 (Ala.1982) (terms of replacement provision upheld as valid condition precedent to receiving full replacement cost); State Farm Fire & Cas. Co. v. Ponder, 469 So.2d 1262 (Ala.1985). Here, however, Ballard does not question the general validity and enforceability of this type of provision in a replacement policy, when the meaning of the provision is known to the insured. Rather, Ballard argues that, under the facts of this case, it was fraudulent for the Syndicate not to inform him, within the written policy, of how the provision would limit the benefits that would be paid to him in the event of a total loss. To establish a claim of suppression under Ala.Code 1975, § 6-5-102, the plaintiff must establish that there was a suppression of a material fact, which the defendant was under a duty to communicate either because of a confidential relationship or because of the particular circumstances of the case. The question of the existence of a duty to disclose a material fact is for the jury to resolve, and in reaching that question the jury should consider the relationship of the parties, the value of the particular fact suppressed, and the relative knowledge of each party. Baker v. Bennett, 603 So.2d 928 (Ala. 1992), cert. denied, 507 U.S. 912, 113 S.Ct. 1260, 122 L.Ed.2d 658 (1993). Ballard does not claim that he had a confidential relationship with the Syndicate, nor do we find one. On the contrary, as a surplus lines insurer, the Syndicate is far removed from an individual insured, and its only link to Ballard within the web of brokers and insurance procurers between them was the written policy itself. The policy states that, until the property is replaced, the Syndicate will pay only the actual cash value of the property. The policy does not, however, reveal the meaning of the term actual cash value. At the summary judgment hearing, Ballard testified that he interpreted the term actual cash value to simply mean the amount of money that the property could reasonably be sold for in the marketplace. Travis Ray Carter, as a 41-year veteran of the insurance business, testified that the everyday interpretation of actual cash value would suggest the amount of money that Ballard's property was worth when it burned. William Payne, president of Sealy Insurance Agency, Inc., with 25 years' experience in the insurance industry, testified that the everyday meaning of the term was fair market value, but he emphasized that the insurance industry defines the term actual cash value differently from the way laypeople define it. He also stated that he knew of no way that a policyholder would know that the insurance industry interpreted the term differently, unless it was defined in the policy. Nelson Gribble, president of North Alabama Insurance, Inc., testified that when an insurance company is assessing the value of a property in order to determine how much it can be insured for, it commissions a valuation report to determine the actual cash value based on fair market value, allowing for depreciation. In utilizing this everyday method of computing actual cash value before issuing coverage, the Syndicate depreciated the property by only $22,400, or 20%, and assigned it a value of $89,600. After the fire, only four months later, the Syndicate utilized the industry method of calculating actual cash value; the Syndicate depreciated the property by another $32,130, or 37.8%, deducted this amount from the policy limits and valued the building at $52,870. James Allen Mitchell, the NAI broker who handled the acquisition of Ballard's policy, testified that in ordinary usage actual cash value is a fairly common-sense term meaning a fairly common-sense thing; it means the value of something, whatever that something happens to be, for cash. He then added that, in insurance jargon, it means replacement cost minus depreciation. Simon White, a London-based claims settler who handles the claims of Lloyd's, London, testified that the term is defined within the industry as replacement cost, less an allowance for depreciation, wear and tear, and that this definition was universal in the settling of insurance claims. White stated that he learned this fact by his experience in the insurance industry. Peter Lenhart, the claims adjuster who calculated the loss on the property, testified that actual cash value is an insurance term that he learned through correspondence courses, through education center training, through the ... Insurance Institute of America, [and] all the classes and knowledge that I received over my career. The evidence establishes that the sole communication between Ballard and the Syndicate was the written replacement policy. As the Syndicate states in its brief, coverage through the non-standard, surplus lines insurance market is unusual and can be complex, and Alabama law does require that there be surplus lines brokers to act on behalf of the insured. Ala.Code 1975, § 27-10-25; § 27-7-1(a)(2). We nonetheless point out that, where a written policy is the only communication from a remote insurer, the written meaning of the policy's terms takes on a heightened significance to the insured, who must abide by them. The evidence shows that the Syndicate employed the term actual cash value as a tool of its trade to sharply limit the benefits Ballard could receive after a total loss, without defining the industry term within the policy. The evidence also shows that the term actual cash value has an accepted everyday meaning, which would be known by a layperson, and that its meaning for purposes of a replacement policy is generally known only to those in the insurance industry. Because Ballard has thus established his suppression claim with substantial evidence concerning the relationship of the parties, the value of the fact suppressed, and the relative knowledge of each party, the claim must be presented to the jury. We do not today disturb that line of cases wherein we have upheld the validity and enforceability of actual cash loss provisions in replacement policies. We again note that replacement of the insured property is a legitimate condition precedent to receiving the full replacement cost. See Huggins v. Hanover, supra. We also recognize that foreign insurers who issue surplus lines policies through a system of brokers and underwriters do this for profit. We emphasize, however, that when consumers generate this profit for an insurer whose only link to them is a written policy, they are entitled to read in that policy the basic facts about the coverage they are paying for. This is a particularly compelling point where a material term in the policy is not given its ordinary meaning, but is instead treated as a term of art and its specialized meaning is kept from the insured, who will obtain and pay for coverage in ignorance, then learn the truth in surprise when a loss occurs. Based on the foregoing, we reverse the summary judgment as to the suppression claim and remand the cause for further proceedings; the summary judgment is affirmed insofar as it relates to the claim based on the theory of agency. AFFIRMED IN PART; REVERSED IN PART; AND REMANDED. ALMON, SHORES, and HOUSTON, JJ., concur. MADDOX and COOK, JJ., concur in part and dissent in part. HORNSBY, C.J., and INGRAM, J., recused.