California has a code requirement that insurers must pay the actual cash value of a loss under a replacement cost policy if the replacement cost benefit is contingent upon the policyholder first repairing, rebuilding, or replacing the damaged structure. Here is the provision of the code:
Section 2051.5. Measures of compensation based on costs of repair, reconstruction or replacement; Minimum time limit; Limitation or denial based on change of venue is prohibited; Exemption for suspected fraud; Time to change policy forms
(1) Under an open policy requiring payment of the replacement cost of a loss, the measure of compensation is the amount it would cost the insured to repair, rebuild or replace what was lost or damaged, without deduction for physical diminution in value, or the limit of insurance, whichever which is lower.
(2) If the policy requires the insured to repair, rebuild, or replace the damaged property in order to collect the full replacement cost, the insurer shall pay the actual cash value of the damaged property, as defined in section 2051, until the damaged property is repaired, rebuilt if or replaced. When the property is repaired, rebuilt or replaced, the insurer shall pay the difference between the actual cash value paid and the full replacement cost reasonably paid to replace the damaged property, up to the limits specified in the policy.
(A) A time limit of less than 12 months from the date on which the first payment against the actual cash value is made shall not be placed on an insured to obtain the full compensation cost of the loss, subject to the limit of insurance.
(B) In the event of a loss attributable to an “emergency,” as defined in Section 8558 of the Government Code, a time limit of less than 36 months from the date the first payment against the actual cash value was made shall not be imposed the insured to receive the full compensation cost for the damage, subject to the insurance limit.
(C) This section does not prohibit an insurer from allowing the insured additional time to collect the full cost of the claim.
(2) An insurer shall grant a policyholder one or more additional extensions of six months for good cause under paragraph (1) (A) or (B) if the insured, in good faith and with reasonable care, encounters a delay or delays in approval of or remodeling of the residence or residence beyond the control of the insured. Circumstances beyond the control of the insured include, but are not limited to, unavoidable delays in building permits, lack of necessary building materials or inability of contractors to perform the necessary work.
(1) In the event of a total loss of the insured structure, an insurance policy issued or delivered in this state shall not contain a provision limiting or denying, on the basis that the insured has decided to rebuild on a new site or to purchase an already built home in a new location, payment of the building code upgrade cost or replacement cost, including any extended replacement cost coverage, to the extent these costs are otherwise covered by the terms of the policy or any policy endorsement. However, the measure of indemnity shall not exceed the replacement cost, including the cost of upgrading the building code and any extended replacement cost coverage, if applicable, to repair, rebuild or replace the insured structure in its original location.
(2) Notwithstanding any other law, in respect of a home insurance policy, the measure of indemnity available to a policyholder to use for rebuilding or replacing the insured home in another location shall be the amount that would have been compensated if it the insured home had been rebuilt. in its original location, and no deduction for the value of land in the new location shall be allowed from that measure of damages. However, the amount of compensation shall not exceed the cost, including the cost of upgrading the building code and any increased replacement cost, if any, to rebuild the insured structure in its original location.
This code was part of my discussion with California-based Merlin Law Group attorneys as a result of yesterday’s post, The devil is in the details when making a claim with Church Mutual Insurance Company. That post discussed whether the policyholder must make an election for actual cash value payments or potentially receive nothing if the property is not repaired, rebuilt or replaced.
The California Code was discussed in a 2021 California case, Westmoreland v Fire Insurance Exchange,1 where the court held:
The insurer contends that subdivisions (a) and (c) of former section 2051.5 must be read together and that the statute, taken as a whole, does not conflict with the subject policy’s settlement loss provision that limits the insurer’s payment of replacement cost to the “smallest” of three specified amounts, including the “amounts actually and necessarily expended to repair or replace” the lost home. Conversely, Plaintiffs argue that former section 2051.5(c)—which itself contains no language limiting indemnification to actual or reasonably incurred indemnity costs—is the only relevant statutory provision where, as here, insureds suffer a total loss and decide to rely on a location other than the insured premises. Applying established principles of statutory construction, we conclude that former subdivision (c) cannot be read in isolation and that the statute must be read as a whole.
When read former subdivisions (a) and (c) together, former section 2051.5 makes reasonably clear that the measure of indemnity for a given replacement cost policy is the same regardless of where the insured decides to rebuild or replace in the event of a total loss. That is, for the insured who decides to build or replace elsewhere, the measure of compensation is the lesser of the following: (1) the amount it would cost to rebuild or replace the structure of the insured premises; and (2) the amount of the coverage limit specified in the policy. Regardless of whether the cost of replacing a residence at another location turns out to be substantially greater or substantially less than the estimated replacement cost of the insured premises, former section 2051.5 provides both the insurer and the insured with certainty that the full extent of a policy’s extended replacement cost coverage would be available to the insured regardless of where
lost housing is compensated.
Plaintiffs have already received the full measure of compensation to which they are entitled because they were paid the actual cash value of the insured home ($372,000) and built a replacement home at another location without incurring additional compensation costs beyond that amount.
This result is nothing new and follows longstanding property insurance adjustment guidelines, with the one exception discussed in the post, The devil is in the details when making a claim with Church Mutual Insurance Company.
When determining the amount of actual cash value, California is different and has code provisions discussed in Applying Depreciation in California – Understanding the Guidelines.
When the Okies left Oklahoma and moved to California, they raised the average intelligence level in both states.
– Will Rogers
1 Westmoreland v. Fire Ins. Exchange73 Cal.App.5th 269 (Call. App. 2021).