Hess v. North Pacific Ins. Co.
| Decision Date | 02 September 1993 |
| Docket Number | No. 60026-1,60026-1 |
| Citation | 122 Wn.2d 180,859 P.2d 586 |
| Court | Washington Supreme Court |
| Parties | Timothy K. HESS and Georgianne H. Hess, husband and wife, Respondents, v. NORTH PACIFIC INSURANCE COMPANY, Petitioner, and Oregon Automobile Insurance Company, Defendant. En Banc |
Helsell, Fetterman, Martin, Todd & Hokanson, William A. Helsell, Robert N. Gellatly, Seattle, for petitioner.
Winston & Cashatt, Fred C. Pflanz, Beverly L. Anderson, Carl E. Hueber, Spokane, for respondents.
William R. Hickman, Sandra Pailca, Seattle, amicus curiae, for petitioner on behalf of United Services Auto. Ass'n.
Sidney R. Snyder, Jr., Ronald S. Dinning, Seattle, amicus curiae, for petitioner on behalf of Pemco, Safeco, and Unigard Ins J. Tucker Miller, Seattle, amicus curiae, for petitioner on behalf of Safeco Insurance Co.
Mark S. Cole, Seattle, amicus curiae.
This case concerns the amount payable under the replacement clause of a homeowners insurance policy when the destroyed building is not repaired or replaced and the insured has no intent to repair or replace. This is the first occasion for this court to interpret such a replacement clause.
The facts are stipulated. Defendant, North Pacific Insurance Company, insured a summer cabin of plaintiffs Timothy K. and Georgianne H. Hess. The cabin was destroyed by fire. The agreed actual cash value was $20,000. The agreed replacement cost was $43,182.10. The insureds did not replace the cabin, nor do they intend to do so. Defendant paid the actual cash value to plaintiffs. Clerk's Papers, at 114-15. Plaintiffs sued for $23,182.10, the difference between the full replacement cost and the actual cash value.
The sole issue is whether, under the terms of the policy, the insureds can collect the full replacement cost when they have not replaced the destroyed insured cabin and stipulated they do not intend to replace it.
The trial court granted summary judgment for said $23,182.10 to the insured plaintiffs, plus prejudgment interest. The Court of Appeals affirmed. Hess v. North Pac. Ins. Co., 67 Wash.App. 783, 841 P.2d 767 (1992), review granted, 121 Wash.2d 1008, 852 P.2d 1091 (1993). We reverse, and thereby join the virtually unanimous holdings in other jurisdictions which have considered the same or similar replacement clauses.
Before analyzing the policy clauses, a brief history of replacement clauses is helpful. Historically, the underlying purpose of property insurance is indemnity. 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. 6 J. & J. Appleman, Insurance § 3823 (1972).
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." Jordan, What Price Rebuilding?, 19 The Brief 17 (Spring 1990) (cited hereafter as the Jordan report).
A Washington statute prohibits "overinsurance", i.e., insurance in excess of the "fair value" (defined as cost of replacement less depreciation), RCW 48.27.010. However, replacement insurance is authorized specifically by RCW 48.27.020:
[T]he insurer may in connection with a special provision or endorsement made a part of the policy insure the cost of repair or replacement of such property, if damaged or destroyed by a hazard insured against, and without deduction of depreciation....
In this case, the relevant provisions of plaintiffs' policy are as follows:
3. Loss Settlement. Covered property losses are settled as follows:
a. (1)-(3) [relate to property not involved here].
b. Buildings under Coverage A or B at replacement cost without deduction for depreciation, subject to the following:
(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 before the loss, we will pay the cost to repair or replace, after application of deductible and without deduction for depreciation, but not more than the least of the following amounts:
(a) the limit of liability under this policy that applies to the building;
(b) the replacement cost of that part of the building damaged for like construction and use on the same premises; or
(c) the necessary amount actually spent to repair or replace the damaged building. [Subparagraphs (2) and (3) relate to determination of the 80 percent of full replacement coverage and are not relevant here.]
(4) We will pay no more than the actual cash value of the damage unless:
(a) actual repair or replacement is complete; or
(b) the cost to repair or replace the damage is both:
(i) less than 5% of the amount of insurance in this policy on the building; and
(ii) less than $1000.
(5) You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss or damage to buildings on an actual cash value basis. You may then make claim within 180 days after loss for any additional liability on a replacement cost basis.
A careful examination of these clauses, read together and in context as we must do, does not reveal any ambiguity. Stated generally, subparagraphs 3.b. (1)(a), (b), and (c) set the limits of maximum liability, i.e., the lesser of (a) or (b) or (c). Those amounts reflect (a) the policy limits, (b) the replacement cost of like construction and use on the same premises, more fully explained hereafter, or (c) the amount actually spent to repair or replace the damaged building.
The Jordan report, cited above, cogently explains:
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.
(Footnotes omitted.) Jordan, at 19-20.
The Court of Appeals somehow concluded that the insurer's interpretation, i.e., pay actual cash value unless replaced or repaired, "clearly implies that an insured who elects not to rebuild is entitled to no settlement at all." Hess v. North Pac. Ins. Co., 67 Wash.App. 783, 787, 841 P.2d 767 (1992), review granted, 121 Wash.2d 1008, 852 P.2d 1091 (1993). The Court of Appeals found that to be an ambiguity when related to subparagraph 3.b. (4): "We will pay no more than the actual cash value of the damage unless: (a) actual repair or replacement is complete". Hess, at 787, 841 P.2d 767.
It appears quite clear that despite the measures of possible liability set forth in 3.b. (1)(a), (b), and (c), subparagraph (4)(a) conditions payment of any one of those amounts upon completion of "actual repair or replacement ". (Italics ours.) The insurer has never contended that it does not owe, at a minimum, the actual cash value of the destroyed insured building, and, indeed, promptly paid that amount after the parties agreed that such in fact was the actual cash value.
The insurer well answers the Court of Appeals reasoning in this manner:
Paragraph 3.b. (1) deals with alternative measurers of replacement cost. When an insured does not replace, the least of the three alternative measures of loss (amount actually spent) is zero. Thus, the insured is not entitled to replacement cost. He is, however, entitled to actual cash value under paragraph 3.b. (4).
Supplemental Brief of Appellant, at 3-4.
The Jordan report summarizes the purpose of this clause:
This requirement for actual repair or replacement by the insured does not affect the company's liability to pay for actual cash value loss, but only for the difference between that figure and the higher replacement cost. The purpose of that limitation, obviously, is to prevent an insured from directly profiting through the receipt of cash funds beyond the actual cash value of the loss, thus forcing the insured to rebuild in order to recover amounts withheld as depreciation.
The Court of Appeals seemed to find some ambiguity because the policy does not define "replacement cost" or "actual cash value". However, the policy does provide an appraisal method if the parties do not agree on the amount of the loss (Clerk's Papers, at 60). In any event, the issue seems irrelevant here because the parties stipulated to both the replacement cost and actual cash value.
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