Sixth Circuit case highlights why you should read your policy
A dispute over policy terms led an insured to file a class-action complaint against his insurer, arguing breach of contract.
The Sixth Circuit has ruled that a homeowner cannot reasonably interpret an ACV endorsement to his policy as creating additional coverage for damage to his roof from a windstorm.
Disputing the terms of the policy
A windstorm caused damage to the roof of Murray Richelson’s home. Richelson filed a claim with his homeowner’s insurer Liberty Insurance (Liberty). An adjuster determined that the cost to replace the roof would be $8,960, but Liberty declined to pay the replacement cost, instead, paying the amount of the actual cash value, or ACV, of the roof. Liberty determined the ACV by applying the $1,000 deductible listed in the policy, and also deducting depreciation from the replacement cost amount. So, Liberty reimbursed Richelson $4,350.50, which equates to less than half the replacement value of the roof, leading to a dispute about the terms of the policy.
Section 1 of the policy addressed “A. Dwelling with Expanded Replacement Cost,” where it states that “[l]osses covered under Section 1 are subject to a deductible of $1,000.” Policies include endorsements, which amend the insurance contract and impact the scope of coverage in some way. In the Richelson’s policy, there was an endorsement that said in large upper-case font “THIS ENDORSEMENT CHANGES YOUR POLICY. PLEASE READ IT CAREFULLY.” Below that warning, the endorsement states that losses to “[b]uildings under coverage A or B, except for their roof surfacing, roof vents and roof flashing materials if the loss to the roof surfacing, roof vents, and roof flashing materials is caused by the peril of Windstorm or Hail, [is] at replacement cost without deduction for depreciation. . . .” The endorsement also provides the coverage that applies in those situations. Claims for losses to “[r]oof surfacing, roof vents and roof flashing materials if the loss is caused by the peril of Windstorm or Hail” are settled at “actual cash value at the time of the loss but not more than the amount required to repair or replace.”
Richelson filed a class action complaint against Liberty, challenging its reading and application of the endorsement. In the class action, Richelson listed two classes of Liberty policyholders: “(1) Homeowners in Ohio with an ACV roof endorsement who filed claims with Liberty after their homes suffered damage and who, as a result of the endorsement, were paid ACV rather than replacement costs; and (2) Owners of Ohio homes who filed claims with Liberty on a home insurance policy with the same LibertyGuard Endorsement, who suffered a loss under Buildings Coverage A or B for which they were paid ACV, after application of a $1,000 deductible.”
Richelson also alleged that the language in the policy declaration led him to believe that the ACF roof endorsement expanded, instead of diminished, the coverage provided by the policy. He also alleged that Liberty included the misleading terms with the intent to mislead; thus, Richelson was fraudulently induced to enter into the insurance contract.
Liberty moved under the Federal Rule of Civil Procedure12(b)(6) to dismiss the case. The district court rejected Richelsons arguments for failing as a matter of law. Richelson brought the case to the appellate court.
Richelson argued two breach of contract theories: First that Liberty breached the insurance contract by using ACV rather than replacement cost in assessing the roof payout; second, if ACV was, in fact, the proper method for determining payment amount, Richelson claims that Liberty still breached the contract by factoring in the $1,000 deductible in the ACV calculation.
The decision
The Sixth Circuit determined that Richelson could not state a claim for breach of contract because Liberty paid ACV for the roof damage. The relevant endorsement exempts the circumstance at issue here from the standard coverage. The language of the endorsement also explains how those issues will be treated and how they will be settled at ACV at the time of the loss but not more than the amount required to repair or replace. The court said the only reasonable interpretation is that the amount of Richelson’s claim for reimbursement for roof damage caused by a windstorm is calculated using the ACV, not the replacement cost of the roof.
Richelson asked the court to read the language of the policy over the endorsement, but the law requires that the insurance contract be examined as a whole. Thus, Richelson has not alleged a viable theory of breach by Liberty.
Richelson next argues that even if ACV governs the payment owed, that Liberty should not have included the $1,000 deductible when it calculated the settlement amount. The page of the policy provides that “losses under Section 1 are subject to a deductible of $1,000. Richelson conceded that the loss fell under Section 1 of the policy, and the court held that the claim was explicitly subject to the deductible.
Richelson further held that the policy language was so misleading that he was fraudulently induced into signing the contract. The applicable fraud law states that the plaintiff must prove six elements: (1) a representation of fact (2) which is material (3) made either knowingly or recklessly falsely, (4) with an intent to mislead (5) with justifiable reliance thereupon and (6) resulting in an injury.
As stated above, the policy plainly stated that the kind of roof damage experienced was covered under the ACV/roof endorsement. Richelson’s argument seems to be that since, in his mind, the language requiring replacement-value coverage is so clear, a reasonable person would have justifiably relied on only that section without reading the entire policy, and would never have expected the insurer to invoke language in an endorsement that changed that initial coverage. The court stated that “one cannot justifiably rely on a purportedly unclear statement in a contract when reading the contract in full would remove any lack of clarity.”
The policy language was clear to a reasonable reader, so the court affirmed the judgment of the district court.
The case is Richelson v. Liberty Ins. Corp., No. 19-3035, 2020 U.S. App. LEXIS 862 (6th Cir. Jan. 6, 2020).
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