Down to Cases

An extreme (and unsuccessful) effort to contort policy languageAlthough courts are often willing to rule, on slim or nebulous arguments, against insurers and in favor of insureds, the following decision of the District Court for the Eastern District of Pennsylvania proves the exception to the rule. It shows that courts will follow insurance policies that are clear and unambiguous, regardless of the imaginative theories posed by the insured.

This case is also important to every agent and broker, especially those in Pennsylvania, because it establishes that there is no obligation imposed on an insurer, agent or broker to inspect and determine the exact replacement value of an insured’s home.A couple had an insurance policy on their home that covered the dwelling for $1,561,000 and the contents for $1,293,289. In 2003, they switched coverage to a different insurance company. They negotiated the policy through their insurance broker, who suggested that the existing limits be retained. Rather than conduct its own appraisal, the new insurer accepted those limits. In November 2004, the couple renewed the policy and increased the limits to $1,639,050 for the dwelling and $1,358,773 for the contents.In June 2005, the couple’s house was destroyed by a fire. Subsequently, the couple submitted claims to their insurer through their public adjuster. Under the policy, the couple was entitled to the amount it would cost to rebuild the home at the same location, which was called “guaranteed rebuilding cost” coverage in the policy. If they rebuilt elsewhere, the most they were entitled to was the policy limit.Believing that the couple was going to rebuild at the same location, the insurer adjusted the loss and prepared an initial estimate of the reconstruction cost. The couple disagreed with the insurer’s initial appraisal and hired their own contractor to prepare an estimate. When the parties could not agree on an estimate, they submitted the dispute to an appraisal process, as per the terms of the policy.Meanwhile, the couple built a new home for themselves in a nearby town. They also received permission to subdivide their old property into three lots, on which they later built three new houses to sell.The appraisal found that the cost to repair or replace the couple’s home was $2,916,900. However, the insurer refused to pay the appraisal amount because the couple did not rebuild their home at the same location. Instead, it paid the couple the $1,639,050 dwelling limit and the $1,358,773 contents limit.The couple sued the insurer for breach of contract, maintaining that they did rebuild at the same location and thus were entitled to the $2,916,900 guaranteed rebuilding cost coverage. They also alleged that their coverage limit did not adequately insure their property, and that the insurer breached its obligation to conduct a pre-loss valuation that would have resulted in higher policy limits.The court first considered the couple’s claim that they had complied with their policy’s “same location” condition and thus were entitled to the guaranteed rebuilding cost coverage. Citing another opinion, the court noted that when interpreting an insurance policy, “the words of the insurance policy must be construed in their natural, plain, and ordinary sense.” It then proceeded to dismiss the couple’s claim.While the court agreed with the plaintiffs that the terms were not defined in the policy, it still found them clear enough. “As this Court has previously noted, ‘the failure to define a term should not send the Court scurrying to a dictionary hunting for ambiguity.’ … Yet Plaintiffs ask this Court to scurry to new heights.”In looking at the policy as a whole, the court found that the term “same location” is not ambiguous. It noted that throughout the policy, “location” referred to the specific address of the plaintiffs’ destroyed home.“It is beyond reason,” the court said, “that ‘location’ is used to indicate ‘address’ throughout the (policy), but when ‘same’ is placed in front of it, its meaning expands to an undefined and undefinable degree. … It is common knowledge that when an insured purchases homeowners insurance, he buys coverage for his individual properties, not for a broad, undefined expanse of miles of space over which he has no ownership. Plaintiffs’ argument fails because it contains no limiting principle: if ‘same location’ can encompass two separate addresses because they are similar and alike in kind, then the fact that Plaintiffs’ properties are five minutes apart is irrelevant; indeed, there are arguably properties in greater Delaware County, or in all of Pennsylvania, or even the entire United States, that may well be more similar and alike in kind than (the address of the plaintiffs’ new home).”In short, the court said that since the plaintiffs chose not to rebuild on the property where their house burned down, they were not entitled to guaranteed rebuilding cost coverage.As an alternative argument, the couple claimed that by subdividing their old property and building three new homes on it, they “rebuilt” their “house” at the “same location,” triggering their policy’s guaranteed rebuilding cost provision.The court found that under that provision, “‘reconstruction cost’ is limited to ‘the lesser of the amount at the time of the loss required to (a) restore or repair a structure; or (b) replace or rebuild a structure at the same location; with materials of like kind and quality.’”“Plaintiffs’ argument that developing their former property into three new properties is synonymous with replacing or rebuilding their destroyed house stretches beyond the bounds of reason and clearly falls beyond the (policy’s) intended scope,” the court said. “It is simply implausible that any reasonable fact finder could construe the plain meaning of ‘materials of like kind and quality’ to include those materials necessary to construct three separate homes where there was once one.”The court added that while the plaintiffs were free to develop their old property as they saw fit, “their insurance policy served to compensate them for their covered loss, not to provide a blank check to fund their future development projects.”The court also considered the plaintiffs’ charge that their insurer breached a contractual obligation by failing to conduct a pre-loss home valuation, and that had the insurer done so their destroyed property would have been insured for at least $1.2 million more than it was. In support of their position, the plaintiffs pointed to a lone sentence in their policy: “We may change the amount of coverage shown on the Declarations Page when the policy renews or when appraisals are conducted to reflect current costs and values.”The court, however, found no obligation to conduct a valuation in that sentence. “The plain meaning of the terms ‘we may change’ and ‘when appraisals are conducted’ suggests only one reasonable interpretation: that Defendant reserves the right to conduct appraisals and may change the amount of coverage, not that Defendant affirmatively assumes an obligation to do so.” The court later added that the sentence “contains no language mandating an appraisal at any time, and certainly not at the implementation of the policy.”The court considered a number of other claims the plaintiffs made, dismissed them all and granted summary judgment to the defendant insurer.Scardino v. American International Insurance Co., No. 07-282 (E.D.Pa. 11/02/2007). Barry Zalma, Esq., CFE, is a California attorney. His practice emphasizes the representation of insurers and others in the business of insurance. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He provides expert witness testimony and consults with plaintiffs and defendants concerning insurance coverage, insurance claims handling and bad faith. He has qualified as an expert in state and federal courts in California, Mississippi, Texas and New Mexico, as well as in the Grand Caymans. He can be reached at [email protected]. His consulting practice’s Web site is www.zic.bz.