| The California Court of Appeal for the Fourth District upheld a trial court’s ruling enforcing the policy limits and replacement cost coverage provisions in a homeowner’s policy because the policy clearly stated the homeowner was not entitled to the total cost to replace her property.
Agnes Everett (“Everett”) purchased a home in October, 1991 for $99,000. At the same time, she purchased a homeowner’s policy from State Farm (“the Policy”). The Policy included an endorsement for guaranteed replacement cost coverage which provided that State Farm would pay the full amount needed to repair the damaged or destroyed dwelling with like or equivalent construction, without regard to policy limits.
In August 1997, State Farm eliminated the guaranteed replacement cost coverage in its homeowner policies and sent each policyholder a notice of the change in coverage. The notice complied with applicable law and informed the insureds that if they chose to renew their homeowners policies with State Farm, guaranteed replacement coverage would no longer be available. The insureds were informed that their policy now has a stated limit of liability that reflects the maximum that will be paid in case of loss.
On September 29, 1997, Everett renewed her homeowners policy with the new terms providing for a stated policy limit. Each year from 2000 to 2003, State Farm sent a renewal certificate to Everett which provided Everett with a reminder that it was her responsibility to insure her home with adequate coverage. State Farm provided Everett with a replacement cost estimate, but State Farm’s renewal certificate advised her State Farm does not guarantee this figure will represent the actual cost to replace her home and it is her responsibility to select the appropriate amount of coverage. In addition, every two years State Farm mailed to its California insureds a “California Residential Property Insurance Disclosure” that explained the terms “replacement cost” and “extended replacement cost,” in compliance with Insurance Code section 10102.
On October 25, 2003, Everett’s home was destroyed by fire. State Farm adjusted Everett’s claim and paid her $138,654.48 for her structural loss and $76,620 for her personal property.
Dissatisfied with this payout, Everett sued State Farm on March 25, 2005, asserting claims for breach of contract, breach of implied covenant of good faith and fair dealing, negligence, reformation, and fraud. Her breach of contract claims were based on two theories. First, she alleged the policy in effect at the time of her loss provided guaranteed replacement cost coverage, such that she was entitled to full payment to replace her property without regard to policy limits. Alternatively, she alleged State Farm failed to provide sufficient notice of the changes in her policy and, therefore, the guaranteed replacement cost coverage should remain in place.
State Farm filed a motion for summary adjudication, arguing the policy in place at the time of Everett’s loss did not include guaranteed replacement cost coverage and that she received sufficient notice of the change in coverage with her 1997 renewal. The trial court granted the motion and it was affirmed on appeal.
The appellate court held the coverage afforded under the policy clearly and unequivocally limits payment to the amount stated in the declarations page. The policy provided the following:
We will pay up to the applicable limit of liability shown in the Declarations, the reasonable and necessary cost to repair or replace with similar construction and for the same use on the premises shown in the Declarations . . .
The court held Everett’s policy did not include language guaranteeing replacement cost coverage. It rejected Everett’s contention the policy was unclear for stating in the declarations both a dollar amount of coverage and a statement that the policy included replacement cost for “similar construction.”
The court rejected Everett’s contention that State Farm used the word “replace” to deceive its customers into thinking they would receive the full cost to rebuild their homes. The court noted that even if the word “replace” is interpreted as restoring the property to its similar state prior to the fire, the “Coverage A Loss Settlement Endorsement” clearly limits payment to the amount stated in the declarations page. The court concluded the policy was not ambiguous.
The court also disagreed with Everett’s contention State Farm was liable under the California Residential Property Insurance disclosure statement (Ins. Code Sections 10101 & 10102) for failing to maintain policy limits equal to replacement costs. The court held Insurance Code sections 10101 and 10102 do not require State Farm to set policy limits that equal the cost to replace the property. Instead, it is up to the insured to determine whether he or she has sufficient coverage for his or her needs. In addition, State Farm’s renewal certificates contained reminders that the State Farm replacement cost figure was only an estimate.
The court also concluded State Farm complied with Insurance Code section 678(a)(1)(A), which governs the method an insurer must use to provide notice to an insured of a reduction in coverage.
Lastly, the court rejected Everett’s negligent misrepresentation claims against the State Farm agents who sold and serviced Everett’s policy. The court noted the policy included an integration clause stating the policy “contains all of the agreements between you and us and any of our agents.” The policy further stated that its terms could not be modified by any oral agreement. Accordingly, the court concluded no oral representation could have been effective to change the terms of the fully integrated policy.
This opinion is not final. It may be depublished, modified on rehearing, or review could be granted. This events would render this decision unavailable for use as legal authority.
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