Insurance coverage

Series on Forest Fire Insurance Coverage, Part 5: Valuation of Loss, Sub-Limits and Amount of Potential Recovery

Insurance policies offer varying levels of insurance coverage and even if the amount purchased was adequate at one time, changes over time (e.g. inflation, upgrades, regulatory changes and surge pricing) can leave the insured underinsured. In this article in the blog’s wildfire insurance coverage series, we highlight the need for policyholders to look closely at policy terms in order to select the right type and amount of coverage for a potential loss.

Various types of cover are available and there have been many disputes over the amount of cover provided by one form of policy or another. For example, the policyholder may have purchased market value coverage (the value of the house at the time of the wildfire), replacement coverage subject to a policy limit, replacement cost coverage guaranteed or a variation on the theme. Although the property may be correctly appraised at the time of insurance purchase, it may become undervalued at the time of loss due to factors such as inflation or home improvements that have not been disclosed to the insurer. And, as generous as the limits may be when the policy is underwritten, as one court explained, they may be insufficient when a “price escalation” occurs after a wildfire.[1]

These concepts have been discussed in detail in Vulk vs. State Farm General Ins. Co. (Boles Wildfire) where the policyholder has purchased a policy providing replacement cover subject to a policy limit intended to reflect the estimated cost of rebuilding the house.[2] After the forest fire destroyed the house, it was rebuilt at a significantly higher cost. In rejecting the policyholder’s argument for full reimbursement, the court held that it was up to the policyholder to choose the cover they wanted (in this case, guaranteed replacement value), that in the circumstances presented, the agent had no particular obligation to recommend alternatives, and that there were no recognized exceptions to this rule.

In another case, the policyholder has taken out replacement cost coverage (value of the building lost or damaged) as well as extended replacement value coverage (cost of repair or replacement) for his house.[3] After the home was destroyed by a wildfire in Northern California, the policyholder embarked on plans to rebuild, but due to obstacles in the rebuilding process, such as the overwhelming demand for architects , contractors and others who have bogged down the permitting process, the surge in demand which has dramatically increased prices. (factors which the insured characterized as “factually and legally impracticable and/or impossible” to overcome) and questions regarding whether the insurer would pay the extended replacement cost, the policyholder sold the property at a loss . The insurer agreed to pay the value of the damaged building but refused to pay the replacement cost because the policyholder had not satisfied the condition precedent, namely the replacement of the property. The court agreed with the insurer’s position, finding that the wording of the policy prevailed and that there was no evidence of anticipated breach.

Policies can also contain sublimits that can affect the scope of recovery. For instance, SECURA Ins. vs. Lyme St. Croix Forest Co. considered whether a wildfire (the Germann Road Fire) that spread and refueled over the course of several days and 7,442 acres constituted a single, unbroken cause of all damage, and thus an event subject to the limit of $500,000 per police occurrence, or multiple occurrences each time the fire spread to new property allowing collection of sublimits for each occurrence up to the $2 million police total .[4] The Court of Appeals held that each of the events occurring over several days and over a wide geographic area could constitute a break in causation under the “cause” theory adopted by the Wisconsin courts and provide for multiple occurrences . However, on appeal to the Wisconsin Supreme Court, the Court ultimately found that the fire was a single event and therefore the $500,000 per event limit applied.[5]

This is the fifth blog post in the series on wildfire insurance coverage.