Should a Deductible Be Subtracted in the Case of a Total Loss?

Consider this scenario - - Jane Doe insures her home for $100,000, with a $1,000 deductible. Unfortunately, Jane's house burns to the ground and is undeniably a "total loss" within the meaning of Tennessee's valued policy statute (click here for a prior post on when a loss should be considered a "total loss").  After months of investigation, the insurance company decides to pay the claim "in full" and sends a check to Jane for $99,000 (policy limits minus the deductible).  Was Jane inappropriately shorted $1,000.  In my opinion, yes.

Under Tennessee's valued policy statute (T.C.A. 56-7-803), an insurer is liable to the policyholder for the full policy limits if a total loss occurs.  In my view, this statute effectively prohibits an insurance company from subtracting the deductible in total loss cases.  My research reveals only one case addressing this precise issue, and that is Thurston Nat'l. Ins. Co. v. Dowling, 535 S.W.2d 63 (Ark. 1976).  In Thurston, the Arkansas Supreme Court held that an insurance company may not enforce a deductible provision in the case of a total loss when it results in the insured receiving less than policy limits in violation of Arkansas' valued policy law.  There is no logical reason why the same rule of law would not be true in Tennessee as well. 

"Total Loss" Doesn't Necessarily Mean "Burned to the Ground"

Tennessee's valued policy law(T.C.A. 56-7-803) provides that an insurer is liable to the policyholder for the full policy limits if a total loss occurs.  As a result, the big "fight" is often over the issue of whether a loss is "total" or "partial" in nature.  Back in May, Parks Chastain commented here that the identity test should be used to determine whether a structure will be deemed a total loss.  Parks relied on the Laurenzi and Hollingsworth cases to support his contention that the test is whether a building has lost its identity and specific character as a building.   I think our courts interpret the valued policy law in a less restrictive manner than Parks suggests is appropriate. 

First, let me point out that the Tennessee Supreme Court, with its present composition, would almost certainly adopt the prudent man test if given the opportunity.  Such a test would be an alternative to the identity test referenced by the Laurenzi decision.  Under the prudent man test, a house could be considered a total loss if a prudent man would not repair the property because the repair costs would be close to or exceed the replacement cost of the structure.  Such a test has been widely accepted across the nation.

Second, and more importantly for a present analysis, the Tennessee Court of Appeals has made clear that Tennessee law does not require that a house is necessarily only a partial loss simply because it can still be identified as to its type of structure. King v. Dunlap, 945 S.W.2d 736 (Tenn. Ct .App. 1996).  On the contrary, both the King and Laurenzi cases make clear that a building can still be deemed a total loss even when walls are still standing, the foundation is unimpaired, and some parts of the structure are unconsumed.  There is no requirement that there be an absolute extinction, or that all materials be physically destroyed.  For example, in Mann v. Grange Mut. Cas. Co., 1986 WL 14223 (Tenn. Ct. App. 1986), the Tennessee Court of Appeals affirmed the trial court's holding that a building was a total loss even when the second level of the house, including the roof and walls, were not completely destroyed.  

The lesson?  Just because the brick is still standing doesn't mean your loss isn't total in nature.  Don't get confused by the "total loss" language.  At its base level, it really all boils down to whether it would be reasonable to repair a house or not.  Even though that's not technically the legal test, its going to result in the same conclusion most of the time. So if an insurance company attempts to argue that a house isn't a total loss even though it is agreeing the home needs to be demolished and rebuilt, don't go for it.  You've got a total loss, and you are entitled to the full face value of your insurance policy.

The Valued Policy Statute Should Not Be Limited to Losses Caused by Fire

Parks Chastain recently authored a post here in which he opined that Tennessee's valued policy statute should apply only to losses caused by fire, not wind.  I disagree. 

Tennessee's valued policy statutes (T.C.A. 56-7-801 through 803) were enacted in 1927, and last edited just a few years later.  Read together, these statutory provisions, known as the "valued policy statute," require an insurer to inspect the insured premises within 90 days of issuing a "fire insurance policy," and if it fails to do so and "a loss occurs," then the face value of the policy is "conclusively presumed to be reasonable."  Therefore, the plain language of the statute doesn't limit its application only to fire losses, but rather is phrased broadly to apply to all losses (that are total in nature).

Recognizing Parks' focus on the language of the statutes that seem to limit their application only to "fire insurance policies," it is worth noting that there are "fire insurance policies" that insure against loss caused by risks other than fire.  See Ballard v. Farmers Mut. Fire Ins. Co., 1991 Tenn. App. LEXIS 799 (Tenn. Ct. App. 1991) (noting that a policy was called a "fire insurance policy" even though it insured against loss caused by fire, lightning or tornado).  Further, true "fire" policies no longer exist, or at least are exceedingly rare if they do.  In today's insurance world, fire is one of many risks that has been incorporated into the modern commercial property and standard homeowner policies.  

Additionally, the valued policy statute is declared to be a remedial statute, and therefore must be liberally construed.  The clear purpose of the valued policy statute is to protect insureds from unscrupulous insurers which might otherwise over-insure property for the purpose of obtaining higher premiums, and then minimize or deny a claim after a total loss by taking the position that the property's value is much less than the face value of the policy.  This purpose has been recognized over and over by Tennessee appellate courts, and there is obviously no reason to differentiate between the cause of the loss (fire v. wind) when interpreting the statute to effectuate that purpose. 

Finally, there is authority from our sister states which support my conclusion.  For example, see Caruso v. Allstate Ins. Co., 2007 WL 625830 (E.D. La. 2007) (interpreting Louisiana's valued policy statute (which is similar to Tennessee's) to apply to wind losses).

 

The Meaning of "Total Loss" Under Tennessee's Valued Policy Law

Often, litigants attempt to use the Valued Policy Law to establish that losses are total for purposes of maximizing policy recovery. In many instances, unless the home or structure is totally destroyed and “on the ground,” so to speak, expert proof can be adduced to establish that much of the building could be re-used, and that the house could in fact be rebuilt. I have had great success using experienced restoration contractors to come to trial, and show “before and after” pictures of their work. Trial Judges have submitted the question of whether a particular property experienced a “total loss” to juries, and these experts have won the case for me.

And the fact is that the statutes have not been applied unless the damage makes the building unrecognizable, or witnesses for the insurance company agree that the home was a “total loss.” Guidance in making the determination of whether this home sustained a “total loss” comes from two Tennessee cases. First, the general rule is stated in Laurenzi v. Atlas Insurance, 131 Tenn. 644, 663, 176 S.W. 1022 (1915), where the court noted:

Was there a total loss? The roof of the building, a wooden structure, was wholly destroyed; likewise all of the walls except on one side, and part of the front porch; but these were so badly burned in places that the lumber in them was not worth the labor of rescuing and removing. However, the walls standing were considered so dangerous by the city authorities that they were required to be taken down. The floor remained uninjured, except that a large hole was burned through it in one place. The brick foundation on which the structure stood was unimpaired. Since, under these facts, the identity and specific character of this structure as a building were obliterated, we think the loss was total, although the parts last referred to remained unconsumed.

Implicitly, the Laurenzi decision follows the general rule that a structure will be deemed a total loss when it has lost its identity and specific character as a building. Our courts have specifically refused to impose a “prudent man test” in place of the Laurenzi decision. In the case of Hollingsworth v. Safeco Ins. Companies 782 S.W.2d 477, 478 (Tenn.App.,1988), the trial could had commented that, under a “prudent man” test, the house in question should be declared a total loss because a prudent man would not repair the house for $31,000.00 or $32,000.00 when a comparable new structure could be built for $35,000.00. That is very close to the constructive total loss doctrines that have been adopted in other states. On appeal, however, the Court of Appeals refused to adopt the “prudent man test,” noting:

We are not prepared to make such an adoption. There is a marked difference between the Supreme Court, the highest court in the state, and the Court of Appeals, an intermediate appellate court. It is the duty of the Court of Appeals to apply the law as promulgated by the legislature or as announced by the Supreme Court. This Court is bound by the Supreme Court's decisions under the doctrine of stare decisis and in no way is it the function of this court to intentionally reverse the holding of the Supreme Court. Although the Supreme Court may wish to adopt the prudent man test for making a determination as involved in this case, we feel constrained to follow the test established in Laurenzi.

Hollingsworth, 782 S.W.2d at 479 -480.

But, what about those counties or cities in Tennessee where code requirements provide that a home should be razed and requires rebuilding if the cost to repair exceeds 70% of the value of the home. There are no Tennessee cases which have held that the local code requirements (be it 50% or 70%) are applicable and trump the insurance policy, but that has occurred in other jurisdictions. However, if the Courts will not apply a “prudent man test,” they should not impose any requirement other than the criteria originally noted by Laurenzi – has the building lost its specific identity and character? If not, there should be no total loss.

 

Tennessee's Valued Policy Law Should Apply Only To Losses By Fire, Not Windstorm

For the past two years, the spring months have brought severe and deadly tornados to various parts of Tennessee. One issue that has often arisen, but has not yet been addressed by any Tennessee appellate court, is the extent to which Tennessee’s “Valued Policy Law” would, or should, apply to wind or tornado losses.

Tennessee’s “Valued Policy Law” (pdf)  is created by three separate statutes, T.C.A. §§ 56-7-801 through 803, all found under in Chapter 7 of the Insurance Code, and specifically in Part 8 (entitled “Fire Insurance”). Attorneys for insureds argue that this law, written in 1927, and last amended in 1932, no longer reflects insurance industry practice and insuring provisions, and that it must be interpreted to cover any losses to which it would otherwise apply (i.e., total losses to real property).

Such an argument is, in my opinion, contrary to a proper interpretation of Tennessee’s “Valued Policy Law.” Some states have specifically expanded the scope of their valued policy law to encompass other causes of loss. For instance:

  • The valued policy law of Minnesota applies to fire, lightning, or other hazard
  • The valued policy law of North Dakota applies to any covered cause of loss
  • The valued policy law of West Virginia applies to losses cause by fire or otherwise.

In contrast, Tennessee’s valued policy law references “fire insurance” and “loss by fire.” As mentioned, the three statutes in play appear in section 8 (“Fire Insurance”) of Chapter 7 of the insurance code. With respect to this issue, these statutes provide in pertinent part:

  • T.C.A. § 56-7-801 – Provides that there is a period of 90 days after which a “fire insurance policy” is issued for an inspection to occur, and prohibits any “fire insurance policy” being issued for an amount in excess of the fair market value of any building or structure;
  • T.C.A. § 56-7-802 – Provides for a return of premium where buildings “totally destroyed by fire” were over-valued and too high a premium was charged. The statue applies to “buildings within the state insured against loss by fire” which “are totally destroyed by fire”; and
  • T.C.A. § 56-7-803 – With respect to losses occurring after ninety (90) days after policy inception, the statute provides that the value as shown on the application or policy shall be “conclusively presumed to be reasonable, and settlement shall be made on that basis.”

Tennessee has recognized that a “fire policy” provided only narrow coverage, and under such coverage, the insured protected by loss from "fire." Allied American Mut. Fire Ins. Co. v. Wesco Paving Co., 35 Tenn. App. 154, 162-163 (Tenn. Ct. App. 1951).

Other jurisdictions having similar valued policy statutes have held that the statutes apply only to losses by fire. One of the best cases I have found is the South Carolina case of McNeely v. South Carolina Farm Bureau Mut. Ins. Co., 259 S.C. 39 (S.C. 1972) in which the court noted that South Carolina’s Valued Policy Statutes referenced total loss by fire, and thus held that the Valued Policy Law did not apply to loss by windstorm. The case analyzed the importance of the language “loss by fire” when reviewing the legislative history of the statute. The statute (Section 37-154 of the 1962 Code of Laws) is very close to the Tennessee version in parts quoted. It provides:

No company writing fire insurance policies, doing business in this State, shall issue a policy for more than the value stated in the policy or the value of the property to be insured, the amount of insurance to be fixed by the insurer and insured at or before the time of issuing the policy. In case of total loss by fire the insured shall be entitled to recover the full amount of insurance, and in case of a partial loss the insured shall be entitled to recover the actual amount of the loss, but in no event more than the amount of the insurance stated in the contract. * * *"

McNeely , 259 S.C. at 42. The Court commented as follows, and much of this reasoning could be applied to the Tennessee statute:

This section plainly says that "in case of total loss by fire the insured shall be entitled to recover the full amount of insurance" provided by the policy. . . . Therefore, under the clear language of the statute, the plaintiff would be entitled to recover the sum of Six Thousand ($ 6,000.00) Dollars, the amount of insurance which his policy admittedly provided, if the mobile home had been destroyed by fire; however, the question now arises as to whether or not this statute is applicable when the mobile home was destroyed by windstorm.

Section 37-154 of the 1962 Code of Laws of South Carolina requires the parties to a fire insurance contract to agree upon the value of the property to be insured and require that such value be stated in the policy.

Prior to 1947 the statute read as follows:

"No fire insurance company or individuals writing fire insurance policies, doing business in the State, shall issue policies for more than the value to be stated in the policy, the amount of the value of the property to be insured, and the amount of insurance to be fixed by insurer and insured at or before the time of issuing said policies, and in case of total loss by fire, the insured shall be entitled to recover the full amount of insurance and a proportion amount in case of partial loss . . ."

In 1947, the Legislature amended this Statute slightly however, in both the original statute and the amended statute the Legislature included the language "total loss by fire." Had the Legislature intended either statute to apply to loss by windstorm, it would have been a simple matter to so state. The 1947 amendment was to clear up any ambiguity that existed in the event of partial loss which we are not concerned with in the instant case. It is patently clear to me that the Legislature stated and intended in clear and unambiguous terms that "in case of total loss --" and described the manner by using the words "by fire."

McNeely, 259 S.C. at 43-44.

As in South Carolina, the province to change the coverage of this statute lies with the legislature, and unless these statutes are amended, this case, and principles of statutory construction, almost compel the conclusion that Tennessee’s Valued Policy Law applies only to “losses by fire.”