Allstate Insurance Company issued a homeowners policy to Kelly and Debbie Minich. In the policy, Allstate agreed to pay the "actual cash value" of the Minichs' house, in an amount not to exceed the "limit of liability shown in the policy Declarations," if the house was damaged or destroyed. The policy's Building Structure Reimbursement provision said Allstate would pay an amount in excess of the home's "actual cash value" if the Minichs were to "repair, replace, or rebuild" their house. The policy's "Building Structure Reimbursement Extended Limits" Endorsement (the "BSREL Endorsement") said this additional payment would not exceed "150% of the limit of liability."
On October 23, 2007, a fire destroyed the Minichs' house. Allstate paid the Minichs the limit of liability ($129,590) minus a $250 deductible. Allstate paid an additional $69,920 under the BSREL Endorsement 15 months after the fire, when the Minichs demonstrated they were rebuilding their house.
The Minichs filed suit against Allstate for breach of contract and bad faith, claiming Allstate should have paid the $69,920 sum immediately after the fire. The Minichs noted California Insurance Code §§ 2051 and 2051.5 require an insurer to pay the "policy limit" whenever a house is destroyed, regardless of whether the insured intends to rebuild. The Minichs argued the 'policy limit' included the additional $69,920 amount.
In its motion for summary judgment, Allstate noted it had paid the $129,590 policy limit within two weeks of the fire. It was not required to pay the additional $69,920 amount until the house was actually rebuilt. Allstate argued the policy provisions were consistent with §§ 2051 and 2051.5 and that the $69,920 amount was above the "policy limit." The trial court granted Allstate's motion for summary judgment, and the Court of Appeal affirmed.
Rejecting the Minichs' claims, the Court of Appeal noted the BSREL Endorsement states that, where applicable, Allstate will pay "150% of the limit of liability." "The BSREL Endorsement thus makes it clear that any payment pursuant to that endorsement would be an amount in excess of the limit of liability or 'policy limit.'"
The Court of Appeal relied in part on Caroselli v. Allstate Property and Cas. Ins. Co. (E.D. Pa. 2010) 2010 U.S. Dist Lexis 83515. In Caroselli, the Pennsylvania District Court held an identical endorsement contained nothing to suggest that it altered the liability limit.
The Court of Appeal also held the Minichs' interpretation was flawed because the policy contained a single limit of liability for Dwelling Protection coverage, applicable to payments made under both the Actual Cash Value and Building Structure Reimbursement provisions of the policy. If the BSREL Endorsement extended the limits of liability, the endorsement would extend the limits of liability applicable to the Actual Cash Value provision, as well. This would mean an insured could collect the full $194,760 regardless of whether the insured undertook to repair or replace the damaged property, contrary to the policy's clear and unambiguous language.
The Minichs also argued § 2051.5 requires an insurer to pay the "actual cash value of the damaged property" regardless of whether the insured replaces the property. Section 2051(b)(1) defines "actual cash value" as "the policy limit or the fair market value of the structure, whichever is less." The Minichs argued the term "policy limit" in § 2051(b)(1) means "the maximum policy benefit potentially owed under the policy." The Court rejected this contention, as well.
Although the Insurance Code does not define the term "policy limit" as used in §2051(b), the Court agreed with Allstate that monies payable pursuant to the BSREL Endorsement constitute an amount above the policy limit. In reaching its conclusion, the Court of Appeal relied in part on Insurance Code § 10102, which uses the term "policy limit" to refer to the policy's limits of liability. The Court concluded, "[w]hile the BSREL Endorsement clearly changes the amount of coverage, it does not change the policy limit. Rather, it provides for a payment 'above the policy limit.'"
Finally the Court of Appeal rejected the Minichs' argument that public policy considerations support interpreting the term "policy limit" in § 2051(b)(1) to mean "maximum policy benefit." The Minichs argued the purpose behind the policy's requirement that a homeowner rebuild before receiving benefits is to ensure a homeowner is not "bettered" by the loss. The Minichs asserted, however, that this rationale does not apply when the policy limit is below the home's fair market value because the insured will never recover the fair market value, even after the maximum policy benefit is paid. The Court of Appeal rejected this contention, noting that such a rule would give homeowners an incentive to underinsure.
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