I recently learned that Tennessee Farmers Mutual Insurance Company (Farm Bureau) has changed the way it will pay roof claims. Specifically, a recent endorsement changes roof coverage to actual cash value for roofing materials instead of replacement cost. This means that roof materials will be depreciated in the event of a roof claim. For example, if hail damages a roof that is 10 years old, the replacement cost would be depreciated to account for the age of the roof. The depreciation rate will vary depending on the age and condition of the roof, but could be as high as 75%, which will impact consumers' ability to replace their roofs after a catastrophe. This is obviously a huge deal for Tennessee consumers, particularly in light of the wind and hail storm events that has become common in our state.
Chip Merlin, in his Property Insurance Coverage Law Blog, commented a few days ago about a recent case out of Washington, Holden v. Farmers Insurance of Washington, 2010 WL 3504821 (Wash. Sept. 10, 2010). The issue there was whether sales tax should be included in insurers' calculations of actual cash value and replacement cash value. In summary, the court rightly determined that sales tax should be included when determining the amount owed, even when paying actual cash value as opposed to replacement cost value.
Although sales tax is a minor issue in many claims, it can add up to a lot of money, particularly when viewed from the vantage that an insurer in Tennessee is basically saving ten percent by refusing to pay sales tax. To view Merlin's full post with a more in depth discussion of the case, click here.
While I acknowledge Clift v. Fulton Fire Insurance Company, 315 S.W.2d 9 (Tenn. Ct. App. 1958), cert. denied, provides a rule for allowing valuation of property under a somewhat “elastic” standard of “value to the owner,” this ambiguous standard should not apply where the valuation provisions of property coverage are specifically set forth in the policy. For instance, most policy provisions now provide that valuation will be based upon an “actual cash value” basis until such time as repair or replacement has occurred. Once repair or replacement has occurred, the insured may be entitled to additional amounts up to the cost of replacement (where replacement coverage is afforded).
Older cases like Clift do not rely upon policies containing the definition of “actual cash value,” a term defined by many modern policies. That definition, widely found in policies today, is similar to the following:
“Actual Cash Value” means replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.
Where similar valuation provisions exist, and particularly where component terms are defined by the policy, I think it would be error for a court to step outside of the definition and apply any other valuation measure, whether it be “value to the owner” or some other measure of damage. Our law has long held that courts are not at liberty to rewrite an insurance policy, even where the court does not favor its terms. Merrimack Mut. Fire Ins. Co. v. Batts, 59 S.W.3d 142, 148 (Tenn. Ct. App. 2001), perm. app. denied.
A common question around my office is, “How do I know what values to claim for my personal goods?” Fortunately, a 1958 Tennessee Court of Appeals opinion provides the answer, but it is not one that is widely disseminated by adjusters to policyholders. In Tennessee, household goods, furniture, clothing and other articles acquired for personal use in the home are valued by the “value to the owner” standard, not by their market value.
In Clift v. Fulton Fire Ins. Co., 315 S.W.2d 9 (Tenn. Ct. App. 1958), the court held:
The phrase ‘the actual cash value’ . . . may mean ‘market value’, or the more elastic standard of ‘value to the owner’.
. . .
‘This doctrine [of ‘value to the owner’] is most frequently and conveniently resorted to in cases of, or damage to, articles which the plaintiff has acquired for personal or domestic use and not for business purposes, such as household goods, clothing, pictures, books, and the like. While usually these things have some slight value for sale at secondhand, this market value would be a very inadequate compensation to the plaintiff who acquired them for use, not for sale. The fact that the property was of this character, that is, used clothing or household goods intended for the owner’s use, is a sufficient showing that market value as secondhand goods is an inappropriate standard, and casual holdings that proof must be made that there is no market value can hardly be supported. (citation omitted)
. . .
In ascertaining the value of goods under this more elastic standard of ‘value to the owner’, evidence of the original cost, of the cost of replacement, the condition of the goods, the use to which they were being put, and all other relevant facts, are to be taken into consideration.
. . .
The goods covered by this policy were household goods, furniture, wearing apparel, and numerous other articles which had been acquired by plaintiffs for personal use of themselves and their children in their home; and the value of such goods is to be estimated not by the market value, not by what they could be sold for in the market as secondhand goods, but by the more elastic standard of ‘value to the owner'.
Clift, 315 S.W.2d at 11-12. This standard is certainly fair to the policyholder. However, actually applying the standard in the real world when reviewing personal property inventory forms is a difficult task indeed. The standard is particularly helpful when defending an insurer’s claim of fraud through alleged overvaluation.