Case Information
*1 Filed 5/26/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION TWO
CALIFORNIA FAIR PLAN
ASSOCIATION, A143190
Plaintiff and Respondent, v. (Contra Costa County Super. Ct. No. C1102417) MARLENE GARNES, Defendant and Appellant.
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, 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 *2 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 “pаrtial 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)
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 *3 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 declaratiоn 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 mean s 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.
*4 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 *5 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 аppeal 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.
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 *7 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)
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 *8 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] *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.” “(2) In case of a partial loss to the structure, or loss to its contents, 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 condition at the time of the injury or the policy limit, whichever is less. In case of partial loss to the structure, a deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life of that structure.” (Italics added.)
Section 16 provides that as used in the Insurance Code, “the word ‘shall’ is mandatory and the word ‘may’ is permissive, unless otherwise apparent from the context.”
*10 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 *11 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 аrgument, 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 *12 “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)
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. (
Jefferson
,
supra
,
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
,
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
*14
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)
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 defined that same phrase in a manner different from the definition adopted in Jefferson . The 2004 legislation thus does indicate a legislative intent to abrogate Jefferson in part.
FAIR also argues thаt section 2051 “does not repeal the actual cash value limit set forth in section 2071.” But the argument relies on a statutory construction that would give “actual cash value” two different meanings as applied to an open fire insurance policy. In measuring the recovery for a partial loss under the mandatory language of section 2051, “actual cash value” is the lesser of the policy limit or the cost to repair or replace the damaged property, less a deduction for physical depreciation. This would be further limited, according to FAIR, by reading the language “to the extent of the actual cash value of the property at the time of loss” in section 2071 to mean the fair market value of the damaged property. Thus, in FAIR’s view, section 2051, in conjunction with open policy ‘requires payment of actual cash value’ for a structure’s contents, ‘the measure of the actual cash value recovery’ 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 based upon its condition at the time of the injury or the policy limit, whichever is less.’ ” ( Doan , at p. 1093.) These descriptions provided background for the court’s discussion of the appraisal process. The court did not decide the meaning of “actual cash value” as used in either section 2071 or 2051 or attempt to reconcile the differences it attributed to these statutes.
section 2071, means that a property owner whose home is damaged but not destroyed may recover not the lesser of two measures (the policy limit and the cost to repair or replace the damaged property minus depreciation) but the least of three (the policy limit, the cost to repair or replace minus depreciation and the fair market value of the property). FAIR does not explain how the words of sections 2071 and 2051 support its position, and for the reasons just stated, they do not.
FAIR argues, however, that this interpretation is necessary to harmonize
sections 2051 and 2071. We are not convinced. To continue to interpret the language
“actual cash value” in section 2071 to mean fair market value in the face of
section 2051’s specific definitions of that phrase would run contrary to the general
presumption that a word or phrase used in a particular sense in one part of a statute is
intended to have the same meaning if it appears in another part of the same statute.
(
Delaney v. Baker
(1999)
Further, if the Legislature had intended to impose a fair market value “cap” or limit on recovery for partial loss to a structure, it would have included fair market value as an express limitation in subdivision (b)(2) of section 2051. This is made evident by the fact that the Legislature included precisely such an express limitation on recovery for total losses to a structure in subdivision (b)(1). (See § 2051, subd. (b)(1) [“In case of total loss to the structure, the policy limit or the fair market value of the structure, whichever is less ”], italics added.) If that is what it intended for subdivision (b)(2), it could and would have used the same or similar language.
Finally, reading the language in section 2071, “to the extent of the actual cash
value of the property” to mean “to the extent of the [fair market value] of the property”
would create a redundancy with section 2051, subdivision (b)(1), which already limits
recovery for total loss to a structure to “the policy limit
or the fair market value
of the
structure, whichever is less.” (Italics added.) (See
Pacific Legal Foundation v.
Unemployment Ins. Appeals Bd.
(1981)
Nor do we agree with FAIR that interpreting the phrase “actual cash value” in section 2071 to mean the same as “actual cash value” defined in section 2051 will result in an implied repeal of section 2071. Again, section 2071 prescribes the basic terms of a fire insurance policy from which, under section 2070, an insurer may not generally deviate. It uses the phrase “actual cash value” but, unlike section 2051, does not prescribe a measure for it or otherwise define it. The definition FAIR urges, which focuses on fair market value, comes from case law discussing an earlier statutory regime, not from section 2071. As incorporated into section 2071, section 2051’s definitions of actual cash value superseded the Jefferson court’s definition in part. But that does not mean section 2051 repealed section 2071.
On the contrary, section 2051 can readily be harmonized with section 2071 by simply incorporating into section 2071 the more specific measures of “actual cash value” now prescribed by section 2051. As the Commissioner explains, “[s]ection 2051 did not repeal section 2071—rather, it provided a clear and consistent measure of аctual 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.”
As so construed, section 2071 retains outer limits on insurers’ liability under an open fire insurance policy. Those outer limits are the “actual cash value” as defined in section 2051 . In the case of a total loss to a structure, the outer limits are set by the lesser of fair market value or the policy limit, and in the case of a partial loss to a structure (or loss to the contents), the outer limits are defined by the lesser of the cost to repair minus depreciation or the policy limit. FAIR fails to explain why, thus reconciled with section 2051, section 2071 does not continue to serve its function of specifying the *18 minimum requirements for fire insurance policies in California. We conclude that it does so.
C. The Legislative History of Section 2051 Also Supports Garnes’s View of FAIR’s Statutory Obligations.
In 2004, the Legislature adopted Assembly Bill No. 2692 (AB 2692), amending section 2051 to add subdivision (b) which prescribes “the measure of actual cash value recovery” under an open actual cash value policy. (Stats. 2004, ch. 605, § 2.) [19] The legislative history of AB 2692, which was sponsored by the Commissioner and the Department of Insurance (Assem. Insurance Com., Background Information Sheet on Assem. Bill No. 2962 (2003–2004 Reg. Sess.) Mar. 18, 2004, p. 2), further supports Garnes’s view of FAIR’s statutory obligations to pay for the repairs of her home. [20]
The purpose of AB 2692 is made plain in many documents contained in the
legislative history files. In the wake of a series of devastating wildfires in Southern
California that destroyed thousands of homes,
[21]
legislators were concerned about a lack
of clarity in insurance policies and inconsistent practices by insurers regarding the
*19
determination of “actual cash value” in adjusting claims under residential fire insurance
policies. It is not entirely clear from the legislative history what gave rise to these
concerns, but the state of the law at the time provides some idea. (See
San Francisco
Internat. Yachting Group v. City and County of San Francisco
(1992)
Prior to 2004, section 2051 provided: “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.” (Stats. 1935, ch. 145, art. 2, p. 595.) In 1970, the
California Supreme Court in
Jefferson
interpreted “actual cash value” to mean fair market
value. And in 1998, an appellate court in
Cheeks v. California Fair Plan Assn.
(1998)
Against this muddled legal backdrop, it is perhaps not surprising that, as the legislative history reflects, insurers were using a variety of different measures of “actual cash value” when adjusting claims made under fire insurance policies, only one of which was replacement cost minus depreciation, and that disagreements about how to measure the recovery under fire insurance policies were a source of continuing conflict between insurers and policyholders.
*20 For example, the Background Information Sheet regarding AB 2692 for the Assembly Insurance Committee, [23] in a description of “existing law on this issue,” stated: “The California Residential Property Insurance Disclosure provides coverage definitions; however, the valuation of property is unclear and continues to be an issue between insurance companies and consumers.” (Assem. Insurance Com., Background Information Sheet on Assem. Bill No. 2962 (2003–2004 Reg. Sess.) Mar. 18, 2004, p. 1.) It described what the bill did as follows: “Clarifies the measurement of ‘actual cash value’ in relation to a homeowners insurance policy. Prohibits insurance companies from deducting depreciation for labor when consumers replace or rebuild their property.” ( Ibid. ) In a section entitled “What’s wrong with existing law? Why is this bill needed?,” it stated: “Many homeowners policies do not clearly define how ‘actual cash value’ will be determined” and referred to a practice by insurance companies in calculating actual cash value of deducting the cost of labor. ( Id. at pp. 1–2.) It further stated: “This bill will explain and provide consistency for how claims will be adjusted and prohibit insurance companies from deducting the cost of labor in settlements.” ( Id. at p. 2.)
Similarly, a Report by the Assembly Committee on Insurance, [24] dated May 5, 2004, states: “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.” (Assem. Com. on *21 Insurance, Rep. on Assem. Bill No. 2962 (2003–2004 Reg. Sess.) as proposed to be amended May 5, 2004, p. 1.) The same report goes on to note that “the author of the bill highlights that the California Residential Property Insurance Disclosure provides coverage definitions; however, the valuation of property is unclear and continues to be an issue between insurance companies and consumers.” ( Id. at p. 2.)
Also, a report of the Senate Committee on Insurance dated June 16, 2004, explains: “Existing law [¶] 1. Defines an ‘open policy’ of fire insurance, generally speaking, as one that does not state the amount for which the item is insured, but also states, in essence, that the measure of payment is the expense to replace the item in its condition at the time just prior to commencement of the fire [Section 2051]; [¶] 2. Otherwise leaves unanswered important questions about how to calculate actual cash value.” (Sen. Com. on Insurance, Rep. on Assem. Bill No. 2962 (2003–2004 Reg. Sess.) as proposed to be amended June 16, 2004, p. 1.) It goes on to explain: “This bill [¶] 1. Would specify that actual cash value, in the case of a total loss, would be equal to the policy limit or fair market value of the structure, whichevеr is less; [¶] 2. Would specify that actual cash value, in the case of a partial loss to the structure or contents, would be the amount it would cost the insured to repair, rebuild, or place [ sic ] the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon the condition at the time of the injury or the policy limit, whichever is less; [¶] 3. Would specify, also with respect to a partial loss of a structure, that a deduction for depreciation shall apply only to parts of the structure that are normally subject to repair or replacement.” ( Ibid. ) It describes the purpose of the bill as “[t]o clarify the measurement of ‘actual cash value’ under a homeowners’ insurance policy, and to provide protections against cancellation during the rebuilding process.” ( Id . at p. 2.) It further states that “[a]ccording 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 . ” ( Ibid. )
Finally, as described in an enrolled bill memorandum [25] AB 2962 was designed, among other things, to “clarify the measurement of ‘actual cash value’ in relation to a homeowners’ insurance policy and help resolve disputes between insurers and their policyholders.” (Enrolled Bill Memo. on Assem. Bill No. 2962 (2003–2004 Reg. Sess.) prepared for Governor Schwarzenegger (Sept. 10, 2004) p. 1.) The same memorandum contains language similar to that in earlier reports, expressing the author’s statement that “the valuation of property is unclear and cоntinues be an issue between insurance companies and consumers.” ( Id. at p. 2.)
Significantly, another enrolled bill report explicitly recognized that AB 2692
would change the law as articulated in
Jefferson
: A section entitled “LEGAL IMPACT”
states: “Jefferson v. Superior Court,
FAIR barely acknowledges this legislative history, [26] which undermines its contention that section 2051, subdivision (b) provides a measure of “actual cash value” that is effectively modified and limited by ascribing a different meaning to the same phrase as used in section 2071. The Legislature was attempting to eliminate confusion and disagreement, not to create them. To read the “actual cash value” in section 2071 to mean “fair market value” and to create an additional limitation on recovery for partial *23 losses beyond the limits imposed in section 2051 would create unnecessary complexity and inject uncertainty into the measure of recovery for a partial loss to a structure, undermining the legislative goals of providing clarity and avoiding disputes. As we have already stated, if the Legislature had intended to limit “actual cash value” for partial losses by fair market value, it could have done so clearly by expressing that limitation in subdivision (b)(2) of section 2051. Further, if that had been the Legislature’s intent, one would expect to see some indication of it in the legislative history of AB 2962, but there is none.
For these reasons, the legislative history supports Garnes’s interpretation of Insurance Code sections 2071 and 2051.
D. The Insurance Commissioner’s and the Legislature’s Interpretations Also Support Garnes’s View of FAIR’s Statutory Obligations.
Other factors support Garnes’s interpretation. First, the Insurance Commissioner’s
interpretation is consistent with hers. While we are not bound by the Commissioner’s
interpretive regulation, we nonetheless accord it “ ‘great weight and respect.’ ” (
Yamaha
Corp. of America v. State Bd. of Equalization
(1998)
The Commissioner’s interpretation is best reflected in a regulation the Commissioner amended in 2006 to include the following language: “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 or destroyed property, as set forth in California Insurance Code Section 2051.” (Cal. Code Regs., tit. 10, § 2695.9.) The Commissioner maintains this interpretation in his amicus curiae brief, and it deserves significant deference. The Commissioner’s interpretation obviously supports Garnes’s interpretation.
*24
Second, as the Commissioner points out, the Legislature itself interpreted sections
2051 and 2071, albeit in legislation enacted six years after the amendment of
section 2051. (See
People ex rel. Lockyer v. R.J. Reynolds Tobacco Co.
(2005)
E. FAIR’s Other Arguments Are Unpersuasive.
FAIR argues that Garnes and the Commissioner’s interpretation of section 2051, subdivision (b) would lead to absurd results because, if she had suffered a total loss , her recovery would have been limited to fair market value, whereas the partial loss she in fact sustained does not so limit her recovery. We disagree. It is conceivable the Legislature intended for homeowners whose houses were not entirely destroyed to have the option of repairing their homes and remaining in the homes and neighborhoods they had chosen (and, for some homeowners, such as Garnes, in the neighborhoods and homes they had grown up in).
Indeed, this would hardly be the first time that real property has been recognized
as unique (see
Real Estate Analytics, LLC v. Vallas
(2008)
The Legislature may well have concluded that, in the case of a home that is not destroyed and is amenable to repair, a measure of indemnity that provides for repair and rebuilding serves to preserve these intangible interests, at least to some degree. It may also have concluded that where a home is destroyed so completely that these attributes can no longer be enjoyed, a recovery that will enable the owner to purchase a dwelling of equal economic value is appropriate. We thus disagree with FAIR that the interpretation of sections 2051 and 2071 urged by Garnes and the Insurance Commissioner produces absurd results.
FAIR also argues that Garnes and the Commissioner’s interpretation would “eliminate[] the distinction between actual cash value and replacement policies.” FAIR is correct in stating that replacement cost policies provide greater coverage than ACV policies. (See § 10102 [“Actual Cash Value Coverage is the most limited level of coverage listed”].) It is also true, as FAIR points out, that “a replacement cost policy pays the insured the replacement cost of the lost or damaged property regardless of its fair market value and without deduction for depreciation.” However, the role that fair market value and depreciation play in the insured’s indemnity obligation under ACV and replacement cost policies is different depending on whether loss to a structure is partial or total. When the indemnity afforded by ACV and replacement cost coverage provided under the Insurance Code is compared for both partial and total losses, it becomes apparent that the interpretation of the Code adopted by Garnes and the Commissioner does not conflate ACV and replacement cost coverage.
Indeed, as we have already alluded to, the differences between the two, under California law, are summarized succinctly in the mandatory form of disclosure contained in section 10102. “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.” (§ 10102, subd. (a).) “REPLACEMENT COST COVERAGE,” “EXTENDED REPLACEMENT COST COVERAGE” and “GUARANTEED REPLACEMENT COST COVERAGE” are all “intended to provide for the cost to repair or replace the damaged *27 or destroyed dwelling, without a deduction for physical depreciation.” Replacement Cost Coverage pays replacement costs “up to the limits specified in your policy”; Extended Replacement Cost Coverage “provides additional coverage above the dwelling limits up to a stated percentage or specific dollar amount”; and “Guaranteed Replacement Cost Coverage” “covers the full cost to repair or replace the damaged or destroyed dwelling . . . regardless of the dwelling limits shown on the policy declarations page.”
In other words, in comparing the two types of coverage with respect to a partial loss, an ACV policy pays the costs to repair “minus a deduction for physical depreciation” up to the limits of the policy, whereas a reрlacement cost policy pays the cost to repair “without a deduction for physical depreciation” up to the limits of the policy, and for Extended and Guaranteed replacement cost coverage, beyond the limits of the policy. For total losses, ACV pays the fair market value of the dwelling at the time of loss, whereas replacement coverage pays for replacement costs up to, or beyond, the limits of the policy.
This comparison, which is entirely consistent with Garnes and the Commissioner’s interpretation of sections 2051 and 2071, belies FAIR’s contention that such interpretation will eliminate the distinction between ACV and replacement cost policies. As the form disclosure statement reflects, the two types of policy provide different indemnity measures for both partial losses and total losses, and replacement policies provide more generous coverage than ACV policies. The further fair-market-value cap FAIR would have us read into sections 2051 and 2071 is not required to achieve this result. In short, FAIR’s interpretation is a solution in search of a problem.
FAIR also argues that Garnes and the Commissioner’s interpretation would “circumvent” the provision in section 2051.5 that allows insurers to withhold a portion of the replacement cost under a replacement cost policy until the insured completes the repair or rebuilding of the property. That section provides in relevant part that “[i]f the policy requires the insured to repair, rebuild, or replace the damaged property in order to cоllect the full replacement cost, the insurer shall pay the actual cash value of the damaged property, as defined in Section 2051, until the damaged property is repaired, *28 rebuilt, or replaced” and that “[o]nce the property is repaired, rebuilt, or replaced, the insurer shall pay the difference between the actual cash value payment and the full replacement cost reasonably paid to replace the damaged property, up to the limits stated in the policy.” (§ 2051.5, subd. (a).) “Had Garnes purchased a replacement cost policy,” FAIR contends, “she would have been entitled to the amount needed to rebuild, repair or replace the damaged property only upon showing that she had made those repairs.” “That is, actual repair or replacement of the damaged property is a condition precedent to recovery of replacement costs.” Under Garnes’s interpretation, FAIR contends, “she would be entitled to replacement cost recovery without having to first repair the property or to otherwise comply with section 2051.5(a).”
FAIR’s description of the statute is not accurate. Section 2051.5, subdivision (a) does not require insureds to repair or replace as a “condition precedent” to recovery of replacement costs. Rather, it implicitly allows FAIR or other insurers to include a provision in the policy requiring the insured to repair or rebuild in order to collect “the full replacement cost.” (§ 2051.5, subd. (a), italics added.) However, it requires the insurer in the meantime to pay “the actual cash value of the damaged property” until the damaged property is repaired or rebuilt, and then to pay the difference between actual cash value and full replacement cost once the repair or rebuilding is completed. ( Ibid .)
Moreover, FAIR does not explain or provide authority for what its obligations are where replacement costs are provided under an ACV policy, much less how they differ from its obligations under section 2051.5, subdivision (a) for a replacement cost policy. Under both types of policy, “actual cash value,” as interpreted by Garnes and the Commissioner, for a partial loss means replacement cost minus depreciation, or the policy limits, whichever is less. However, the indemnity measure under a replacement cost policy is replacement costs “without a deduction for physical depreciation,” or the policy limits, whichever is less. Under an ACV policy, the owner is entitled to actual cash value, period: that is, the lesser of the policy limit or replacement costs minus depreciation. Under section 2051.5, subdivision (a), under a replacement policy that requires repair, rebuilding or replacement, the owner is entitled to actual cash value in the *29 same amount as an ACV policyholder, at the outset, but in addition, is entitled to the difference between actual cash value and full indemnity (replacement costs without depreciation) at the conclusion of repair or rebuilding. There is no anomaly in this result. The two types of policyholders аre treated the same before completion of repair or rebuilding, but the replacement policyholder ultimately receives an additional payment, and is therefore better off than the ACV policyholder, once repair or rebuilding is complete.
In short, this argument, too, lacks merit.
Finally, FAIR argues that Garnes and the Commissioner’s interpretation would create a “moral hazard.” It posits that “[s]ince a partial loss may easily exceed the actual cash value (fair market value) of the property, an insured could purchase an old, run- down property, over-insure it and hope for a convenient fire that would not totally destroy the property.” Further, “[i]f Garnes’ interpretation were to be adopted, an insured would have every incentive to make a claim for the cost of repairs, then sell the property as a teardown and pocket the balance.”
The “hazard” FAIR describes is, to be generous, overstated. The idea that individuals would purchase a “run-down” property and then “hope for a convenient fire that would not totally destroy the property” is at best speculative. Further, if FAIR means to suggest an owner might bring about such a fire intentionally, such “moral hazard” could be rectified by the insurer’s invocation of the intentional acts exclusion of section 533 to deny coverage. Regardless, FAIR’s argument amounts to an attack on the policy underlying the standard form fire insurance policy as adopted by the Legislature. To the extent FAIR thinks it ought to be revised, it is a matter for the Legislature, not this court.
II.
The Insurance Code Governs FAIR’s Obligations To Garnes.
The parties also dispute whether the Policy is to be apрlied in accordance with its
terms or instead in accordance with the Insurance Code. FAIR argues that regardless of
whether the Policy complies with the governing Insurance Code provisions, this case and
*30
its obligations to Garnes are “governed by the policy she purchased, not by some
statutory form policy she never purchased.” Garnes relies on
Century-National Ins. Co.
v. Garcia
(2011)
In view of this dispute, a few words about the intersection of insurance policies and the Insurance Code are in order. As Witkin points out, “All insurance policies issued in California are governed by the provisions of the Insurance Code. [Citation.] When insurance coverage is required by law, the statutory provisions are incorporated into the insurance contract. The obligations under an insurance policy are measured and defined by the pertinent statute, and the statute and the policy together form the insurance contract. [Citation.] This general principle is subject to the condition that statutory provisions may not be read into a policy to the insured’s detriment, even where the statutory language appears mandatory.” (2 Witkin, Summary of Cal. Law (10th ed. 2005) Insurance, § 8, p. 30.)
“While the duties and obligations of the insurer and the insured are contractual in nature, neither party has the inviolate rights that normally characterize private contracts. This is because the business of insurance is a matter of the public interest, and insurance contracts are subject to the reasonable exercise of the state’s police power. [Citation.] Any provision in an insurance policy that fails to conform to law or violates public policy is unenforceable.” (2 Witkin, Summary of Cal. Law, supra , § 8. p. 30.) Finally, “[p]olicies may be required to include certain provisions.” ( Ibid . [citing as example § 11580].)
Consistent with these principles, courts have long held that “an insurer has the
right to limit policy coverage in plain and understandable language and . . . may limit the
nature of the risk it undertakes to assume. [Citations.] Nevertheless, an insurance
company’s limitation of coverage must conform to the law and public policy. [Citation.]
Furthermore, it is also well settled that insurance contracts, as contracts of adhesion, are
*31
subject to careful judicial scrutiny to avoid injury to the public. [Citation.] Courts
considering adhesion contracts have a heightened responsibility to prevent the marketing
of policies that provide unrealistic and inadequate coverage. Thus, any portion of an
insurance contract which is violative of public policy is not enforceable.” (
Carson v.
Mercury Ins. Co.
(2012)
Century-National , on which Garnes relies, applied these principles to a fire insurance policy challenged by the insureds as inconsistent with section 2071. The California Supreme Court held an exclusionary clause that was less favorable to the insureds than the section 2071 standard form policy impermissibly reduced the statutorily mandated coverage and thus was invalid and unenforceable. ( Century-National , supra , 51 Cal.4th at pp. 566, 573.) It reversed the Court of Appeal’s affirmance оf a trial court ruling sustaining the insurer’s demurrer based on this exclusion provision in the policy. (See ibid .) The insured was entitled to enforce the policy notwithstanding the invalid provision.
Specifically,
Century-National
involved a fire insurance policy that contained
clauses precluding coverage if the loss was caused by the intentional act or criminal
conduct of “any insured.” (
Century-National
,
supra
,
The Supreme Court determined that, while the statutory standard form contained “no express exclusion for losses caused by intentional acts or criminal conduct,” section 533 set forth such a willful act exclusion that was incorporated into the standard form policy. ( Century-National , supra , 51 Cal.4th at pp. 568–569; see id . at p. 570 [referring to section 533 as “implied statutory exclusion”].) But section 533 was a more limited exclusion than that in the Century-National policy. “Section 533’s use of the term ‘the insured’ bears directly on the instant coverage issue: unlike policy exclusions thаt refer to ‘an’ insured or ‘any’ insured, exclusions based on acts of ‘the’ insured are construed as not barring coverage for innocent coinsureds. [Citations.] Given the settled meaning of the language used in section 533, the standard form fire policy must be construed as including a willful acts exclusion that is protective of innocent insureds.” ( Century-National , at p. 569.) Because, “under the standard form, which must be read as including section 533’s exclusion for losses caused by ‘the wilful act of the insured’, . . . innocent insureds would not be barred from coverage,” the court concluded that “the intentional acts exclusion in the Century-National policy results in coverage that is not at least substantially equivalent to the level of protection provided in the statutory standard form fire policy” and therefore was “invalid.” ( Id . at p. 573.)
In
Howell v. State Farm Fire & Casualty Co.
(1990)
Section 530 and
Sabella
govern how coverage is determined when there is a
concurrence of different causes of loss. (See
Howell
,
supra
,
Further, the court’s reasoning in
Howell
was not limited to section 530. “Stated
simply, the important question presented by this case is whether a property insurer may
contractually exclude coverage when a covered peril is the efficient proximate cause of
the loss, but an excluded peril has contributed or was necessary to the loss. We conclude
that a property insurer may not limit its liability in this manner, since the statutory and
judicial law of this state make the insurer liable whenever a covered peril is the ‘efficient
proximate cause’ of the loss, regardless of other contributing causes. Consequently, the
policy exclusions at issue in this case are not enforceable to the extent they conflict with
California law.” (
Howell
,
supra
,
Century-National
and
Howell
hold, and
Julian
reiterates, that where California’s
statutory or decisional law require coverage, an insurer may not circumvent the law by
employing contrary contract terms. FAIR counters with
Cheeks
, in which a panel of the
Second District Court of Appeals suggested the opposite. However, it did so in dicta
*34
that can have no force after the California Supreme Court issued its decision in
Century-
National
13 years later. Further,
Howell
and
Julian
involved the requirements of
sections 530 and 532, general provisions of the Insurance Code regulating causes of loss,
and case law interpreting them. These cases demonstrate that where an insurer’s policy
contains terms that conflict with the law, the courts will decline to enforce the
impermissible terms and read into the policy the terms required by statute. (See also
Wildman
,
supra
, 48 Cal.2d at pp. 39–40 [where policy provisions were in derogation of
Vehicle Code sections, latter “must be considered a part of every policy of liability
insurance even though the policy itself does not specifically make such laws a part
thereof”];
Utah Property & Casualty Ins. Guaranty Ass’n v. United Services Auto. Assn.
(1991)
FAIR seeks to distinguish Century-National , contending it involved an exclusion that conflicted with section 2071. According to FAIR, “Garnes does not claim that the FAIR Plan policy fails to comply with section 2070 or 2071 . Rather, she claims the policy does not comply with section 2051 .” FAIR concedes that section 2071 is mandatory but argues “section 2051 contains no such mandatory language” and for this reason “ Century-National is inapplicable.”
We disagree for three reasons. First, Garnes plainly does argue that the Policy fails to comply with sections 2070 and 2071. She points out that section 2071 provides for coverage “ ‘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.’ ” She further argues that section 2051 defines “actual cash value” for purposes of the section 2071 standard form policy and that the statutory definition is “mandatory.”
Second, FAIR’s argument that section 2051 is not mandatory is spurious. Section 2051’s language is mandatory. It provides: “Under an open policy that requires payment of actual cash value, the measure of the actual cash value recovery, in whole or partial settlement of the сlaim, shall be determined as follows : . . . .” (§ 2051, subd. (b), italics added.) It then sets forth the measures that apply in the case of total loss to the structure and in the case of partial loss to the structure. ( Ibid .) And lest there be any *35 doubt about the meaning of “shall,” section 16 provides that “[a]s used in this code the word ‘shall’ is mandatory.” Moreover, the legislative history makes clear that the measures adopted in section 2051 were intended to be mandatory. The legislative goals of clarity, consistency and dispute avoidance would not be served if insurers could substitute other and conflicting provisions in their policies in place of section 2051. Section 2051 thus provides mandatory minimum coverage under an open ACV fire insurance policy.
Third, since mandatory insurance coverage provisions are incorporated into every
policy to which they pertain, section 2051 is incorporated into the standard form policy
set forth in section 2071, as indicated by case law, regulation and statute. In
Century-
National
the court stated: “Because section 533 represents ‘ “an implied exclusionary
clause which by statute is to be read into all insurance policies” ’ [citation], the standard
form fire insurance policy is properly read as excluding coverage for losses caused by
‘the willful act of
the
insured.’ ” (
Century-National
,
supra
,
Further, as the Commissioner points out, its Regulation 2695.9, subdivision (f)(1) explicitly incorporates section 2051 intо the standard form policy. The regulation states: “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.” (Cal. Code Regs., tit. 10, § 2695.9, subd. (f)(1).)
Finally, section 2070 requires “[a]ll fire policies” to be on the standard form or provide coverage for fire losses that is “substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.” (§ 2070.) The Policy, insofar as it purports to cap indemnity for partial losses at fair market value, or to treat a loss that does not destroy the structure as a “total loss,” is not “substantially *36 equivalent to or more favorable to” Garnes than the standard form policy, read to incorporate the provisions of section 2051. The Policy, to that extent, is unenforceable, and we must treat it as if its indemnity terms conformed to section 2051.
In short, the Policy must be applied in accordance with the Insurance Code rather than by its own terms.
DISPOSITION The judgment is reversed, and we remand the case to the superior court for proceedings consistent with the views expressed in this opinion. Garnes is awarded costs of appeal.
*37 STEWART, J.
We concur.
RICHMAN, Acting P.J.
MILLER, J.
California FAIR Plan Assn. v. Garnes (A143190)
Trial Court: Contra Costa County Superior Court
Trial Judge: Hon. Steven Austin
Counsel:
Hereford Kerley, Law Office of Dylan Schaffer, Kerley Schaffer, J. Edward Kerley, Dylan L. Schaffer for Defendant and Appellant.
Kamala D. Harris, Attorney General, Kathleеn 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.
Notes
[1] All further statutory references are to the Insurance Code, unless otherwise indicated.
[2] The suit also named Garnes’s husband, Johnie Garnes, who is now deceased.
[3] FAIR also alleged it had paid her separate amounts totaling about $67,000 for demolition, asbestos abatement, emergency board up and lost rental value. Those amounts are not in dispute.
[4]
The parties and the Commissioner have also submitted various requests for
judicial notice, some of which we now rule upon. On July 15, 2015, Garnes submitted a
request for judicial notice of certain correspondence from counsel for the Commissioner
to counsel for FAIR, which FAIR opposed. We deny this request as untimely, having
been filed after FAIR had filed its respondent’s brief. (See Evid. Code, § 453, subd. (a).)
On August 19, 2015, the Commissioner submitted a request for judicial notice of five
items. We grant the request for the first three items, but deny it as to the two letters from
the Commissioner’s counsel to FAIR’s counsel in 2014 and 2015 because, as FAIR
points out in its brief in response to the Commissioner’s amicus brief, these letters pertain
to an argument—that FAIR’s policy is unenforceable because FAIR did not seek or
obtain the Commissioner’s permission to use it—that was not raised in the parties’ briefs
on appeal. (
Mercury Casualty Co. v. Hertz Corp.
(1997)
[5] The Policy insures the dwelling for $425,000 and personal property for $50,000.
[6] This is to be distinguished from a “valued policy,” which is one that “expresses on its face an agreement that the thing insured shall be valued at a specified sum.” (§ 412.) As FAIR points out in its brief, the coverage amounts of $425,000 for the home and $50,000 for its contents were requested by Garnes and not based on any inspection or valuation assessment by FAIR.
[7] The parties dispute whether Garnes’s dwelling suffered a “total loss” or a “partial loss.” However, their disagreement on this point is of a legal rather than a factual nature. The effect of the fire on Garnes’s home is not disputed. The fire caused extensive damage to Garnes’s home, but did not physically destroy the building.
[8] Section 2051, subdivision (a) states: “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.”
[9] Section 2051, subdivision (b) рrovides: “Under an open policy that requires payment of actual cash value, the measure of the actual cash value recovery, in whole or partial settlement of the claim, shall be determined as follows: “(1) In case of total loss to the structure, the policy limit or the fair market value of the structure, whichever is less.
[10]
For example, she cites a definition for “total loss” in Black’s Law Dictionary
(7th ed. 1999) and cases discussing the meaning of this term (see, e.g.,
Martinez v.
Enterprise Rent-A-Car Co
. (2004)
[11] For this same reason, its lengthy discussion of other jurisdictions’ interpretation s of “total loss” or “partial loss” for purposes of property insurance policies is not relevant.
[12] Merriam-Webster’s first definition of “loss” is “destruction, ruin.” (<https://www.merriam-webster.com/dictionary/loss>.)
[13] See <https://www.merriam-webster.com/dictionary/structure> (defining “structure” to mean, inter alia, “something (such as a building) that is constructed”).
[14]
The average clause was designed to reduce the insurer’s coverage obligation if
the property was substantially underinsured. (
Jefferson
,
supra
,
[15] Sections 2051 and 2071 are in Division 2, Part 1, Chapter 2 of the Insurance Code, which is entitled “The Fire Insurance Contract.” Chapter 2 contains three articles, the first (irrelevant here) concerning “Changе of Risk,” the second (containing section 2051) governing the “Measure of Indemnity” and the third (containing section 2071) governing the “California Standard Form Fire Insurance Policy.”
[16]
As the Commissioner points out, the Legislature is presumed to have been
aware of judicial precedent in effect at the time it enacts or amends legislation and to
have acted in light of such precedent. (
In re W.B.
(2012)
[17]
Doan v. State Farm General Ins. Co.
(2011)
[18] We say “in part” because under section 2051 fair market value still plays a role in defining actual cash value where there is a total loss of a structure.
[19] AB 2692 not only added subdivision (b), but also enacted a new section 675.1, which prohibits insurers from cancelling coverage in the case of a total loss to the structure while the structure is being reconstructed (§ 675.1, subd. (b)) and, if the time for renewal occurs before reconstruction is complete, requires insurers to adjust the limits, coverages and premiums to reflect the change in the insured’s exposure to loss. ( Id ., subd. (a).)
[20]
Garnes also asks us to consider the legislative history of a similar, but not
identical, predecessor bill, Senate Bill No. 1678, which was proposed in 2002 by Senator
Richard Polanco but which, after a number of amendments, ultimately failed to pass out
of committee. We decline to do so because neither house of the Legislature passed
Senate Bill No. 1678, and the history that surrounds it thus “cannot be deemed a reliable
and clear indication of the Legislature’s intent” two years later, when the Legislature
enacted AB 2692. (See
Medical Bd. v. Superior Court
(2003)
[21]
(Assem. Insurance Com., Background Information Sheet on Assem. Bill No.
2962 (2003–2004 Reg. Sess.) Mar. 18, 2004, p. 1.) For a discussion of other legislation
passed and a regulation adopted in response to the same wildfires, see
Association of
California Ins. Companies v. Jones
(2017)
[22] Further, as Garnes’s counsel pointed out at oral argument, while the fair market value of a home that has been destroyed in a total loss is easy enough to ascertain, it is not obvious what method should be used to determine the fair market value of parts of a home that are merely damaged.
[23]
Courts consider such background information documents in discerning
legislative intent. (See
Quarry v. Doe I
(2012)
[24]
Committee reports also are an appropriate sоurce of legislative intent. (See
Mt.
Hawley Ins. Co. v. Lopez
(2013)
[25]
The California Supreme Court has routinely considered statements in enrolled
bill reports and memoranda as evidence of the Legislature’s intent. (See
Lockheed
Information Management Services Co. v. City of Inglewood
(1998)
[26] FAIR merely concedes that the Legislature was concerned “that insurance policies were inconsistent or unclear as to how they defined ‘actual cash value.’ ”
[27]
Specifically, the
Yamaha
factors weigh powerfully in favor of affording this
significant deference. The Legislature has empowered the Commissioner to adopt rules
and regulations as necessary to implement the insurance laws of the state. (
Calfarm Ins.
Co. v. Deukmejian
(1989)
[28] The disclosure statement is consistent with the measures of indemnity provided in section 2051, which governs open ACV policies and section 2051.5, which applies to open replacement cost policies. The latter section provides in relevant part that “Under an open policy that requires payment of the replacement cost for a loss, the measure of indemnity is the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without a deduction for physical depreciation, or the policy limit, whichever is less.” (§ 2051.5.)
[29]
As a case cited by the Insurance Commissioner reflects, this rule is of long
standing. (See
Wildman v. Government Emp. Ins. Co
. (1957)
[30] The court in Cheeks rejected FAIR’s interpretation of the policy language it was using at the time, which was the same or similar to the standard form policy. ( Cheeks , supra , 61 Cal.App.4th at pp. 426–429.) The court’s comment that FAIR could have used other language that was inconsistent with section 2071 was unnecessary to its decision. (See Cheeks , at p. 429 & fn. 5.)