In the wake of the wildfires that devastated Southern California in October of last year, more than 22,000 insurance claims were filed, according to the Insurance Information Network of California. While the bulk of those claims may be for additional living expenses due to the mass evacuation of San Diego County, at least 1,500 homes were destroyed by the fires. The issues involved in fire benefits under a property policy may not be as contentious as those arising from claims that resulted from Hurricane Katrina, but with so many claims filed, disagreements are bound to arise. A recent decision concerning a dispute arising from an earlier wildfire – the “Cedar Fire” of 2003 – may be of interest to those involved in claims arising from the 2007 wildfires.
Stone v. Fidelity Nat. Ins. Co., No. B190329 (Cal.App. 2 Dist., Oct. 29, 2007), involved a dispute over the proper valuation of a home damaged by the Cedar Fire. Under the insured homeowners’ policy, the insureds were to receive the actual cash value (ACV) of the damaged portion of their home based on a formula provided in the policy. Further, if the insureds completed repairs within a certain fixed period, they would receive the difference between previously-disbursed ACV and the replacement cost value (RCV). The insureds sued their carrier for bad faith based on the carrier’s alleged persistent low estimates of the ACV and inadequate investigation. After trial, the court awarded the plaintiffs $1.6 million in punitive damages (reduced from a jury award of $5.1 million).
On appeal, the California appellate court upheld the decision on punitive damages. Specifically, the court determined that there was sufficient evidence in the record for a finding of bad faith. Among other evidence, the court cited the failure of the insurer to investigate the house’s foundation after being notified that the insureds’ contractor had found spalling and cracking. The court also noted that the insurer chose to rely on an adjuster who failed to account for the insureds’ improvements to the home in making his estimate. An insurer’s retention of unreasonable experts, noted the court, is one circumstance allowing a bad-faith claim to proceed to the jury.
Another aspect of the Stone case merits attention is that, at the trial level, the jury determined that the insurer’s bad faith conduct had nullified the plaintiffs’ obligation to complete repairs before receiving that portion of the RCV not covered by the previous ACV payment. However, the appellate court reversed that portion of the decision, stating that such a contractual requirement will be waived only when the insurer actually stands in the way of repairs. As the plaintiffs had the financial wherewithal to complete repairs, the low ACV payment did not operate to prevent such repairs.
This is the first in a series of blog entries that will examine decisions relating to the 2003 Cedar Fire as a guide to issues that may arise in disputes relating to the October 2007 wildfires.