Conway v. Farmers Home Mut. Ins. Co.

• Decision Date: 18 July 1994
• Docket Number: No. D016627,D016627
• Citation: 31 Cal.Rptr.2d 883,26 Cal.App.4th 1185
• Court: California Court of Appeals Court of Appeals
• Parties: William T. CONWAY et al., Plaintiffs and Appellants, v. FARMERS HOME MUTUAL INSURANCE COMPANY, Defendant and Respondent.

Page 883

31 Cal.Rptr.2d 883

26 Cal.App.4th 1185

William T. CONWAY et al., Plaintiffs and Appellants, v. FARMERS HOME MUTUAL INSURANCE COMPANY, Defendant and Respondent.

No. D016627.

Court of Appeal, Fourth District, Division 1, California.

July 18, 1994.

[26 Cal.App.4th 1187] Hugh D. McLean, Del Mar, for plaintiffs and appellants.

Kane & Whelan and Mark C. Kane, Glendale, for defendant and respondent.

BENKE, Acting Presiding Justice.

Consistent with all of the out-of-state authorities which have considered the issue, in this case we hold an insured homeowner may recover the replacement cost of fire damage to an insured home by purchasing another home at another location. Accordingly, we reverse the judgment entered in favor of the defendant insurer.

FACTUAL AND PROCEDURAL SUMMARY

The facts which give rise to this appeal are, in all material respects, undisputed. In November 1989 plaintiffs and appellants William Conway and Ken Whalen (Conway) purchased a house at 252 Daisy Avenue in Imperial Beach. Conway paid $230,000 for the house and subsequently rented it to tenants. Conway obtained $100,000 in fire insurance on the property from defendant and respondent Farmers Home Mutual Insurance Company (Farmers).

On March 11, 1990, the house was damaged by fire. Although the house could have been repaired, Conway decided not to make any repairs because Conway believed it made more economic sense to develop the Daisy Avenue parcel in conjunction with development of an adjacent parcel Conway owned. Instead of repairing the damage on Daisy Avenue, within three months of the fire Conway paid $230,000 for another single-family home on Ebony Avenue in Imperial Beach.

Following the fire Conway and Farmers submitted the amount of the fire loss to a panel of appraisers. The appraisers found the replacement cost of the fire loss was $90,721 but the actual cash value of the property destroyed was $76,279.44. Thereafter Farmers paid Conway $76,279.44.

On March 8, 1991, Conway filed a declaratory relief action against Farmers. Conway's Sitting without a jury, the trial court found in favor of Farmers. The trial court reasoned that because the Daisy Avenue house could have been repaired, Conway was not entitled to the replacement cost of the loss. Judgment was entered in favor of Farmers and Conway filed a timely notice of appeal.

complaint alleged Farmers was obligated to pay the replacement value of the loss, rather than the actual cash value.

DISCUSSION

The policy Farmers issued to Conway promises that in the event of a fire at the insured premises, Farmers will pay for: "c. Buildings under Coverage A or B at replacement cost without deduction for depreciation, subject to the following: [p] (1) If at the time of loss the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately prior to the loss, we will pay the cost of repair or replacement, without deduction for depreciation, but not exceeding the smallest of the following amounts: [p] (a) the limit of liability under this policy applying to the building; [p] (b) the replacement cost of that part of the building damaged for equivalent construction and use on the same premises; or [p] (c) the amount actually and necessarily spent to repair or replace the damaged building.... [p] (4) When the cost to repair or replace the damage is more than $1000 or more than 5% of the amount of insurance in this policy on the building, whichever is less, we will pay no more than the actual cash value of the damage until actual repair or replacement is completed."

The parties vigorously dispute the meaning of the terms "replace" and "replacement" in paragraphs c. (1)(c) and c. (4). Farmers argues that when a building may be repaired, these terms require that any replacement of damaged property occur at the same location as the damaged building. Conway argues the policy places no restriction on where an insured may replace a damaged building.

In resolving this conflict we begin by noting there is no reported California case which discusses whether the replacement cost of a fire loss may be recovered where the insured decides to replace a damaged building by purchasing another building at a different location. However Conway's interpretation of the Farmers policy is supported by all of the out-of-state authorities which have considered the issue. (See e.g. S and S Tobacco v. Greater New York Mut. (1992) 224 Conn. 313, 617 A.2d 1388, 1391; Huggins v. Hanover Ins. Co. (Ala.1982) 423 So.2d 147, 150; Smith v. Michigan Basic Property Ins. Assn. (1992) 441 Mich. 181, 490 N.W.2d 864, 868; Ruter v. Northwestern Fire & Marine (1962) 72 N.J.Super. 467, 471-473; 178 A.2d 640, 643; Johnson v. Colonial Penn Ins. Co. (1985) 127 Misc.2d 749, 751-752, 487 N.Y.S.2d 285; Blanchette v. York Mut. Ins. Co. (Me.1983) 455 A.2d 426, 427-428; see also Hess v. North Pacific Ins. Co. (1993) 122 Wash.2d 180, 859 P.2d 586, 588 (Hess ).)

The court in Hess explained the genesis of the replacement cost provisions of fire policies: "Traditional coverage was for the actual or fair cash value of the property. The owner was indemnified fully by payment of the fair cash value, in effect the market value, which is what the owner lost if the insured building was destroyed. [Citation.] [p] However, it was recognized that an owner might not be made whole because of the increased cost to repair or to rebuild. Thus, replacement cost coverage became available. 'Replacement cost coverages ... go beyond the concept of indemnity and simply recognize that even expected deterioration of property is a risk which may be insured against.' " (Hess, supra, 859 P.2d at p. 587.)

Significantly the policy in Hess contained standard limitations on the recovery of replacement costs identical to the ones in Farmers's policy. Although writing in the context of a dispute over whether the recovery of replacement costs is permissible where an insured has not actually made any replacement, the court adopted the following interpretation of those limitations: "The first measure, of course, limits the amount available for replacement to policy limits, while the second relates to a theoretical or hypothetical measure of loss: that is, the replacement cost of rebuilding the identical structure as one limit of the company's liability. This particular limitation does not require repair or replacement of an identical building on the same premises, but places that rebuilding amount as one of the measures of damage to apply in calculating liability under the replacement cost coverage. The effect of this limitation comes into play when the insured desires to rebuild either a different structure or on different premises. In those instances, the company's liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds.

Finally, the third limitation of liability strengthens the requirement that liability of the company does not exist until repair or replacement is made. The purpose of this limitation is to limit recovery to the amount the insured spent on repair or replacement as yet another measure of the loss liability of the insurer. This third valuation method is intended to disallow an insured from recovering, in replacement cost proceeds, any amount other than that actually expended. [Citation]." ¹ (Hess, supra, 859 P.2d at p. 588, emphasis added.)

We believe the result reached by the out-of-state authorities is the same one required under principles of contract interpretation established by our Supreme Court. In AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 821-822, 274 Cal.Rptr. 820, 799 P.2d 1253, the court stated: "Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. [Citation...