Recently, the California Court of Appeal held that recovery under a standard California fire policy is limited to the specified policy limits, even if the actual cash value of the loss exceeds those limits.
The California FAIR Plan Association (the “FAIR Plan”) was established by the California legislature in 1968 to make available “basic property insurance” to property owners who are unable to procure such insurance through normal channels from an admitted insurer. The FAIR Plan is an involuntary joint reinsurance association of all insurers authorized to write property insurance in California. The governing statutes require the FAIR Plan to provide insurance for the peril of fire which is equivalent to, or more favorable than what is contained in, the standard form fire insurance policy set forth in Insurance Code § 2071.
In St. Cyr v. California FAIR Plan Assn., ___ Cal.App.4th ___, 2014 WL 346074 (2d Dist. Jan. 31, 2014), the plaintiffs were policyholders who lived in high fire risk areas and whose homes were destroyed in a wildfire. Despite having been paid the full amount of their policy limits for destruction of their properties, the policyholders sued the FAIR Plan for breach of contract, bad faith, and unfair business practices. Specifically, the policyholders argued that, although standard fire policies require payment for actual cash value of dwelling loss and the actual cash value of their homes exceeded their policy limits, the FAIR Plan limited payment to the policy limits.
The court rejected the policyholders’ argument based on the express language of Section 2071, and sustained the trial court’s dismissal of the action. The court noted that the statutorily-required policy language provides that fire coverage is afforded “to the extent of the actual cash value of the loss,” but also that coverage is provided “to an amount not exceeding _____ dollars.” Thus, the stated limit of insurance “fixes the maximum amount due under the policy.” The court also noted that, under Insurance Code § 2051, which specifies the “measure of indemnity” under an “open” policy, loss payment is determined based on the lesser of the policy limit or the cost to repair and/or replace the damaged property. Therefore, “[a]s appellants were paid the full amount of their policy limits, they were paid the amount due.”
It should be noted that, under California Insurance Code § 10102(e) and (f), a policy issued as “guaranteed replacement cost coverage” may not limit coverage to a specified amount. The policy at issue in the St. Cyr case was described by the court as “bare bones” coverage, and did not implicate Section 10102.