The U.S. Fifth Circuit recently faced some atypical language in a homeowner’s policy written in Texas, providing guidance in interpreting property loss provisions under Texas law.
In its January 28, 2016, opinion, the court first had to determine whether the insureds or the insurer bore the burden of proving depreciation to the property at issue. This issue was particularly important as the case was on review following a summary judgment. The panel explained that under Texas law, the insured bears the initial burden of proving a covered loss, while the insurer bears the burden of proof regarding the application of an exclusion. The panel noted that no Texas court had previously “addressed a policy provision that is substantially similar in its overall structure and language” to the policy before the court.
The court characterized the issue for decision as whether the insured was entitled to the “market value” of its repairs or the actual repair cost. The most troublesome portion of the applicable policy’s “Loss Settlement” provision provided “[i]f you have a covered partial loss to your dwelling or an other structure, and do not begin to repair, replace or rebuild the lost or damaged property within 180 days from the date of loss, we will only pay the reconstruction cost less depreciation.” According to the court, if this provision was a “pre-condition” to coverage, the insured had the burden of proof, but if it was a contractual limitation on damages, then the insurer bore the burden of proof. According to the court, the question of whether the cited language “sets forth a contractual measure of damages that overrides the default common law standard or a limitation of liability is not an easy question.”
The insurer alleged that the sentence should be read as a measure of recoverable damages, which would fall to the insured to prove, as if the provision stated: “If you have a covered partial loss to your dwelling or an other structure, and do not begin to repair, replace or rebuild the lost or damaged property within 180 days from the date of loss, we will only pay the reconstruction cost less depreciation.” The court rejected this interpretation, however, interpreting the language as a limitation of liability that the insurer must prove. The court observed that the entire provision began with the words “our limit of liability for covered losses,” suggesting a limitation of liability. The provision also immediately followed another clause that was clearly a limitation provision.
Finally, the court simply found the insurer’s argument resulted in a “perplexing structure. It would be unusual for policy language to first limit the insurance company’s overall liability and then set a contractual measure of damages controlling only a subset of potential covered losses ….” In a further slight to the insurer’s argument, the court added that “[o]dder still would be reading the final sentence in Item 4(b) as placing a burden on the insurer in its first clause, and a burden on the insured in the next clause (at least absent any express language setting forth the contrasting burdens).” The court found the insurer’s interpretation troubling in cases where the parties dispute whether the insured began to repair their property within 180 days of the loss. “It makes no sense to put the onus on the insured to prove that they did not begin repairs on the dwelling within 180 days in order to have access to a lesser recovery—a burden they would never seek.” Based on the above, the court held that the provision at issue clearly set forth a limit of liability which the insurer had to prove.
The court also had to decide how to compensate the plaintiffs for their personal property. The relevant policy endorsement provided that the insured “‘may’ seek reimbursement ‘on a replacement cost basis’ for items actually ‘repair[ed], restore[d], or replace[d]’ within a year of the loss. Otherwise, [the insurer] will pay the ‘actual cash value’ of the damaged property.”
The court found the actual provision “inconsistently phrased” and possessing a “scattershot and somewhat redundant organization.” Without fully deciding whether this provision stated a measure of damage or a limitation of liability, the Fifth Circuit reversed the district court’s summary judgment for the insurer. The district court had faulted the insured for only providing evidence of replacement cost, instead of evidence regarding the actual cash value.
The Fifth Circuit noted that “actual cash value” means “market value,” and that Texas law recognizes that “personal effects have ‘no market value in the ordinary meaning of that term.” Instead, the “rule is that where household goods have no recognized market value, the trier of fact may consider, in determining the actual value to the owner at time of loss, the original cost, cost of replacement, opinions of qualified witnesses, including the owner, the use to which the property was put, as well as any other reasonably relevant facts.” However, the “overarching inquiry is ‘the actual worth or value of the articles to the owner for use in the condition in which they were at the time of the [loss] excluding any fanciful or sentimental considerations.’” In light of these broad rules regarding valuing personal property, the court found that the insured’s statement of replacement value was some evidence of “actual cash value,” such that summary judgment for the insurer was improper.
Ayoub v. Chubb Lloyds Insurance Company of Texas, No. 14-51301 (1/28/16).