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California Fair Plan Association v. Garnes

California Court of Appeals, First District, Second Division

May 26, 2017

CALIFORNIA FAIR PLAN ASSOCIATION, Plaintiff and Respondent,
v.
MARLENE GARNES, Defendant and Appellant.

         Superior Court of Contra Costa County, No. C1102417 Hon. Steven Austin Judge

          Hereford Kerley, Law Office of Dylan Schaffer, Kerley Schaffer, J. Edward Kerley, Dylan L. Schaffer for Defendant and Appellant.

          Kamala D. Harris, Attorney General, Kathleen A. Kenealy, Chief Assistant Attorney General, Paul D. Gifford, Senior Assistant Attorney General, Joyce E. Hee, Supervising Deputy Attorney General, Robert E. Asperger, Deputy Attorney General for Dave Jones, Insurance Commissioner of the State of California as Amicus Curiae on behalf of Defendant and Appellant.

          Amy Bach, Daniel Wade for United Policyholders as Amicus Curiae on behalf of Defendant and Appellant.

          Lewis Brisbois Bisgaard & Smith, Raul L. Martinez, Elise D. Klein for Plaintiff and Respondent.

          STEWART, J.

         In 2011, Marlene Garnes's family home in Richmond, California was seriously damaged by a kitchen fire. She had purchased a fire insurance policy for the property, with a policy limit of $425, 000 (the Policy), from California FAIR Plan Association (FAIR), California's insurer of last resort. The dispute in this case and the issue on appeal is how much coverage Garnes is entitled to under the Policy. She claims she should receive the amount it will cost her to repair the house, less an amount for depreciation, the net amount of which the parties agree would be $320, 549. FAIR contends the Policy, and the Insurance Code, allow it to pay her the lesser of that amount or the fair market value of the house, which at the time of the fire was $75, 000. The answer to this question depends on interpretation of sections 2051, 2070 and 2071 of the Insurance Code, [1] including the phrases “total loss to the structure, ” “partial loss to the structure” and “actual cash value” in section 2051, and whether sections 2070 and 2071 permit insurers to provide less favorable coverage than that prescribed by section 2051. Applying our independent judgment to these questions of statutory interpretation, we conclude that Garnes is correct. Section 2051 of the Insurance Code provides that under an open fire insurance policy that pays “actual cash value, ” as does the Policy here, the “measure of the actual cash value recovery... shall be determined” in one of two ways, depending on whether there has been a “total loss to the structure” or a “partial loss to the structure.” For a “partial loss to the structure, ” the measure prescribed is “the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation” or “the policy limit, whichever is less.” (§ 2051, subd. (b)(2).) Construed in accord with its plain meaning, this provision, coupled with sections 2070 and 2071, sets a minimum standard of coverage that requires FAIR to indemnify Garnes for the actual cost of the repair to her home, minus depreciation, even if this amount exceeds the fair market value of her home. Further, the legislative history and the Insurance Commissioner's interpretation of this statute also support this interpretation. FAIR's arguments are based on interpretations of these sections that cannot be squared with their plain language, and the contention that requiring recovery of repair costs less depreciation where they exceed fair market value is bad policy. The latter argument is for the Legislature, not this court. The law supports Garnes's interpretation. Therefore, we reverse the trial court's judgment and remand this matter for further proceedings consistent with this opinion.

         BACKGROUND

         FAIR is an insurance industry placement facility and joint reinsurance association created by the Legislature in 1968 to ensure that homeowners who live in high risk or otherwise uninsurable areas have access to basic property insurance. (St. Cyr v. California FAIR Plan Assn. (2014) 223 Cal.App.4th 786, 792-793; §§ 10090-10091.) It is composed of insurers licensed to write and engaged in writing basic property insurance within this state, and it is charged with assisting persons in securing basic property insurance and administering a program to equitably apportion that insurance, and the risks and benefits it entails, among California insurers. (§§ 10091, subd. (a), 10094.)

         In October 2011, Garnes's home in the Iron Triangle neighborhood in Richmond was damaged by a fire. She submitted a claim to her insurer, FAIR, seeking indemnity for the costs required to repair her home, less depreciation. FAIR declined to pay the amount she requested and instead paid her the $75, 000 it determined represented the fair market value of her property in 2011. When the parties were unable to agree, FAIR filed an action against Garnes[2] seeking declaratory relief regarding the interpretation of section 2051. FAIR alleged it had issued Garnes a policy that covered the damage to her home, that the cost to repair and rebuild the home was estimated to be more than $350, 000 and that the home's fair market value in its undamaged condition before the fire was $75, 000. It further alleged that Garnes claimed she was entitled to the cost to repair her home, that FAIR had paid her the fair market value of $75, 000 for her home[3] and that the parties disputed whether the damage resulted in a total loss or a partial loss within the meaning of section 2051. FAIR contended the loss was total because the cost to repair exceeded the home's fair market value, and that Garnes was entitled only to the fair market value of the home under section 2051. According to FAIR, Garnes contended she suffered only partial loss, which entitled her under section 2051 to recover the lesser of the policy limit and the cost to repair or replace less depreciation. FAIR sought a declaration that damage to Garnes's home constituted a total loss within the meaning of the Policy and section 2051 and that Garnes, therefore, was entitled only to the actual cash value, meaning fair market value, of her Richmond home.

         Garnes filed an answer contesting FAIR's interpretation of section 2051 and alleging that the Policy, as written, violates sections 2051, 2070, 2071, 10091 and 10094. She sought a declaration that “total loss” under section 2051 means total loss to the structure and that FAIR was violating its statutory obligations. She also filed a cross-complaint against FAIR asserting claims for breach of contract and the covenant of good faith and fair dealing; FAIR filed an answer denying her allegations.

         In August 2012, FAIR filed a motion for summary judgment on its complaint against Garnes. It argued that the Policy limits Garnes to the actual cash value of the home where the cost to repair the damage exceeds the home's fair market value, and that the Policy complies with sections 2051 and 2071.

         FAIR based its motion on a handful of undisputed facts. These included that FAIR issued the Policy providing coverage for Garnes's dwelling, that the dwelling was damaged by fire within the policy period, that Garnes submitted a claim for the cost of repairing the damage, less depreciation, of $320, 549.24, and that the appraised fair market value of the home before the fire was determined to be $75, 000. FAIR also set forth the relevant terms of the Policy, which stated that if the cost to replace or repair a damaged dwelling exceeded its actual cash value, which the Policy referred to as “Total Loss, ” FAIR would pay the actual cash value, but in any other case, which the Policy described as “Partial Loss, ” FAIR would pay the lesser of the cost to repair less reasonable depreciation or the actual cash value.

         In opposition to FAIR's motion, Garnes offered the following additional facts: The Policy has a limit of $425, 000, Garnes's father purchased the Richmond home in the 1950s, it was Garnes's childhood home and Garnes intended to repair and move back into it, but FAIR had refused to pay an amount sufficient to repair it. Garnes also stated that FAIR never changed its policy form to comply with the amendments to section 2051 enacted by the Legislature in 2004, despite having been warned by the Insurance Commissioner, and had refused to pay her the amount required by section 2051, subdivision (b).

         Garnes contended that the 2004 amendments to section 2051 were part of the Homeowners' Bill of Rights, which was designed to protect consumers of insurance who suffer loss of homes or other structures, that the bill required insurers to amend their policies to comply with section 2051 by July 1, 2005, and that FAIR did not amend its policies. She argued that the Policy, by seeking to limit recovery for partial losses to fair market value, was “in clear contradiction with section 2051.” She further argued that the court should look to the Insurance Code, not the Policy, to determine the extent of FAIR's liability for her fire loss.

         In a one-page tentative ruling that it subsequently adopted as its order, the trial court granted FAIR's motion for summary judgment, adopting FAIR's interpretation of the statutes. The parties thereafter stipulated to certain rulings that resolved the remaining issues, and the court entered judgment in favor of FAIR on all claims.

         This appeal followed. After the parties submitted their briefs, we received and granted requests to file amicus curiae briefs from the Insurance Commissioner (Commissioner), who is charged with enforcing the Insurance Code and other laws regulating the business of insurance in this state (§§ 12906, 12921), and from United Policyholders, a national non-profit organization that seeks to promote and protect the interests of insurance consumers.[4]

         DISCUSSION

         The facts here are not in dispute. The parties agree that Garnes purchased from FAIR an insurance policy with a limit of $425, 000[5] covering fire damage to her Richmond home for the period from December 23, 2010, to December 23, 2011. A kitchen fire occurred on January 1, 2011, within the policy period, that caused substantial damage to her home. The cost to repair the damage, including necessary lead and asbestos abatement, was $362, 670. Subtracting depreciation, the public adjuster submitted a claim to FAIR on Garnes's behalf for $320, 549. FAIR obtained an appraisal to determine the fair market value of the home in its undamaged condition just prior to the fire, which was determined to be $75, 000.

         It is also undisputed that the Policy FAIR issued to Garnes is a fire insurance policy of a kind known as an “open policy, ” meaning “one in which the value of the subject matter is not agreed upon, but is left to be ascertained in case of loss.” (§ 411.)[6] Further, it is an “actual cash value” or “ACV” policy. In a section entitled “CONDITIONS, ” the Policy contains a paragraph entitled “Loss Settlement, ” which states in relevant part that FAIR will pay the following amounts for losses to Garnes's dwelling: “(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..., we will pay such actual cash value. [¶] (2) Partial Loss: In the cases of losses that are not described in (1) above, we will pay the least of the following amounts: [¶] (a) The lower of the cost either to reconstruct or replace the damaged part of the property, less a reasonable amount for depreciation; or [¶] (b) The actual cash value before the loss of the damaged property.” The Policy defines “actual cash value” of property to mean “its fair market value.”

         At the crux of this appeal are two legal issues, which we review de novo. (Mt. Hawley Ins. Co. v. Lopez (2013) 215 Cal.App.4th 1385, 1393-1394 [“The de novo standard of review applies to issues of statutory and insurance policy interpretation”].) First, do the relevant provisions of the Insurance Code, sections 2051, 2070 and 2071, which govern open ACV policies, require FAIR to provide coverage to Garnes to pay for the repair of the damage to her home, minus depreciation, if this amount exceeds the fair market value of her home, as Garnes contends, or are these statutes consistent with the Policy, which categorizes any loss in which cost to repair exceeds actual cash value as a “total loss” entitling the policy holder to, at most, the fair market value of her property, as FAIR contends?[7] Second, if these statutes and the Policy conflict, which governs the parties' relationship here, the statutes, as Garnes contends, or the Policy, as FAIR contends? We conclude Garnes is correct as a matter of law in both respects: the Insurance Code requires payment of the costs to repair her home, less depreciation, even if this amount exceeds the fair market value of her home, and it governs over any conflicting terms of the Policy.

         I.

         The Insurance Code Requires FAIR to Pay for the Repair of Garnes's Partially Damaged Home.

         In their dispute over what the Insurance Code requires, Garnes and FAIR principally debate two questions of statutory construction. First, does “total loss” in section 2051, mean, as FAIR contends, damage to a dwelling so extensive that the cost to repair or replace it exceeds its fair market value, or, as Garnes contends, the total physical destruction of a dwelling? Second, does “actual cash value” as used in section 2071 mean, as FAIR contends, the fair market value of the dwelling, exclusive of the land, or, as Garnes contends, the “actual cash value” that is set forth in section 2051, which for a loss that is partial is the lesser of the cost to repair the dwelling minus depreciation and the policy limit?

         We construe insurance statutes “to ascertain and effectuate legislative intent, ” looking first to the statutes' words. (CalFarm Ins. Co. v. Wolf (2001) 86 Cal.App.4th 811, 815.) “If those words are clear, there is no need for construction. ‘ “When the language is susceptible of more than one reasonable interpretation, however, we look to a variety of extrinsic aids, ” ' including the object to be achieved, the evil to be remedied, public policy, the statutory scheme of which the statute is a part, and legislative history.” (Ibid., fn. omitted.) Applying these principles, we have examined the statutes' plain meaning, the relevant legislative history and the Insurance Commissioner's interpretation of the statutes, and conclude that Garnes's interpretation of the statutes is correct.

         A. Section 2051 Plainly Refers to Physical, Rather than Economic “Loss.”

         Section 2051 sets forth the “measure of indemnity in fire insurance” for an open ACV policy. Section 2051, subdivision (a) states that an insurer's indemnity obligation under an open ACV policy is generally based on the expense of replacing lost or injured property.[8] This obligation is further explicated by subdivisions (b)(1) and (2), which prescribe mandatory measures of “actual cash value recovery” for each of two distinct situations: one that applies “[i]n case of total loss to the structure” and another that applies “[i]n case of a partial loss to the structure” or to loss of the contents.[9]

         In the case of a “total loss to the structure, ” recovery is limited to the lesser of the policy limit or a property's “fair market value.” (§ 2051, subd. (b)(1).) In the case of “partial loss to the structure, ” however, recovery is not limited to fair market value; instead, it is the lesser of the policy limit or “the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its conditions at the time of the injury.” (§ 2051, subd. (b)(1).) Under subdivision (b)(2), it is clear that in the case of “partial loss to the structure, ” the insured is entitled to repair, rebuild or replace that which was lost or injured. While such recovery is reduced by a deduction for physical depreciation and may not exceed the policy limit, nothing in subdivision (b)(2) or the remainder of section 2051 indicates that the policyholder is limited to the fair market value of the property or any part of it.

         The language of section 2051 not only specifies the meaning of “actual cash value” for total and partial losses, it provides strong indication of what constitutes a total or partial loss of a residential property-specifically, that the determination depends on what happens “to the structure.” Contrary to FAIR's policy definition, which defines “total loss” and “partial loss” by reference to economic considerations (whether the cost to repair exceeds the property's fair market value), section 2051 differentiates between the degree of loss “to the structure, ” and it prescribes two different measures of actual cash value depending on whether the loss to the structure is “total” or “partial.”

         The parties cite various authorities regarding the meaning of the phrases “total loss” and “partial loss, ” but these authorities are of little value because they do not address the statutory language before us: “total loss to the structure” and “partial loss to the structure.” Garnes cites authorities that are equivocal and indicate there are two possible meanings of “total loss”; however, these authorities do not contain language referring to “loss to the structure.”[10] FAIR refers throughout its briefs to “total loss” and “partial loss” but fails to address the full phrases used in section 2051: “total loss to the structure” and “partial loss to the structure.”[11]

         While neither party provides any case law or other authority interpreting either “total” or “partial” “loss to the structure, ” we are at a loss to understand how the phrase “loss to the structure, ” without more, can possibly connote the economic concept FAIR urges, i.e., a loss requiring repairs that would or would not cost more than the structure's fair market value. While “loss” by itself may be physical or economic, [12] the “structure” obviously refers to a physical structure, i.e., the insured dwelling.[13] As Garnes puts it, “in the statute, the object phrase-‘total loss'-operates upon the subject phrase-‘a structure'-by way of the preposition ‘to.' Had the Legislature used the word ‘of', or used a different sort of construction, such as ‘where a structure is a total loss', there might be some ambiguity. But total loss to a structure unmistakably contemplates a quantum of physical damage-i.e., complete or total-and excludes the sort of economic analysis employed by FAIR Plan.”

         Further, if the Legislature had intended an economic definition, it could have said so. Indeed, FAIR provided just such an explanation or definition for “total loss” in the Policy: “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....” And Black's Law Dictionary defines “constructive total loss” as “[s]uch serious damage to the insured property that the cost of repairs would exceed the value of the thing repaired.” (Black's Law Dictionary (8th ed. 2004) p. 964.) But the Legislature did not employ such language connoting an economic measure. Instead it employed a phrase, “loss to the structure, ” that connotes physical damage. Applying that meaning to the undisputed facts, it is apparent that the loss to Garnes's home was partial within the meaning of section 2051, as she contends, rather than total, as FAIR contends. Garnes's home was damaged, not destroyed.

         Nonetheless, FAIR contends, even if the loss was partial, the outer limit of recovery allowed under the Insurance Code is the fair market value of the dwelling. While FAIR acknowledges that section 2051, subdivision (b)(2), addressing recovery in the case of a partial loss to the structure, “does not mention ‘fair market value' as an outside limit, ” it contends section 2071 contains an “indemnity cap, ” i.e., that the “actual cash value” cap in that section is synonymous with the fair market value of the property, and that section 2051 “was not intended to repeal” this cap. To evaluate this argument, we must consider section 2051 together with sections 2070 and 2071.

         B. Sections 2070, 2071 and 2051 Read Together Support Garnes's View of FAIR's Statutory Obligations.

         Section 2070 generally requires fire policies in California to be on the standard form set forth in section 2071, but permits insurers to deviate from the form “provided, that coverage with respect to the peril of fire, when reviewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.” (§ 2070.) FAIR appears to argue that the Policy is “consistent with” the standard form, which we take to mean “substantially equivalent” to it.

         The standard form as set forth in section 2071 provides, in relevant part, that in consideration for the premium, the insurer “does insure [the insured] 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....” (§ 2071, subd. (a).) FAIR argues this language “clearly ‘caps' the limit of liability at the ‘actual cash value of the property' at the time of loss.” Next, FAIR relies primarily on Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, 402 (Jefferson)for the proposition that “ ‘actual cash value of the property' as used in section 2071, is synonymous with ‘fair market value.' ” “Thus, ” FAIR continues, “if the cost to repair or replace the damaged property is more than its fair market value, then, according to the plain language of section 2071, there is no coverage for the repair or replacement cost to the extent it exceeds the actual cash value of the property.”

         In Jefferson, the California Supreme Court addressed the meaning of “actual cash value” as used in the “average clause” of the standard form insurance policy then set forth in section 2071. The insurers sought to apply the average clause, which allowed them to proportionately reduce their coverage of fire damage to a hotel if the hotel owner had not purchased a policy insuring the building to at least 70 percent of its actual cash value.[14] (Jefferson, supra, 3 Cal.3d at p. 400.) They contended “actual cash value, ” as used in the “average clause” of the policy, did not mean fair market value, but meant the replacement cost of the building less depreciation. (Id. at p. 401.) The replacement cost for the hotel, less depreciation, was determined to be almost $170, 000-far more than the hotel's fair market value of $65, 000. (Id. at p. 400.) Whether the hotel was insured for 70 percent of its actual cash value depended on whether “actual cash value” was interpreted to mean replacement cost less depreciation or the hotel's fair market value. By using the higher replacement cost minus depreciation measure, the insurers sought to invoke the average clause and thereby reduce what they owed the hotel owner under the policy. (Id. at p. 401 [insurers sought to pay $10, 154 as proportion of $24, 102 loss].) The Supreme Court held that “ ‘[a]ctual cash value, ' ” as used in section 2071, was “synonymous with ‘fair market value' ” rather than “replacement cost less depreciation.” (Jefferson, at p. 402.)

         The Jefferson court also sought to reconcile the use of the term “actual cash value” in the average clause with the term's use in the basic insuring clause of the policy: “The term appears not only in the average clause, ... but also in the insuring clause and must be given the same meaning in both. The latter clause insures ‘to the extent of the actual cash value of the property at the time of loss, but not exceeding the... cost to repair or replace the property....' Since replacement cost less depreciation can never exceed replacement cost, it would not be logical to interpret this clause to mean ‘to the extent of the replacement cost less depreciation, but not exceeding the... cost to repair or replace the property.' (Italics added.) If ‘actual cash value' had been intended to mean replacement cost less depreciation, the Legislature would not have used ‘the cost to... replace the property' as a limiting factor, and would have specified as a limiting factor only the cost to repair the property.” (Jefferson, supra, 3 Cal.3d at p. 402.)

         FAIR's reliance on Jefferson overlooks one thing: the case involved a standard form policy that was part of an earlier statutory regime. In 2004, 34 years after Jefferson was decided, the Legislature adopted the current version of section 2051, which prescribes the method for determining (and therefore the meaning of) “actual cash value” for purposes of determining the insurer's indemnity obligation under an open fire insurance policy. Thus, while in 1970, the Jefferson court interpreted “actual cash value” as used in section 2071 to mean “fair market value, ” in 2004 the Legislature adopted a more specific and mandatory measure of “actual cash value” in a closely related section of the Insurance Code, section 2051.[15] For a total loss, the Legislature determined “actual cash value” means the lesser of fair market value of the structure or the policy limit. For a partial loss to the structure or loss to its contents, it means the lesser of the cost to repair or replace the thing lost or injured minus a reasonable deduction for physical depreciation or the policy limit. (See Kirkwood v. California State Automobile Assn. Inter-Ins. Bureau (2011) 193 Cal.App.4th 49, 53 [“the 2004 amendments to section 2051, ... set out the precise method of determining actual cash value of lost or injured property under an open policy of fire insurance”].)[16] To the extent section 2051's definition of “actual cash value” differs from that in Jefferson, this later-enacted legislation controls.[17] (See Adoption of Kelsey S. (1992) 1 Cal.4th 816, 844 [statute superseded prior California Supreme Court decision]; City and County of San Francisco v. Cobra Solutions, Inc. (2006) 38 Cal.4th 839, 850 [statute superseded prior court of appeal decision].)

         But, FAIR argues, “there is no indication that the Legislature intended to abrogate the Supreme Court's interpretation of the phrase ‘actual cash value of the property' as used in section 2071.” The Legislature's failure to specifically amend section 2071, FAIR contends, gives rise to a presumption that it did not intend to alter the operation of that section. We disagree. Section 2071 did not and does not define “actual cash value, ” although the court interpreted that phrase in Jefferson. As already discussed, the Legislature thereafter, in amending closely related provisions of the Insurance Code, specifically ...


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